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IPPSO FACTO August 2017 Issue – The flourishing market for corporate sustainability investments

“Canadian companies are increasingly focused on making long term improvements in their environmental and social performance, in some cases upping the ante to levels never before seen. This is reflected in a range of sizable new investment programs targeting significant advancements in sustainability, environmental impacts and governance. Many of the programs include long term Power Purchase Agreements, an investment category that is likely poised for impressive growth.”

IPPSO FACTO – the magazine of the Association of Power Producers of Ontario (APPrO) requested that Quinn & Partners contribute to its August 2017 issue. In this article, Francisca Quinn provides information on greening corporate portfolios and the advantages of long term Power Purchasing Agreements (PPAs).

You can read the article here: The flourishing market for corporate sustainability investments

The evolution of GRESB – Getting to business value

Last week, Quinn & Partners’ Tony Pringle was in New York City for the annual GRESB results release. Here he reports on GRESB’s continued growth and explains how your company can use the survey to create business value.

 

Eight years in: GRESB continues to gain momentum

GRESB – the Global Real Estate Sustainability Benchmark – has increased 20% annually since it launched in 2010. In 2017, 850 companies and funds participated, representing 77,000 assets and $3.7 trillion in real estate value.

Although North America still lags behind Europe in number of participants, it has almost three times the asset value, demonstrating that the assessment is well established in Canada and the US.

In public markets, GRESB participants represent the majority of market value, covering 54% of North America, 70% in Europe, and 50% in Asia-Pacific. To fill in the gaps, GRESB now scores non-participating companies based on publicly disclosed Environmental, social and governance (ESG) information. Although these scores are not as robust, they give investor members a full market picture. Including disclosure from non-participants also allows GRESB to compete with other ESG ranking organizations. Since GRESB’s suite of assessments also includes real estate debt and infrastructure, it provides investors a one-stop-shop for ESG data in real asset portfolios.

GRESB’s continued relevance is driven in large part by investors. GRESB is supported by 66 investor members, representing $17 trillion in assets under management – more than double the value of last year’s GRESB members. In a survey of these investor members, 94% stated they use GRESB data in their investment process, and two thirds stated they either mandate or strongly encourage participation from all the funds they invest in.

But transparency still trumps performance for investors: Only 35% of investor members set performance targets for GRESB, and these targets relate to participation or year-on-year improvement.

 

“The [GRESB] process makes us better.” 

This was the opening statement from James Kennedy, Managing Director of Asset Management at JP Morgan Chase at last week’s results release. Kennedy’s view was echoed by the sector leaders, demonstrating that investors alone aren’t driving GRESB participation. Curiosity, competition and companies’ desire to find business value appear to be equally important.

This sentiment was echoed by the sector leaders, who provided examples of how they turn GRESB questions into business value. Prologis, who’s conversations around tenant engagement have led them to develop a customer sustainability advisory council, is a prime example of innovating GRESB questions into business value.

“Internal conversations initiated by GRESB participation have made Boston Properties a stronger, more purposeful organization.” – Ben Meyers, Manager of Sustainability at Boston Properties.

Checking off a box in the GRESB survey doesn’t deliver value – that comes from developing an approach and executing a program to address a material industry E, S or G topic. GRESB’s true value, then, lies in using the survey as a change management tool to spark internal discussions and action plans around topics such as sustainable development, health and wellness, climate risk and resilience and tenant and community engagement. These are issues that span across departments.

For example, conversations on industrial property data with one client led to collaboration between property management, leasing, communications and operations to engage industrial tenants and green the standard lease. As more companies strive for GRESB leadership and check off more boxes, differentiation comes with execution, not score.

 

The stages of GRESB – From GRESB NYC results presentations

Source: 2017 GRESB results

 

What’s next: The assessment continues to evolve

“The test is getting harder” according to GRESB’s head of North America, Dan Winters. The leadership pack is getting more crowded as companies advance their practices and the assessment will change more in 2018 as a result.

Questions on sustainability management will dig deeper to identify companies with more sophisticated sustainability governance. Some of the questions from the voluntary health and wellness assessment will be integrated into the main survey. And there will be greater emphasis on providing property level performance data.

 

Recommendations for success

Having supported 12 GRESB submissions in 2017, with 10 Green Stars and one country leader, Quinn & Partners has learned a few tricks to improve score results and identify business value.

  • Start early: Have a plan in place to get going as soon as the pre-survey is released in January
  • Provide time to prepare for reporting for improved results: Give properties a pre-emptive head’s up, especially third-party managed properties
  • Start conversations that bridge silos: Set up meetings with multiple departments for questions pertaining to risk assessments, tenant engagement, community engagement, and health and well-being
  • Don’t wait for September’s results to plan for next year’s improvement: Develop action plans during the GRESB process in April
  • For non-participants, review the survey and do a gap analysis: Consider participating or at least identify areas where you can create value for your customers and company

For more information, please contact Tony Pringle (tony@quinnandpartners.com).

Tony Pringle is a Co-founder and Partner at management consultancy Quinn & Partners. He is Quinn & Partners’ lead on Global Real Estate Sustainability Benchmark (GRESB) services for real estate, infrastructure and mortgage investors. He is also a member of multiple GRESB Technical Working Groups and supports GRESB training.

CANADIAN COMMERCIAL REAL ESTATE: THEORY, PRACTICE, STRATEGY

TDC Final Cover

Francisca Quinn was proud to join a group of leading sustainability and real estate professionals in contributing content to Chapter 5, Sustainability in Real Estate, of “Canadian Commercial Real Estate: Theory, Practice, Strategy”. The textbook was published in 2016 by the Real Property Association of Canada (REALPac) and written by its CEO, S. Michael Brooks. It is the first comprehensive literature on Canadian commercial real estate.

Chapter 5 provides a thorough overview of the evolving context of sustainability in commercial real estate. Specifically, the chapter explains material sustainability impacts of the real estate industry, green building certification and sustainability disclosure.

The textbook is currently used at Ryerson University in its real estate project capstone course.

Building a trusted investor brand

If you do not include sustainability in your investor reporting, you may be missing out on a powerful opportunity to strengthen your investor brand. Investors are becoming more attuned to the value of a well-executed sustainability strategy and they are seeking evidence that companies are taking action.

That was the message driven home in December by institutional investors speaking at two landmark conferences – the inaugural Sustainability Accounting Standards Board (SASB) Summit in New York and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) Report Launch in London.

Here’s why sustainability reporting matters and how you can use it to satisfy investor demands, prepare for regulatory compliance, and differentiate your brand.

Sustainability matters because it is a proxy for good management

A recent study by the American CFA Institute reveals that 73% of surveyed investors consider ESG integration – or how a company manages issues relating to the environment, company stakeholder groups and governance – when researching and analyzing potential investments.

Investors increasingly view companies that take a proactive approach to sustainability as well-managed. That’s because many sustainability-related issues are tied to future trends that can significantly impact markets, inputs, economics and business models.

Take climate change, for example. The global 2015 Paris Agreement and new Canadian federal and provincial legislation aimed at addressing our radically warming planet are altering the business landscape in far-reaching ways. All industries will be affected in some way: the need to manage energy cost risk, deal with carbon constraints, market new services or access innovation subsidies are just a few of the foreseeable impacts.

Of course, climate change is only one sustainability issue. Business ethics. Workplace safety. Child labour. Pollution. They’re all part of the emerging agenda. Failing to address these in company disclosures looks odd through the investor’s lens and can negatively impact the management’s reputation and brand – not only among investors, but also among employees, customers and other important stakeholders, all of whom see value in a sustainable enterprise.

Act now – ahead of investor regulations

Your disclosure strategy also positions you to comply with any future regulatory disclosure requirements. In a recent landmark report, the Financial Stability Board, chaired by Bank of England Governor Mark Carney, highlighted the need for better corporate climate change management information to support the financial services sector’s lending and insurance underwriting decisions. In fact, select sustainability reporting in financial disclosures is already mandatory in some jurisdictions, including the European Union, Norway, South Africa and parts of Asia.

It’s about disclosing pertinent information – not best performance

Investors are not expecting companies to be a star in all areas of sustainability. They are seeking affirmation that that the companies in their portfolios have started to elevate sustainability to C-Suite and board room discussions. They want assurance that management teams are addressing the broader environmental and societal issues affecting their businesses, and they want to know that companies are managing these as they would any other business issue. “Transparency trumps performance.”

Report on the most important issues

Disclosure should incorporate topics that are most material to the company and its industry, and it should tie into a general discussion about the company’s broad strategic challenges and opportunities, including the management of current and future risks.

At a minimum, reporters should provide a qualitative discussion about the company’s management approach and support the narrative with quantitative performance data. To prove that sustainability is managed as a business issue, it is valuable to discuss future objectives and progress to targets. It is also valuable to name those in senior management or at the board level who are responsible for strategy oversight and performance improvement.

Sustainability reporting should start with financial reporting

Historically, companies have published sustainability information separate from other core investor disclosures. In our opinion, this is unwise: it subjects the reporter to undue litigation risk as financial reporting guidelines clearly state that companies need to disclose factors that “would reasonably be expected to have a significant effect on the market price or value of a security” (Ontario Securities Commission).

Sustainability opportunities and risks can have material implications on company cash flow and asset valuation. For example, how is climate change affecting product demand, supply chain and physical infrastructure? What are the investment returns from water and energy efficiency programs? How is the company creating strategic opportunities through stakeholder partnerships?

The largest companies in the world include sustainability information in their annual financial reports. According to a 2016 KPMG study, three of five of the 250 largest companies in the world follow this practice, and this number is expected to grow. Most also independently assure the information.

Incorporate voluntary reporting to deepen brand building

Progressive companies recognize that voluntarily disclosing detailed sustainability information generates profound reputational benefits among their broader stakeholder groups. This can be done through supplementary channels, such as a stand-alone sustainability or corporate responsibility report and through your company website and social media.

Don’t be daunted – just get started

Formulating your company’s response to sustainability risks and opportunities takes commitment, time and effort. But do not wait until you have the best possible message because it will likely never happen. Start with a few key messages: What is at stake for your company? What is your overall plan? Which executives are in charge? Complement this with a simple scorecard and report on emerging performance indicators.

Whether you are incorporating sustainability information disclosures into financial disclosure or reporting voluntarily, help is at hand. Reporting standards such as the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP) provide cross-industry guidance, while the Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures supply checklists tailored to specific industry sectors.

It is important to realize that even publishing sustainability “work in progress” information is beneficial to your reputation and your risk management strategy. It signals to the investor community that your company has a prudent and insightful approach to managing emerging, macro-type risks. And it puts you on a path to developing a robust sustainability disclosure strategy that will drive company action and clearly differentiate you amongst your capital market competitors.

 

To learn how Quinn & Partners can help you map out your sustainability reporting strategy please contact Francisca Quinn at 416-300-8068 or francisca@quinnandpartners.com.

New GRI Standards Released

Some of you who follow sustainability news may have seen last week’s news about the “new” GRI Standards. For all current GRI reporters, all is well – no cause for concern. For other, non-GRI sustainability reporters, there is now an exciting opportunity to gradually adapt to the well-recognized standards and declare “GRI-referenced” for partial report sections. In this short email, we’ll explain what you need to know.

In our view, the GRI Standards are a reorganization of existing G4 guidance. It does not provide anything new. However, the new format makes guidance more easy to navigate and comprehend and there is more direction on challenging areas such as “boundaries” and “context”.

GRI – the global sustainability reporting authority

Since 2000, the Global Reporting Initiative’s (GRI) Sustainability Reporting Guidelines have been used by thousands of organizations in more than 90 countries to guide sustainability reporting. On October 19, 2016, GRI released the “GRI Standards”, which modify the current “GRI G4” guidelines (launched May 2013) to a set of more flexible and modular Sustainability Reporting Standards.

Moving from a de facto standard to a formal standard will allow GRI to be referenced more broadly by governments and market regulators around the world. Becoming an official standard also means there is greater clarity in language and better distinctions between “requirements”, “recommendations” and “guidance” – good news for those in charge of developing GRI reports.

New modular structure provides flexibility

The GRI Standards incorporate all key concepts and disclosures from the G4 Sustainability Reporting Guidelines, but they clarify requirements, recommendations and guidance in shorter pieces that can be applied selectively. Companies which follow the GRI Standards will continue to state “In accordance with GRI”.

The modular approach will also be helpful for the Global Sustainability Standards Board (GSSB), GRI’s newly-formed standard-setting body, as it updates the reporting guidance over time. Instead of issuing new versions of the (200-page or so) guidelines and implementation manual, only select pieces need updates. 

Implication for reporters

The GRI Standards are required for all GRI sustainability reporters publishing as of July 1, 2018.

Reporters transitioning from G4

For organizations already reporting in accordance with G4 Guidelines, the impacts on the reporting process are minor. No new topics have been added, key concepts such as Reporting Principles, Management Approach remain and most disclosures from G4 carry over.

Reporters transitioning from G3 or G3.1

If your organization is transitioning from G3.1, you have two options. You can either align select sections of your sustainability report and declare “GRI-referenced” OR if you desire to report “in accordance” with GRI, you need to go through the same step as you would have in moving to G4 – consult with internal and external stakeholders to define material topics and provide information about management approach and performance for each of these. For information on the evolution from G3.1 to the content used in G4/GRI Standards, we suggest consulting this article.

Your pathway to GRI Standards reporting

Current reporting status      Steps to GRI Standards
In accordance with G4
  1. Identify the (minor) changes in disclosures using GRI “transition document”
  2. Report on required organizational and business information
  3. Relabel and rearrange overlapping disclosures; re-organize GRI table
G3.1 compliant report
  1. Engage stakeholders and conduct materiality analysis
  2. Win internal support for more comprehensive disclosures (G3.1 versus GRI Standards)
  3. Report on required organizational and business information
  4. Relabel and rearrange overlapping disclosures; construct GRI table
Non-GRI report
  1. Adopt select GRI Standards modules OR
  2. Engage stakeholders and conduct materiality analysis
  3. Report on required organizational and business information outlined by the Standards

The team at Quinn & Partners is well versed in sustainability reporting, GRI Standards and integrated reporting. For current clients, we will raise the new sustainability reporting opportunities with you in our ongoing advisory services. For new clients, please get in touch to discuss sustainability reporting and the GRI Standards.