How data is going to be a vital tool for ESG investment

Across the globe, governments, organisations and individuals are pushing to reduce their carbon footprint. This drive has been particularly helped by new regulations and policies. The United Nations for example estimates that as of now, “countries representing more than 65% of global CO2 emissions and more than 70% of the world economy, will have made ambitious commitments to carbon neutrality.”

A large number of countries have as such implemented their own policies. In the UK, the Climate Change Act is committed to cutting greenhouse gas emissions (GhG) to net zero by 2050. In France, part of new climate change regulations requires 7.2 million badly insulated homes to carry out renovation works by 2028. 

This greater awareness of the actions of many industries on the environment is meaning that many actors within each sector are closely considering the role they play. The real estate sector is no exception and many corporate are now setting their own net zero targets, with their real estate strategies playing a large part in how they aim to achieve this. As such, new best practise standards are being set across the industry and the industry as a whole is truly beginning to address climate related demands. This is manifesting itself in a growing demand for qualitative and quantitative data related to Environmental, Social and Governance (ESG). 
 

Nehla Krir explains how a new understanding of environmental factors are influencing the work of BNP Paribas Real Estate Investment Management (REIM). She points out that, “Looking at our ESG commitments means assessing assets in a number of ways. Firstly, we manage an existing portfolio of around 1,600 properties, which means we must assess the ESG performance of the assets in this portfolio, by prioritising them. What’s more, each time we acquire new assets, they must be evaluated in terms of ESG performance and the level of energy efficiency. This means looking at the location, the typology of properties and in the future assessing the potential climate related risks, for example how vulnerable they are to extreme heat, cold or floods. We must then ask, ‘what is the potential impact of these factors to the asset?’.”

This kind of assessment means that investment decisions must be constantly made relating to if a building should be refurbished, modelled, upgraded or even sold and what the best course of action is to make it more environmentally compliant. As Nehla Krir points out, “this is a time consuming and detailed task and requires us to work with different partners to carry out a thorough investigation of each asset to decide if it is worth the investment.” 
 

Investors are now looking for new sustainability commitments and within this is the broader question of the potential related risks that climate change has on a building. This is where data can and will play a large role in making these assessments, as many factors will impact such an assessment. For example, a building situated in Barcelona may well be at risk of extreme heat and could benefit from solar panels or a garden rooftop, whilst a building in Stockholm might be at risk of snow damage and have to take appropriate measures. 

This means that as Investment Management specialists, the need to look at assets and a portfolio on a broader level, and not just a local one is crucial to tackling the broader carbon footprint of a portfolio. Added to this is the speed of restrictions in different countries, as the timelines for certain measures to be put in place are different depending on the location. 

What’s more, data can play an important role in giving companies a greater idea of their overall carbon footprint, meaning not only the physical climate change risk of their assets but also how the company’s assets affect the environment in ways such as energy consumption, water use and the amount of waste. 

By being able to harness data in such a global way, companies can optimise their building and assets and provide real estate with an informative and incredibly useful overview. 
 

The impact of climate change and risk on investment portfolios mean that steps need to be taken to ensure a certain level of resilience. As Nehla Krir points out, “Thanks to EU and local regulations, we are given a common framework to work towards. This means we work with these regulations, which have pushed the financial sector to classify their products and be able to demonstrate that sustainability risks are now considered for investment decisions and also that these investment decisions can have a positive impact on the environment. This is now a prerequisite for assessing risk and something which our investors push for.”

In this way understanding local regulation is important, combined with data on the potential risk of a building and future climate related risk. The challenge currently for Investment Management is being able to gather data from tenants, as much of this data for the moment remains proxy data so estimated vs actual data is something which needs to be further worked on. 

Nehla Krir outlines how BNP Paribas REIM is addressing the issue by stating that, “Collecting data is an extremely important issue for us. We are currently working with our partner Deepki who are helping us to collect energy consumption data from our tenants. It takes time and also depends on the willingness of our tenants but regulation is helping with this and investor demand is increasing. This means that we can now explain to our tenants exactly why such collection is important. This is driving the whole industry to demand more accurate data and monitor it .”
 

The need for an ESG hub that compiles all climate related data for assets and buildings, is something which Nehla Krir believes is essential for the advancement of the industry. She points out that, “We have to change business plans regularly and need to be transparent with our investors. This kind of ESG data platform would allow us to assess risk and be clear with our investors and tenants. When we make climate risk assessments, we need to be able to assess the risks or opportunities of an asset’s location, and use proxy or real energy and CO2 data to simulate the potential related climate risks. By being able to view this data in one place, we can make decisions about what we need to do for the asset. Do we invest? Refurbish? Or re-develop? Hold? Or sell?”

It is this kind of data and understanding of it that will create greater transparency in the sector, and ultimately make it easier for portfolios to meet net zero targets by 2050. The process also seems to be win-win, as by implementing climate risk strategies through the understanding of data means buildings can reduce their insurance risk, increase rental values and even gain environmental certificates, which makes the more attractive to tenants. 

As Nehla Krir sums up, “We believe we need to be pragmatic, we don’t need to collect tons of data or reporting. The advantage of managing buildings means we also need to take time to adapt the asset, our internal processes and integrate consistent CAPEX plans. I would encourage all asset owners to understand their portfolios and integrate the processes step by step, and in doing so engage with all stakeholders to align everyone. Working in a collaborative way means being able to create a solid ESG framework and help investors get a better understanding of their portfolio’s ESG performance and potential resilience.”