It makes great business sense to go beyond “checking a box” with ESG best practices
BY PAUL BERGERON
Globest Real Estate Forum
Environment Social & Governance (ESG) leads with the environment, and from that,
much of it focuses on reducing greenhouse gas emissions, something that
commercial real estate is striving to do as reports show buildings emit 40 percent of
carbon, according to the US Green Building Council.
Apartment operator Veritas, based in San Francisco, has been ahead of the curve in
planning and executing strategies that not only cut emissions but attract residents
and investors.
The company has grown its portfolio of apartments and mixed-use multi-family
considerably in recent years.
Jeff Jerden, COO, Veritas tells GlobeSt.com that it’s taken a while for commercial real
estate companies such as apartment owners to focus greatly on ESG for their
operations. He said a report from 2021 on ‘Why ESG?’ points to institutional investors
initiating the trend, which is trickling down to the real estate operators with whom
they invest.
An excerpt from that report read, “The era of companies being able to sweep bad
behavior under the rug is soon to be over. For too long, companies have been
allowed to look profitable when the cost of using public assets – such as clean air
and water — has not been properly accounted for in determining profits.”
At First, Tracking Seems ‘Cumbersome’
For investors focused on ESG, improving environmental sustainability generally
comes with an attractive return on investment. Many institutions are going beyond
“checking a box” with ESG and want partners who embrace these issues and have
long-term abilities to perform to these shared goals.
“When you first start tracking progress toward ESG principles it will probably seem
cumbersome, even elusive,” Jerden said. “Not everyone will agree on what should be
measured or how. But part of the progress is having those conversations and
agreeing to start somewhere.”
Jerden said Veritas didn’t wait for widely-accepted or mandated standards.
“We’ve jumped ahead in the past couple of years by heeding signposts on metrics
that were becoming widely accepted, but investors and operators still on the fence
shouldn’t wait for one to become the ‘gold standard,’ he said. “They can and should
instead be moving in the direction of implementing a measurement and reporting
methodology – now.
Escaping the ‘Wild, Wild, West’ of Reporting
Jerden said the biggest challenge that real estate firms have faced to get through
initial due diligence on greenhouse gas/climate reporting compliance such as the
Carbon Risk Real Estate Monitor (CRREM) and GRESB is that ESG was in the “wild,
wild west” of metrics and reporting.
“That ‘wild west’ mindset has made it difficult for real estate operators to anticipate
what institutions want, but the conversation is rapidly fixing on CRREM, GRESB and
the US SEC’s reporting requirements for Scope 1, 2 and 3 emissions.
- Scope 1 emissions are those that come directly from an organization’s owned or
controlled source.
- Scope 2 emissions, also known as indirect emissions, are emissions from
purchased electricity, heat, steam, or cooling consumed by the company, but
generated elsewhere.
- Scope 3 emissions refer to carbon impacts across a company’s value chain,
outside of its direct control.
“Operators who more deeply understand and begin to echo ESG strategies will be in
the best position to align with institutions,” Jerden said.
“Industry consultants and investors themselves tell us that, soon enough, operators
won’t even get to the initial due diligence stage of institutions pre-qualifying a
partner, unless the operator can show a strong track record, a deep understanding
of ESG issues, and robust reporting capabilities to back up the performance. All of
the above is dependent upon data-driven, well-designed information systems.”
Achieving ‘Early-Mover’ Status
Jerden said that Veritas has had the benefit of an early-mover status thanks to ESG
having been an important component of our LP’s investment criteria since the
beginning of our partnerships.
“For us, the upfront investment of time in overcoming compliance issues has meant
that our focus now is instead on working with existing investors first to understand
what’s important to them and why. From there, we can align their goals into our own
environmental programs.”
Veritas’ portfolio primarily is made up of smaller-scale assets with 20-50 units per
building – a segment that is known for being difficult to operate at scale.
But thanks to the Veritas:DRIVE backbone, he said the company is able to instill in its
portfolio a level of efficiency more commonly seen at properties with 300 units or
more.
“This allows us to deliver better, cheaper and faster service to our residents, and to
our investors,” Jerden said.
“For example, we instituted centralized leasing operations (CLO) and centralized
maintenance operations (CMO) that are unusual if not unique for a firm of our size.
We use artificial intelligence to efficiently route technicians in the field and have
implemented thoughtful automation to streamline complex internal workflows,
making scale possible for buildings that often average fewer than two dozen units
each.
To read the full report, click here.
