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The Devil’s in the Data

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Written by Frankie Demetriades, Associate Director, ESG UK

Net zero carbon, carbon neutrality, net zero in operation, net positive carbon…these terms have become commonplace within the real estate sector. The need for the sector to de-carbonise has generally been acknowledged, and the race is now to see who can accomplish it first. However, fundamental to achieving these targets, is understanding how our buildings are currently performing and what needs to be done to transition to Net Zero Carbon (NZC). Which is where ESG data comes in.

ESG data reporting has been carried out by institutional landlords for many years now, usually by an inhouse sustainability team or a consultant. The data collected might be used for benchmarking purposes such as GRESB, or cited within an annual ESG report, or simply saved in an excel file to be used at some undetermined later date. The rapid rise in recognition of the importance of NZC though has meant that ESG data has suddenly been thrust into the limelight, and all the challenges, inaccuracies and frustrations that sustainability teams have been feeling for years, have now become apparent to the wider market. ESG data is messy.

Consider energy data, for example. Previously this information was used only by a small section of the industry, yet it’s now become relevant to a much broader selection of professionals including asset managers, investment managers and investors themselves. As these agents look to use this information to inform investment and business decisions, the process of collecting and verifying ESG data needs to go through a maturing process to match this increased investor demand, yet the traditional hurdles to achieving this are still present. The 2022 ‘Evora Annual Investor Survey’, for example, stated that 86% of respondents questioned the quality of their ESG data and didn’t consider it to be ‘investment grade’.

One of the persistent challenges with the collection of this data, is the multitude of stakeholders involved. Most landlords won’t directly procure the energy used to run their assets, and therefore they won’t have visibility of that consumption data. In this instance landlords are reliant on tenants to provide the data, but largely they aren’t obliged to do so, and even if they are willing to share, it might not be at the required granularity. Data quality is also particularly problematic as it’s difficult to determine whether there are automation processes in place, whether it’s been manually entered and whether there are verification checks in place at all. This lack of direct access to the information is one of the materials problems with providing investment grade ESG data.

What’s more, whilst investors and fund managers are looking to utilise this data for their investment decisions. The problem is that ESG data doesn’t necessarily map to the parameters of traditional financial data, which means there can be problems in translation. Firstly, it’s unlikely that the data will be as up to date as financial information as it can sometimes take months for utility providers to issue their invoices. Secondly, whereas a fund manager might look at a building as a single asset, in terms of ESG data there could be numerous sources which might, or might not, correlate with the parameters of traditional lease structures. Thiscan lead to issues with storing the data in the correct format against the right unit, and therefore with how that information affects the decision-making process.   

Different options to overcome these issues have been trialled within the market with varying success depending on the asset types, lease structures, occupiers in situ and the equipment available. Amongst other options, these could include installing data loggers to monitor energy consumption, which can be expensive and requires tenant consent, and data sharing clauses within commercial leases, which can be difficult to enforce though often provide a useful point of reference within lease terms. Unfortunately, it’s likely that trial and error will be the best way to find the solution, or mix of solutions, that are most effective for a specific portfolio.

Whilst there isn’t currently a definitive solution to this issue, there are reasons to be optimistic. Businesses of all sizes and sectors are becoming more aware of the importance of ESG, which makes the conversation around data sharing much easier. Technology also continues to develop which will improve the accuracy and reliability of the data collected. Finally, there is a growing industry demand for regulatory intervention requiring the sharing of this information. This has already been seen in certain provinces in Canada, and for larger buildings in France, and these examples could pave the way for similar schemes to be introduced in the UK.

ESG data may remain a problem to be solved, but as the key to achieving the industries NZC ambitions, the focus on finding a solution has never been greater. As they say, the devil is in the data.