ESG checklists are becoming more common as a standard part of CRE due diligence as the CRE industry continues to expand their risk and opportunity lens to futureproof their assets and investments. The scope of these checklists varies significantly from one company to another depending on their goals for obtaining the information and the level of maturity of their sustainability program. From 5 items to over 100 items, property owners and investors are gathering a broad range of ESG information as part of the Property Condition Assessment (PCA) or as a stand-alone deliverable. In this brief, we’ll share what we’re hearing from clients about the wide variety of ESG Checklists. We’ve gathered this data from direct client requests, commercial real estate associations, and rating agencies.
Most Common ESG Checklist Items:
- Green Building Certifications and Energy Star Certification – Including the Version (if applicable) and Date Obtained
- LED Lighting – % of Property
- Energy Star Appliances – % of Property
- Low Flow Water Fixtures – % of Property
- Recycling Programs
- White or Reflective Roofing’s
- Presence of Renewable Energy Onsite
- Presence of EV Charging Stations
- Walkability Score
Less Common but Growing in Importance ESG Checklist Items:
- Building Energy Performance Considerations, such as:
- Is the property subject to energy performance reporting or energy benchmarking laws?
- If so, is the property in compliance?
- If not, what are the potential costs associated with non-compliance and what are the upgrade costs required to achieve compliance?
- Physical Risk and Resilience Considerations, such as:
- Is the property subject to elevated physical risks such as flood, wind, wildfire, extreme heat, etc.
- Are there any existing resilience measures in place (resilient roofing, floodproofing measures, wildfire prevention, etc.)
- What are the potential costs to the building associated with the hazards
- What are the potential costs for recommended resilience measures
ESG Checklist Items Covered in Energy Audits:
On occasion, clients will ask for items in the ESG Checklist that would also be covered in an Energy Audit. While it’s possible to include these in a Checklist, the ideal scenario for those who want the full picture is to invest in an Energy Audit. The biggest difficulty in this review is getting access to the utility data. Items typically included in an Energy Audit include:
- Energy and Water Consumption
- Energy Use Intensity Calculations
- Greenhouse Gas Emissions Calculations
- Utility Data Information
- Available Utility Incentive Programs
- Efficiency opportunities for major equipment nearing end of useful life
- Utility Data structure
Business Enterprise and ESG Checklist Items:
A category of ESG items sometimes included in a Checklist are more related to the business enterprise than to the real estate asset. These items can be challenging to ascertain in the field during a site inspection:
- Governance related topics such as
- Has the entity made a commitment to an ESG Leadership Standard or Reporting Framework?
- Does the entity have a DEI program, including supplier diversity, in place?
- Is there an existing off-site source or renewable energy credit benefiting the property?
If possible, it is recommended that these items be covered in interviews with representatives at the organizational level rather than on-site property managers.
Final Thoughts on ESG Checklist Items
In summary, ESG checklists are becoming more and more common as a standard part of CRE due diligence. The scope of these checklists varies significantly from one company to another depending on their goals for obtaining the information and the level of maturity of their ESG program. Our recommendations for developing an ESG Checklist are as follows:
- Begin with the end in mind – Plan ahead for how you will use the information whether it be for your organization’s sustainability reporting or property level risk management and underwriting or both.
- Start somewhere – Use a crawl, walk, run mentality to build your organization’s capacity to obtain and digest this information. But start. If your transaction or acquisition volume is slower than usual, this is a great time to begin adapting your existing processes to incorporate these new risks and opportunities.
- Break down the silos- Connect the sustainability teams with the underwriting and asset management teams so that information that is collected is used in a meaningful way across the organization.
Sustainability of business operations involves future-proofing all aspects of the business, and this information has value to different parties in various ways. For instance, information about physical climate risks and resilience measures can also have value to the underwriting team as it relates to property insurance rates, and to the property management team as it relates to natural hazard preparedness measures. Risk management and due diligence are long-standing existing processes in CRE, and adding ESG Checklists is a streamlined way to connect sustainability to existing risk management and asset value preservation goals.
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