Like it or not, GRESB is the defacto index of choice for the majority of real estate investors looking for a convenient proxy measure for ESG across the funds and companies in which they invest. When Hillbreak engages with institutional investors around the world on behalf of its manager clients, it is the consistent point of reference that nearly all will point to, irrespective of their relative maturity on the responsible investment curve.
In many cases, especially in Asia but commonly in North America and parts of Europe too, investors have yet to develop their thinking on how they should effectively integrate ESG into their real estate allocations and investment strategies. Yet they will often acknowledge that ESG considerations are becoming material and, in the absence of a fully considered approach, are easily seduced by the simplicity (for them) of asking or instructing managers to submit to GRESB and to disclose their results.
At the more advanced end of the spectrum, typical of a number of institutional investors in Northern Europe, and especially from the Nordics and The Netherlands, a more informed view underpins the approach. But here paradox prevails: whilst critical of the inherent limitations of a single, relative global benchmark applied to a highly heterogenous asset class, they will at the same time be relying heavily on that benchmark to drive investment decisions and engagement strategies. For example, some will now insist that all of the funds in which they invest achieve a minimum ‘star rating’ on the GRESB 1-5* scale, or at least present a detailed route map to demonstrate how they will get there. The classic folly of trying to compare apples with oranges.
Admittedly, for those investors with the most sophisticated ESG strategies and policies, GRESB is treated as one of a few tools to support their approach. Yet for many, especially in the non-listed sector, it is very much a case of throwing all ESG eggs into the one GRESB basket.
This is a triumph of concept and marketing for the founders and now, the incumbent owners of GRESB, the Green Business Certification Inc. (GBCI). We have commended the driving forces behind GRESB in the past for the impact the service has had in driving ESG up the real estate capital markets agenda, and we continue to hold the view that the movement would be unlikely to have the profile that it does now were it not for the agency given to investors by the tool.
The irony, of course, is that the greater the traction GRESB receives in the market, the more important it becomes for its owners and operators to be accountable to its customers for its accuracy, transparency, reliability and fairness. And here is where things stumble heavily (it may be a little hyperbolic to claim that they fall flat on their face).
What are the issues?
The recently released response to the 2018 GRESB Survey Consultation from the Better Buildings Partnership (BBP) reveals the frustrations of many of those (major) real estate companies and fund managers that have a history of GRESB participation going back to its founding year, many as managers of multiple participant funds. Strip away the diplomatic veneer, and the BBP response is damning. Moving far beyond polite requests for improvements to the user experience (of which there are some), the BBP members call into fundamental question the trust that can be placed in GRESB. Of particular note are the observations relating to:
- Inconsistent and arbitrary treatment of evidence, commentary and clarifications uploaded to GRESB (with the same evidence or clarifications being accepted in some cases and declined in others) resulting in different scoring outcomes for identical inputs.
- Lack of transparency, openness and fairness in
the scoring and validation process (the ‘black box’ factor), including:
- No opportunity for participants’ results to be changed retrospectively in the GRESB portal where errors in scoring have been identified.
- Participants subject to the full validation process receiving unfair advantage from the tailored guidance given to them by GRESB but which is not shared with others (this effectively amounts to selective coaching by GRESB of some participants).
- Opaque guidance resulting in materially different approaches to data reporting amongst participants, in good faith.
- Questionable peer group allocations and no accounting for the investment strategy of individual entities. In the real world, the relevance and materiality of ESG factors to the risk profile and impact of funds will vary greatly between, say, an opportunistic vehicle with a short holding cycle and a core fund of trophy assets managed over the long-term.
- Methodological concerns that create incentives for perverse behaviours (the ‘tail wagging the dog’ factor), apply arbitrary conditions (e.g. on the timing at which certain measures may have been installed), require information that is often simply not available or internationally comparable and, more profoundly, risk allocation and divestment decisions being made that are based on a biased depiction of portfolio and asset quality. A key issue in this regard is the inadequate distinction between assets over which landlords have management control, and those that do not.
Where are the challengers?
One might be tempted to draw a parallel with contemporary politics in that, in the absence of a credible and effective opposition, the more complacent an incumbent power can be and the more maladministration it can get away with. How resonant does that feel in many parts of the world right now, by the way?! In the case of GRESB, a comment we often hear from investors is that it is the best of a bad bunch of indices available to them that have applicability to both listed and non-listed real estate vehicles. Faint praise indeed! To where should (or could) investors or participants turn for an alternative? None are particularly forthcoming.
That said, there are emerging examples of automated, AI-driven innovations which give an indication of what the future for asset- and portfolio-level benchmarking might hold, although these are currently subject to major constraints of their own, giving rise to similar efficacy and transparency concerns.
GRESB has always claimed to listen to its stakeholders, but in reality, this is subject to an important caveat: if those stakeholders stump up some cash, which, in the spirit of transparency, we should declare that Hillbreak does not – we have always taken the active decision to stand outside of the GRESB tent. Sure, the Survey is subject to annual iteration, typically to a rather modest extent, and there is an extensive governance structure which is inclusive of many users of the service – both investors and participants. But these iterations have not resulted in a resource that is fit for the purposes to which much of our industry is putting it, especially when it comes to the questionable efficacy of making positive or negative screening decisions based solely or predominantly on GRESB scores.
All change (please)?
The 10-year birthday of GRESB is approaching, and much promise has been made of improvements to come to mark its landmark anniversary. Some of those outlined are welcome, especially the distinction of the Assessment into separate Management and Performance Components and the development of an as-yet-undefined Data Quality Standard. However, these fall sort of the reboot that is needed and which, in our view, is already long overdue. Where so much is as stake, duty of care and fitness for purpose are paramount. We continue to wonder if the custodians of GRESB have truly grasped the burden of responsibility that they have placed upon themselves.
Educating investors on the limitations of GRESB as a proxy for risk, quality and performance (arguably, a role for GRESB itself) is rapidly moving up the list of priorities for fund managers, as the number of allocation decisions influenced by the Benchmark become greater. Of course, it is incumbent upon investors to ensure that they understand the systems they are deploying to inform their allocation decisions, especially if they have a fiduciary responsibility to others. Yet it is clear to us that this is commonly not the case and there remains much work for investors and managers to do together as a key tenet of the client-manager relationship.