Environment, social, and governance standards have become increasingly important to investors in recent years. ESG standards give stakeholders additional transparency to risks and highlight opportunities in companies committed to social and environmental change. The GRESB score is a standard rating system that helps investors evaluate these factors.
What Is an ESG Score and How Does It Differ From a GRESB Score?
As impact investing was emerging in the early 2000s, investment expert Ivo Knoepfel presented the idea of considering ESG factors in capital markets. He authored a report spurred by a UN Global Compact initiative that sought to quantify social impact so investors had assistance and clear guidance in making responsible choices. The ESG score meaning is an objective measure of any investment’s environmental, social, and governance performance.
There are many certifications, standards, and frameworks that stakeholders depend on for evaluating ESG performance. Some voluntary frameworks, like the Carbon Disclosure Project, publish greenhouse gas emissions data, while the Dow Jones Sustainability Indices disclose ESG data, assets, and real estate portfolios. The Global Real Estate Industry Benchmark score is a measure of how well real estate companies and funds integrate the standards at the organizational level.
How Does an ESG Evaluation Help Determine an Investment’s Performance?
You should first understand what each component means before you can begin to decipher ESG scores:
Environmental: Actions that impact the environment, such as the use of fossil fuels and natural resources, waste disposal, and carbon emissions that contribute to pollution.
Social: Organizational considerations that impact society, such as employment equality, gender diversity, employee satisfaction, health and safety, human rights, and employee retention rates.
Governance: Factors such as company culture, ethics and values, pay ratios of employees and board members, fraud, and anticorruption and transparency.
Each of these pillars presents opportunities and risks that investors need to be aware of. Conscientious stakeholders want to align with and invest in funds or companies that support their own goals for mitigating climate change, protecting human rights, and working to improve biodiversity, board management practices, gender equity, data security, and transparency. A GRESB score focuses on building data from funds and assets in the real estate industry to help forecast performance by:
- Simplifying the collection and validation of ESG data
- Working with management on opportunities and risks
- Ensuring ESG is a significant factor in investment decisions
- Investigating the portfolio’s environmental footprint
- Planning for emerging regulations and how to mitigate financial risks
What Is a “Good” GRESB Score?
Various methodologies use a 0-100 rating system, typically with a score of 70 or above constituting a “good” rating. Others use an alphabetic system where AAA is the best and CCC is the worst. The GRESB rating uses a numeric system.
The 2021 GRESB Real Estate Assessment determined the benchmarks from a review of 1,520 property companies, REITs, funds, and developers comprising 117,000 assets. They determined that 73 was the average Standing Investments Benchmark score and 79 was the average Development Benchmark score. The numeric scores correlate to a star rating:
- 5 Stars = 86.44 – 99.61, with an average performance score of 61.64
- 4 Stars = 79.37 – 86.37, with an average performance score of 54.5
- 3 Stars = 71.82 – 79.36, with an average performance score of 47.78
- 2 Stars = 61.89 – 71.81, with an average performance score of 40.63
- 1 Star = 8.78 – 61.76, with an average performance score of 27.15
Only 20% of participants receive the coveted 5-Star GRESB score designation each year. This means only a relatively few investments in the real estate industry can successfully show attention to ESG practices in enough areas to achieve the highest scores. Considering these statistics, a star rating of 3 or above would likely be considered “good.” However, many factors determine these scores. It would be advisable to get expert advice on exactly what these scores indicate and what it means for your goals.
An ESG Consultant Can Help You Analyze GRESB Scores
The GRESB score consolidates many factors gathered from data from companies and funds in the real estate industry that provides important indicators of ESG success. However, the results aren’t necessarily self-explanatory, nor are they the only framework that predicts the likelihood of ESG success. Depending upon your goals, risk tolerance, and other criteria, GRESB may not be the only ESG evaluation you should consider. For expert guidance in understanding ESG score meaning to help ensure the best results in implementing your sustainability plans, get in touch with one of our ESG Property Consultants today.