Dr Nathan Delacrétaz, Post-doctoral Researcher at the Center for Risk Management at Lausanne, outlines a scoring system offering investors a nuanced understanding of Swiss real estate funds’ commitment to sustainability.
When it comes to global sustainability objectives, the real estate sector is a pivotal force, wielding substantial influence in the collective effort to meet the ambitious 2050 goals. Switzerland’s real estate market, representing nearly 40% of the nation’s total energy consumption according to the Swiss Federal Office of Energy, plays a central role in the larger challenge. Although energy consumption is of course a critical factor in the Swiss transition programme, it is crucial to recognise the additional impact of the real estate sector too. The complexities of the real estate sector, which involves a variety of activities and considerations, underscore the necessity for a comprehensive approach.
Most prevailing ESG certification labels are not able to fully capture complex real estate dynamics. Due to the heavy workload and the financial cost involved, these labels, while valuable, often favor larger investment entities, making them inaccessible to a broader spectrum of participants in the real estate market. This limitation results in an incomplete narrative, leaving significant portions of the real estate market unexplored and unassessed.
Responding to the challenges posed by the 2050 climate change goals and the limitations inherent in current ESG certification labels, the Center for Risk Management – Lausanne (CRML) has developed the Public Real Estate Sustainability Switzerland (PRESS) scores. This transformative solution is systematic, comprehensive, public, and independent, seeking to redefine the assessment paradigm for Swiss real estate. The aim is not only to democratise access to ESG insights, but also to provide a comprehensive and forward-looking perspective. In doing so, we navigate the complexities of the real estate sector, and align with global sustainability objectives.
From survey-based scores to public data-based scores
For the past two years, our approach to evaluating the ESG practices of real estate investment vehicles relied on comprehensive surveys, offering an in-depth understanding of sustainability strategies and behaviours. While informative, this survey-based methodology revealed several drawbacks.
The survey data, sourced directly from investment vehicles, suffered from a lack of homogeneity in quantitative measurements, particularly concerning CO2 emissions. This heterogeneity presented a challenge, as different funds employed varying measurement approaches, which affected the precision and reliability of ESG evaluations.
However, the limitations of the approach extended beyond data heterogeneity. As the exclusive use of funds’ data faced constraints in disclosing detailed information on individual funds’ ESG evaluations, this confidentiality posed a significant drawback, hindering financial actors from obtaining a comprehensive view of the ESG landscape within the real estate sector.
In response to these challenges, a significant transition was initiated with our industry partner Quanthome, a Swiss start-up providing data processing solutions based on quantitative methods for the entire real estate industry. Shifting from a survey-based approach to leveraging building-level data and fund communication, enabled us to address the inconsistencies encountered in the previous methodology.
The move to building-level data allows us to independently estimate CO2 emissions, for instance, eliminating dependence on the disparate methodologies used by individual funds. This approach ensures a more uniform and reliable assessment of ESG metrics, providing a comprehensive and accurate picture of each investment vehicle’s sustainability performance.
Moreover, the data not only resides at the building level but is also informs the funds’ communication. This unique combination allows for the evaluation of the funds’ strategy in a forward-looking manner whilst also evaluating the application of these strategies in the field. This dual perspective provides investors with a more comprehensive and nuanced understanding of the ESG practices of real estate investment vehicles.
Moving forward, our commitment to transparency and accuracy has led to adopting a public data-based approach. This methodology utilises publicly available data at the building level, alongside insights from funds, ensuring a more transparent and up-to-date evaluation of ESG practices. This strategic shift empowers the delivery of freely accessible ESG evaluations, fostering transparency and facilitating informed decision-making for investors.
The architecture of PRESS scores
At the core of evaluating Swiss real estate funds’ ESG performance is an integrated methodology that combines quantitative metrics with textual analysis, ensuring a comprehensive assessment.
The quantitative approach systematically addresses key factors at both building and fund levels, providing relevant metrics for the ESG pillars. These metrics are then aggregated, offering insight into sustainability management at the fund level. The environmental pillar is captured through indicators like energy intensity and CO2 intensity. The social pillar encompasses considerations such as accessibility, rental pricing, outdoor noise pollution, and tenant policy. The governance pillar is evaluated through indicators such as Minergie share of buildings, gender diversity of the board, ratification of international treaties, and sustainability reporting.
Complementing these quantitative metrics is a textual analysis which is derived from a detailed review of annual reports. By employing a specialised ESG dictionary and using a `bag-of-words` strategy, the relative occurrence of each term in the dictionary is assessed. This textual analysis enriches the evaluation by capturing the real estate funds’ narrative and commitment to sustainability. This in turn allows for the measurement of aspects beyond the quantitative approach, such as employee well-being. Importantly, this textual analysis provides qualitative forward-looking insights into the strategies shaping the future sustainability landscape for each fund.
This integrated approach which combines both quantitative and textual analysis forms the foundation of the PRESS scores system. It ensures a comprehensive and readable assessment, providing investors with a nuanced understanding of Swiss real estate funds’ commitment to sustainability.
What lies ahead for PRESS scores
In the dynamic landscape of sustainable investing, the implementation of PRESS scores emerges as a powerful tool, providing investors with deep insight and elevating market transparency. The commitment to providing clear, independent, and accessible ESG evaluations signifies a paradigm shift. Our initial emphasis on real estate funds included in the SWIIT index (comprising real estate funds with a listing on the Swiss Stock Exchange and at least 75% of their fund assets invested in Switzerland) facilitated streamlined access to crucial data, establishing the groundwork for a robust and transparent evaluation process.
The current system is limited to listed funds, and we recognise that there’s a need for increased coverage, especially for funds specialising in commercial real estate and other investment vehicles, including real estate companies and foundations. Moving forward, our dedication to advancing sustainability in the Swiss real estate sector remains unwavering, and includes future plans for enhancing the indicator set, and integrating challenges posed by climate change. The PRESS scores set the stage for a more transparent, accountable, and sustainable future in the Swiss real estate market.
This article was co-authored by Eric Jondeau, Professor of Finance at HEC Lausanne, the business school at the University of Lausanne and Co-director of the Centre for Risk Management (CRML).