ESG audit in real estate assets, what is it?

The real estate sector, impacted by new consumption habits, demographic and social changes and a greater awareness of the need to care for the planet, is going through a new era in which sustainability is key. In this way, the ESG (Environmental, Social and Governance) concept is increasingly present in all activities in the sector.

The concept of integrating ESG in the process of investment analysis, selection and valuation of assets, management and optimization of portfolios is today a fact for most investment and asset managers, which in turn what they do is reflect the demands and preferences of institutional and private investors.

In the Real Estate sector, the integration of ESG aspects in the process can be carried out both at the organization or entity level, as well as at the portfolio or individual asset level.

In the case of organizations or entities that manage real estate assets, it is necessary to take into account how they also integrate ESG in their acquisition, operation and maintenance and divestment processes. Likewise, the fact that they have a clear ESG culture, as well as an ESG strategy, ESG risk management and implementation of ESG aspects in operations throughout the cycle of managed assets and portfolios (acquisition, management, divestment… ). At he same time, within G (Governance), all aspects of transparency and reporting are included (global ESG ratings such as those of Sustainalytics or GRI, or specialized in real estate such as GRESB).

Carrying out a materiality analysis (ESG factors with a financial impact on the stakeholders considered) for the entity or organization is the basis on which the ESG strategy is usually built, which will later lead to the implementation of specific plans.

In the case of portfolios or specific assets (real estate), the scope of the ESG audit should include some of the following aspects, based on the materiality analysis and ESG strategy previously carried out:

1. Environmental Assessment:

• ESA Phase 1 according to ASTM E 1527-13, which also includes, for example, materials containing asbestos, radon, lead-based paints, PBC, alumina cement, etc.
• Controlled equipment against air and water quality infection risks, such as legionella or containing prohibited CFCs.

2. Risks from natural disasters: Risks from earthquakes, tsunamis, risks from water floods, risks from extreme weather conditions.

3. Sustainability assessment:

3.1. Decarbonization: Roadmap for decarbonization at 20 years with an increase of 1.5º C
(CREEM route): Determination of the CO2 balance, the final energy demand and the primary energy demand for heat and electricity in kWh/m2 per year, based on the energy efficiency certificates and/or the values ​​provided by the seller. Realization of the stranded assets diagrams.

3.2. Evaluation of compliance with the requirements of the EU Taxonomy, including the criteria for Substantial Contribution to some of the environmental objectives, and No Significant Harm to the rest of the environmental objectives, while ensuring the Minimum Social Guarantees.

3.3 Pre-Assessment of green building certificates (for example, LEED, BREEAM, HQE, DGNB, VERDE).

3.4 Energy Performance: Energy Performance Certificate (EPC), local thermal regulations and building compliance, Energy Monitoring Systems (EMS).

3.5. Carbon Footprint: Calculation of the carbon footprint of existing buildings according to ISO 16745-1:2017 or other standards. As well as proposals for reduction and, where appropriate, compensation.

3.6. Water management: optimization of potable use, recovery of rainwater and gray water, efficient irrigation systems.

4. Social performance and governance

This section will evaluate, among others, aspects related to:

4.1. Control and measurement of indoor air quality, as well as other aspects related to health and well-being.

4.2. Pre-evaluation of health and wellness certificates such as WELL or FITWELL.

4.3. Building accessibility.

4.4. Mobility resources: Availability of public transport, facilities for pedestrian or bicycle access, electric chargers, shared vehicles.

4.5. Community Relations: Scheduled events for ESG discussion, support for local initiatives, tenant services communications.

4.6. Transparency: Tenant satisfaction surveys, scheduled meetings with tenants, ESG communications to tenants.

5. Other aspects

Those related to Smart Building (WiredScore connectivity certification, digital performance, etc.), or other environmental, social or governance aspects that have been key in the materiality analysis can be included.

The process of an ESG audit would be as follows:

Firstly, an analysis of existing data on the property is carried out, continuing with an on site visit in which to collect and analyze all the relevant information, which is as follows:

• Basic data of the property.
• Property description: footprint, year of construction, location and alignment, significant aspects of the construction, important retrofitts.
• Responsibilities of the owner and of the different contractors: maintenance, waste management, security, etc.
• Construction description: description of structures, facades, insulation, glazing, doors and windows, installations and equipment. Accessibility systems.
• Description of the building management policies by the owner.
• Description of the operation and maintenance programs.

After the visit and the analysis of all the information, the audit report must be prepared, which will bring together all this information, giving the necessary recommendations for compliance with the proposed ESG regulations and objectives, as well as the CAPEX identified to meet these objectives.

It is important to note that an ESG audit can be carried out both in the acquisition process (as part of the due diligence of the asset) and during the asset management or asset portfolio phase (asset management). Both the buyer and seller of the property, as well as the property manager, must be involved in the audit process, which will generate transparency regarding the ESG compliance situation and therefore support the Governance aspects that are also included within the ESG concept.

As can be seen, ESG audit processes include very varied aspects, on which specific specialized knowledge is required, which is why they will normally require the participation of several experts from the advisory or consulting organization, which must have proven experience in this type of audit. processes.

Ineria Management has advised on a multitude of purchase and sale operations, as well as property management, through the performance of ESG audits and ESG consultancy specialized in the aforementioned aspects, contributing to the process of natural integration of ESG in the life cycle of real estate assets.