ESG is set to be a key topic for 2023, with investors, operators, developers and asset managers working hard not only to improve their performance, but also comply with a growing raft of legislation.
Panel of experts
- William Hulls, chief revenue officer, Demand Logic and board member of the UK Proptech Association
- Jimmy Jia, head of ESG, Pi Labs
- Ami Kotecha, co-founder, Amro Partners & chair of the UK Proptech Association
- Roelof Opperman, founder and chief executive officer, Cognovum
- Andy Saull, senior consultant, CBRE
- Darren Williamson, national head of real estate, Freeths
- Chair: Andrew Saunders, contributing editor, Property Week
Panellists at the proptech think tank event explored the hot ESG issues and how proptech can help to address them.
Ami Kotecha: Decarbonisation and energy security are two of the biggest issues right now. Proptech start-ups that either tackle energy efficiency using smart infrastructure and the Internet of Things,or provide renewable energy installation and management services, are seeing major growth in demand for their services. Operators can now access useful insights to manage down consumption without sacrificing comfort.
At the UK Proptech Association, we are also seeing a number of climate tech startups that respond to pain points around managing whole life carbon processes and tools that encourage transparency and counter greenwashing.
Jimmy Jia: The real estate sector is the ESG sector. After all, what is real estate but the consumption of environmental resources for the creation of social spaces? So nearly every business decision that is made within the sector will affect either the E, the S or the G in one way or another.
But there is a problem with metrics and standards: the metrics we have don’t help us to make day-to-day decisions. Does an EPC rating help you decide how much is worth spending on upgrades? Can you use a Scope 1, 2 or 3 [direct and indirect carbon emissions measurements] to decide when to construct a new building? No. And even the standards that we do have are changing – this year alone, both the greenhouse gas protocol science-based target initiative and the GRI [Global Reporting Initiative] are under revision. So if you are trying to decide what’s going to be green by 2030, what do you do?
Darren Williamson: The lack of standardisation is a big gripe from my clients when looking at ESG policies. EPCs, NABERS, BREEAM – you can’t put them all together. So, in the absence of a global standard, companies have to put together their own, which is time consuming and subject to change. The other thing clients are looking to proptech for help with is stripping out some of the costs involved in ESG compliance.
These things come at a cost and on top of three years when so many other costs – energy, financing, construction – have already been going through the roof.
Andy Saull: Every corporate has their target and has made their statement about wanting to reach net zero by a certain time. But nobody really understands how they are going to do it, or the measurements and the data they will need. Take retrofitting: as much as 75% of carbon is embodied during construction, so we must look at how proptech can help make efficiency gains in existing stock. But the retrofit rate in Europe is only around 1% per year, and 20% of buildings don’t even meet current Minimum Energy Efficiency Standards [MEES]. We need to triple the retrofit rate: very few companies have set aside the multiple millions that it will take to do this but it is potentially a big opportunity for proptech.
Roelof Opperman: One big problem is that people don’t know what the government is going to do – there’s a huge amount of uncertainty around policy that is creating confusion on the investment side. Take MEES – no-one knows what the heck it is in terms of the legislative process. And carbon offsets are mostly a complete joke – I call them carbon indulgences. People are starting to ask whether it wouldn’t it be better to invest in real innovation, so we can be truly net zero, rather than in these indulgences that aren’t really helping?
Where do the big opportunities lie for proptech that aren’t currently being addressed?
Kotecha: One area proptech can play a bigger role is in solutions for optimising and managing distributed energy systems, because that’s the future. It’s not about switching on a light and expecting the electricity to come only from the main power grid any more, the options now are so varied and tiered: solar, wind and hydrogen; waste heat as fuel sources; vehicle to grid batteries; district heating as storage and distribution options; and more to come.
Typically, we see point solutions from proptech that provide answers to a single part of a problem – there’s a massive opportunity now in looking at things more holistically.
We also need to collect more and better quality data, and apply algorithms that help us to optimise and automate more decisions – I believe there will be a big role here for generative artificial intelligence in the future.
Saull: We are discussing only 2% of total global real estate. What about the 98% long tail of real estate that isn’t owned or managed by pension funds? Some 90% of population growth by 2050 is going to be in Africa and Asia, where there are limited building codes.
Opperman: That’s why you must look at innovation. In Europe, the UK and the US, everyone is looking for regulation to solve this, and it’s not going to. You can’t go to India and China – which produce a lot less carbon on a per capita basis by the way – and tell them they can’t have better standards of living or continue to grow. The only way to do this is to innovate.
There is a lot of attention on the ‘E’ of ESG, but what about the other factors – social and governance?
Jia: The ‘S’ and ‘G’ are separate issues and should be treated as such, even though they all feed back to the same business processes. ‘E’ is fundamentally a decision that affects a resource flow: energy, water, carbon, materials. ‘S’ is about access: a safe working environment, an equitable salary, and some other benefit that a person does not normally have access to. The governance is ‘How do we know?’ I can say ‘I have a good social impact and I can give you the numbers to prove it’, but how do you know those numbers are correct or trustworthy?
We need to triple the retrofit rate; very few companies have set aside the multiple millions it will take to do this
Opperman: It’s very hard to solve more than one problem at a time. We need to prioritise the ‘E’ over the ‘S’ and the ‘G’. People are confused about what the ‘S’ and the ‘G’ are. They are hard to define and get gamed, so you end up with the situation where a major oil firm gets higher ESG ratings than Tesla, for example. But if you really believe in climate change, it’s the ‘E’ that is existential; if you don’t focus on that first you don’t get to worry about the other two.
Kotecha: I don’t disagree that ‘S’ is harder than ‘E’ and there are differing views about what it stands for and the materiality behind it. But I do disagree that ‘S’ is less important than ‘E’. For instance, we have lots to do on gender parity – not just on the gender pay gap, but also in terms of parity of power – and inclusion. Those are big ‘S’ issues that are measurable and that can be actioned.
Saull: There are new benchmarks emerging thanks to proptech that will enable us to measure social impacts, and they are linked to environmental factors. There is a lot of discussion currently about poor air quality and how it can inhibit people’s performance. Air quality is inextricably linked to your HVAC system, so why are we talking about wellbeing and sick days in isolation from energy efficiency? If we measure these benefits together, the investments required for better technology start to make a lot more sense.
Is ESG viewed by the sector as a cost, or as a duty to stakeholders, employees and society as a whole?
William Hulls: Our data shows us that what people want from their buildings is changing. As well as asking about the rent per square foot and the service charge parameters, tenants do increasingly want to know what the air quality their people will be working in is like, how it will be monitored and what’s being done to optimise the HVAC systems. That’s being driven by a big increase in public awareness around things like the impact of particulate matter on air quality.
We have lots to do on gender parity and inclusion. Those are big ‘S’ issues that are measurable and can be actioned
But ESG is also really starting to hit the bottom line – we’ve got clients whose energy bills have gone from £280,000 to £1.2m for a single building. As a result, in the past nine months we’ve seen a huge shift from companies passively look at ESG and trying to put together a carbon reduction plan to them saying ‘We need it now’.
Is it harder for smaller firms to make good proptech decisions, and where can they get advice?
Williamson: If you are a smaller operator or developer it can be very hard to understand what’s out there in terms of ESG proptech, and what will work best for you. It is easier if you are a large company with the money to invest in researching what’s on the market.
Hulls: The proptech industry is now huge considering it didn’t really exist 10 years ago. So there are many different solutions, but a lack of education around not only the ‘E’ (environment) but also the ‘S’ and the ‘G’ needs to be tackled. The government is hiding away from this and letting the big companies take the lead.
Saull: The first step must be reporting on energy. Are you collecting granular energy data and storing it in purpose built, energy software rather than a spreadsheet? You can’t understand any sort of strategy until you understand how your buildings operate. It’s not just an issue for smaller businesses – CBRE did a survey of our 100 largest accounts recently that found 60% said they did not have the correct data – some of the largest real estate firms in the world.
Kotecha: I recommend that they contact us at the UKPA, we have a number of proptech members who can assist and who have more than likely dealt with SMEs as part of their own growth journey.
Opperman: If you Google ESG software or smart meters, you’ll find there’s some really good off-the-shelf hardware you can attach to your meters and monitor through software. Or you can go to your tenants and ask them to share their data. People who aren’t from a technology background can sometimes view tech as some sort of scary alternative universe. However, it’s just a practical tool that everyone can use.