Cracking the occupier problem: why bother with tenant ESG data collection and engagement?
On the path to net zero, problems are aplenty; the goal is so urgent given the ever closeness of our 2030 targets, and there’s so much interference and resistance, that our sustainability efforts must be targeted for the greatest benefit.
The question “why bother?” is thus not only sensible to apply to each emissions category, but imperative – why should you, as a real asset owner or investment manager, even care about your occupiers’ emissions and emissions reduction targets?
Even once the “why” has been answered for your assets, the “how” is usually the tougher nut to crack – many readers from the real estate sector will be familiar with the struggle to get data coverage points for the tenant-controlled spaces when reporting to GRESB, or the tussle with occupier’s legal teams when you try to add data sharing clauses into leases.
In this piece we will answer these questions, unpack some of the complexities around tenant data reporting and give you a glimpse into our work with a variety of real estate industry players as well as future regulatory changes.
Scope 3 emissions – out of sight, out of mind
In GHG accounting a company’s Scope 1 and 2 emissions are direct emissions that have been created as a consequence of its activities. Scope 1 are direct emissions that are generated by the company’s owned assets (e.g. fuel combustion in owned buildings or cars) whereas Scope 2 occur from sources not owned or controlled by it – the emissions from power generation supplying it with grid electricity.
Scope 3 emissions are those that result from activities from assets not owned or controlled by the reporting company, but which the company can indirectly affect in its value chain. Scope 3 is split into 15 distinct categories. For many companies, Scope 3 emissions are where their biggest impacts lie – but they can be easy to dismiss as “one step removed” and their importance is questioned due to the difficulty in quantifying their actual impact.
Tenant emissions fall into Scope 3 – or do they?
The GHG protocol allows several reporting consolidation approaches (deciding what is in or out of reporting). If you are a real estate asset owner or investment manager, your approach will determine how the emissions from tenant demises are classified. If the financial or equity consolidation approach are applied, then all emissions from an owned building should be included in Scope 1 and 2 reporting.
If, however, the operational approach is used – and it enjoys great popularity in GHG reporting – then the situation becomes more convoluted. A company has operational control over an operation if it or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation.
So, in a situation where you lease out a space where the tenant has its own fiscal utility supply meters, is in charge of its fit-out and the operation and management of its premises, then you as the landlord could say you have no operational control, and the tenant’s energy consumption can be excluded from your Scope 1 and 2, and reported under downstream investments in your Scope 3.
A little confusing so far – but it’s about to get worse...
In managed buildings, the management company, contracted by the asset owner or manager, tends to be responsible for obtaining the utilities for the entire building, and is therefore the bill-payer to the utility supplier. In these situations, the asset owner will often “see” the consumption of the whole building, covering both common areas and tenant spaces – but in the absence of submetering to specific spaces, a more granular breakdown will not be available and the tenants simply pay a share of whole building consumption based on their floor area.
What cannot be measured, cannot be managed – and a tenant who has no visibility over its energy consumption or control over its HVAC system will not be incentivised to own or reduce their consumption. This is the kind of “grey area” situation where whole building consumption should be reported in the asset owner’s Scope 1 and 2 emissions due to a lack of visibility or control by the tenant, which also shifts the lack of specific visibility on units that are responsible for higher consumption to the asset owner.
As far as investors and management teams investigating cost effective reductions are concerned, Scope 1 & 2 emissions are the figure looked at in GHG reporting, as Scope 3 data is seen as a lot more difficult to measure and trust. The intuitive interpretation of Scope 1 and 2 emissions is that these are more direct and immediate impacts which you have greater control over - and should therefore be able to reduce more swiftly and effectively.
This means that at a glance, inflated Scope 1 and 2 footprint may make your portfolio appear at a disadvantage, and there is a reputational risk there - especially as investors often rely on headline figures and may not dig into the detail enough to understand your methodology. You will also find difficulty in justifying year on year trends if you cannot specify why there are changes in your data, which in reality was due to tenant choices that you currently have no way of knowing.
A complete picture is needed for effective prioritisation
Even more importantly, to set an effective net zero strategy you need to be in possession of a realistic understanding of where your carbon impacts lie, and where your areas of influence are - something that was noted in the recent SBTi report reviewing the impact of the 1.5 degree campaign, where 53% of those surveyed highlighted the challenge of Scope 3 being a barrier to them when trying to set net-zero targets. Your commitments must be underpinned by realistic and detailed bottom-up asset intervention planning to be effective.
This should in turn reflect the real-life opportunities for reducing emissions – which will become clear when you have granular data and can understand what is driving whole-building performance (e.g. if the energy-efficient tenant A is effectively subsidizing the high consuming tenant B, as they both pay for their energy based on floor area). You can’t do that if you don’t know your tenant consumption – either through a lack of submetering in managed buildings, or through a lack of access to data in building where tenants procure their own supplies.
When it comes to utilities obtained directly by the occupier, many asset owners and investment managers have close to zero visibility into their magnitude. This is particularly common for full repair and insure (FRI) leases, which are prevalent in single-tenanted buildings, and some specific property types, such as retail outlets, residential, or industrial properties.
This is worrying from both an accuracy in accounting point of view as well as for any asset management or portfolio management teams that need to target emissions source to reach their commitments, as this consumption usually forms a major part of the asset owner’s Scope 3 GHG footprint – especially if the portfolio churn is low.
Estimation of tenant emissions
In many instances, companies will try to obtain a full picture by estimating the emissions associated with tenant spaces using typical industry GHG intensity benchmarks applied to the unit floor areas.
This is a useful first step for a preliminary understanding of the portfolio and should be encouraged for companies at the start of their net zero journey.
However, due to the massive role that a building’s operation plays in determining its energy performance and benchmarks primarily being based on older data, benchmark-based estimation can yield building level figures which can over or underestimate actual consumption by over 20%, sometimes resulting in a very inaccurate measure of actual portfolio emissions.
Since benchmarks are generally lacking in granularity and do not take local context into account, they are a very poor way to identify assets that present a stranding risk, or assets which are likely to be a problem when trying to achieve company targets and what level of intervention is required to get back on the right track.
Key drivers and benefits of engaging with occupiers to understand the consumption they obtain directly:
If having read the above you still need some convincing, here is a list of the key benefits of trying to collect data on your occupier consumption:
- Accurately track your full impact
For most real estate companies, occupier utility consumption accounts for the vast majority of their Scope 3. This data is needed for accurate planning and reporting.
GRESB, the Global Real Estate Sustainability Benchmark, places very high value on complete Scope 3 emissions data coverage, and this is a major driver for improved data collection for many of our real estate clients as well as a market-wide identifier of good performance.
The NABERS tenant and landlord ratings scheme is becoming an ever more prominent asset comparison tool. An understanding of tenant data through comprehensive submetering is a pre-requisite of the scheme.
- Identify energy intense occupiers to engage with to reduce your Scope 3
Energy intensity metrics are one of the most easily digestible ways for all stakeholders to compare actual asset performance across asset types and unit use classes. Alongside the future benefits to be gained from market led disclosures such as GRESB as well as your current commitments requiring an appropriate intensity metric, being able to utilise both an accurate building EUI and unit level EUIs can help you answer the question of “where do I start?” when working out how to reduce your Scope 3 emissions.
- Give the tenants visibility into their utility consumption & emissions
Increasingly occupiers are requesting their landlords provide them with specific and real data on their energy consumption either from their own interest in reducing their emissions or to reduce their costs where they are charged a fee based on floor area. This is serving as a driver for the installation of sub-metering where applicable but few occupiers that procure their own energy will understand their emissions, what is the cause of their level of emissions and their performance relative to their peers.
- Collect information which can be used for occupier engagement
The more data-rich a dataset is about a given occupier; the more bespoke and occupier-specific support services can be provided. Accurate and consistent occupier data can unlock numerous benefits for both the occupier and the landlord such as improving the occupier experience, for instance through reduced maintenance costs, inter-occupier energy consumption competitions / league tables. All of which can reflect well on asset management teams and can be of benefit to certain disclosures as well as provide a reputational boost.
Some of our clients have developed “house” performance benchmarks – a tenant might receive a communique such as “As a financial services occupier we would typically expect you to consume XXXX kWh/m2/yr. Your data suggests you are using XX% more than this, and we wanted to highlight this to you so you can potentially investigate and reduce this consumption.”
- Drive opportunities for landlords to influence tenant emissions
The data behind occupier engagement is the key to getting the best outcomes for both landlord and tenants from the process. Reviewing, communicating and acting upon sub metered or separately metered data with occupiers on a regular basis is an effective way to lead occupiers on a journey to improved efficiency and understanding. These conversations can open avenues to influence fit out and retrofit decisions while actively demonstrating the impacts of choices being made by occupiers, sometimes for the first time.
Future regulatory changes
Much of the discussion in this article so far has been on the current benefits that collecting tenant data could bring to you but there are numerous future benefits that long term tenant data collection offers beyond your own internal planning.
A brief glance around the current landscape of ESG reporting on real assets will highlight the increased number of funds with confirmed SBTi’s which cover all emissions, a keen focus on data completeness for market led reporting initiatives like GRESB and a requirement for verified or assured data.
The strongest statement of intent for the future of ESG reporting was seen from 2021 where the International Financial Reporting Standards (IFRS) announced the formation of the International Sustainability Standards Board (ISSB) to lead on the disclosure of high quality and globally comparable sustainability related information. Since that time, we have seen the ISSB release it’s first two standards, the EU commission has adopted the European Sustainability Reporting Standards (ESRS), Corporate Sustainability Reporting Directive (CSRD) has expanded on the Non-Financial Reporting Directive (NFRD) and EU Taxonomy has come into play.
A key thread linking all of these acronyms is “Interoperability”. Standards are now being designed to ensure global reporting is aligned and that they benefit each other, aiming to reduce the resource required and minimising duplicated effort. CSRD in particular has a goal that sustainability and financial information should have a similar level of assurance with a standard being developed by the International Audit and Assurance Standards Board (IAASB).
When it becomes a requirement for real asset owners to have verification or assurance on their Scope 3 data, those who put in the effort now to gather as much real data as possible will not only have had years to action the benefits of actual data but will look to fly through the data assurance process, saving money and cementing their credibility in the sustainability market.
There is much more to understand in each of those areas than this article can possibly cover so I strongly suggest supplementing this reading with the other suggested articles.
Join our webinar: The net zero benefits of occupier engagement and how to achieve them
The one remaining question is how to go about gathering this data? Join our webinar with guest speaker Grace Hamer, Cadogan’s Occupier Engagement Manager where we will discuss our experiences of data collection methods and the benefits of a strong engagement programme.
Find out more about the occupier engagement webinar
Property Week article: Tenant emissions- a silent majority
Tenant-controlled spaces account for upwards of 50% of landlord energy consumption but collecting tenant data has not been a focus for most portfolios. Because of the difficulties in data collection methods and data privacy the magnitude of tenant emissions are estimated. In this article Jack Edwards, Senior Consultant at Verco discusses the pitfalls of estimated tenant data and the impact ithas on net zero planning and performance.
Read the Property Week article here
Verco's Occupier engagement service
For a cohesive occupier engagement strategy which connects the dots between your carbon targets, occupier needs and regulatory requirements, take a look at our Occupier engagement service.
