Real estate: navigating the complexity of ESG disclosure standards and frameworks

At a time when capital markets are demanding greater disclosure of environmental, social and governance (ESG) factors, companies must be more transparent than ever when it comes to extra-financial information.
As the world grapples with the realities of climate change, sustainability is gaining ground in the business world.
The real estate sector is no exception, given that buildings are responsible for around 18% of greenhouse gases (GHGs) in Canada.
Against this backdrop, sustainable finance is emerging as a new standard in the real estate industry, forcing players in the field to turn the corner without further delay.
To meet their obligations effectively, however, companies face a number of challenges, and the adoption of greener practices is proceeding at varying speeds.

Determining which ESG factors to focus on

First, they need to determine which ESG factors are relevant to their business model.
What are the most important issues for the organization and its stakeholders?
The list can be long, from building energy efficiency to employee health and safety, community relations and sound governance structures, to name but a few.

Reliable and accurate data collection systems for all identified elements are also required for comprehensive coverage of ESG performance.
Investors are looking for precise data, backed up by clearly defined objectives.
To capture their interest, it is also crucial to focus on information that has a direct impact on the company’s financial situation. Many deplore the fact that data is too often not consistent and comparable.

Choosing the right frames of reference

Companies must then select the appropriate disclosure frameworks, which is no small task. As they multiply and constantly evolve, it’s easy to get lost. Here’s an overview of the main frameworks and how they work.

Commercial Real Estate Appraisal System (GRESB)

The Global Real Estate Sustainability Benchmark (GRESB) is a platform used by property owners, investors and managers to report and compare their ESG performance in a standardized way.
It is aligned with international rating systems, such as the Global Reporting Initiative (GRI), the Task Force on Climate-related Disclosures (TCFD), and the United Nations Principles for Responsible Investment (PRI).

GRESB evaluates companies’ ESG performance in three categories: management, performance and development.
After validation by an external auditor, companies receive a score and a rating, which facilitates communication with stakeholders.

In addition, GRESB analyzes listed real estate companies through its Public Disclosure tool, assigning scores based on 22 relevant ESG indicators.

Global Reporting Initiative (GRI)

The GRI Standards are designed for public reporting in the business world on the economic, environmental and social impacts of organizations.
They aim to ensure comparability, transparency and accountability to stakeholders.
The GRI standards are divided into four series of standards, which are either universal or specific to certain economic issues (anti-competitive behavior, economic performance, etc.), environmental issues (waste management, energy, water, etc.) and social issues (occupational health and safety, diversity, etc.).

Sustainability Accounting Standards Board (SASB)

SASB establishes sector-specific standards for the disclosure of environmental, social and governance issues, covering 77 sectors.
SASB standards are integrated into the International Financial Reporting Standards (IFRS) and the International Sustainability Standards Board (ISSB).

Science-Based Targets Initiative (SBTi)

The Science-Based Targets initiative recognizes companies that set science-based targets to reduce their carbon footprint, in alignment with the goal of limiting global warming to 1.5°C.
The SBTi process includes engagement, target development, validation and reporting of annual progress.

Task Force on Climate-related Financial Disclosures (TCFD)

The TCFD encourages companies to disclose information on climate-related financial risks, focusing on governance, strategy, risk management and metrics.
The framework is incorporated into IFRS S1 and S2, introduced by the International Sustainability Reporting Board (ISSB).

Task Force on Nature-related Financial Disclosures (TNFD)

TNFD, aligned with TCFD, works on nature-related financial disclosure, helping companies to understand and manage nature-related risks and opportunities.

Companies have to choose between these frameworks to report on their ESG progress.
According to a study by Financial Executives International, a professional association for financial executives, 85% of companies use several disclosure frameworks.
A structured, well-informed approach is therefore essential to navigate this complex environment.

Towards global standardization

In recent years, stricter regulations on the disclosure of sustainable finance information have been introduced around the world.
With the implementation of the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) on January 1, 2024, companies are now held legally accountable for their environmental, social and governance (ESG) impacts.
Their first reports are expected in 2025, based on data from the 2024 financial year.
Due to the interconnectedness of markets, this directive will influence the operations and ESG disclosure practices of companies outside its borders, notably in North America.

And what are the new standards in Canada?

Canada is also following suit.
It has recently taken an important step towards standardizing and making comparable sustainability information.
On March 13, 2024, the Canadian Sustainability Reporting Standards Board (CSRB) published its first draft standards for public consultation, marking a significant milestone in the creation of the Canadian Sustainability Reporting Standards (CSRS).

These new standards, NCID 1 and NCID 2, are largely aligned with IFRS S1 and S2.
NCID 1 concerns general financial reporting requirements relating to sustainability, and NCID 2 concerns disclosures relating to climate change.

While we await the final version and entry into force of these draft ESG standards (expected in the coming months), Canadian companies need to prepare for their adoption, as they will be required to provide full disclosure on sustainability opportunities and risks from January 2027.

Meeting all these requirements, however, makes it difficult for organizations.
North American and European investors have called for unified global standards and a consistent framework for ESG disclosure and assessment.
This will ensure the quality and verifiability of reports.
To be continued.

ESG reporting: the growing importance of double materiality

Numerous regulations and international standards, such as those promoted by the Global Reporting Initiative (GRI) and the countries of the European Union, now include the concept of double materiality in ESG reporting.
This is encouraging companies to adopt this approach to comply with new regulatory requirements.
Double materiality analysis is, however, demanding for organizations.

Adopted by the world of CSR (Corporate Social Responsibility) in 2006 with the GRI, the concept enables a company’s CSR issues to be ranked in order of priority.
Generally speaking, financial or simple materiality is applied.
It focuses on the impact of social and environmental issues on a company’s economic performance.
For example, by reducing its greenhouse gas emissions, a company can improve its brand image and attract investors, which has a positive financial impact and offers a competitive advantage.
However, implementing this approach is problematic for social and environmental topics, as some important information can be overlooked.

In addition to identifying the significant issues that can influence the decisions of financial players, double materiality looks at the negative and positive impact of a company’s activities on the environment and society.
It assesses how the company’s actions affect the various stakeholders.
For example, if a real estate company is building a housing complex on a former industrial site, it will have to take into account environmental risks, i.e. the impact on local ecosystems, workers’ health and environmental quality, etc.

Opposing visions

Dual materiality is a concept supported by the European Union, notably through theEuropean Financial Reporting Advisory Group (EFRAG), with data disclosure for multi-stakeholder use (investors, customers, local communities, the environment, etc.).
It will also be at the heart of the application of the Corporate Sustainability Reporting Directive (CSRD).
TheInternational Sustainability Standards Board (ISSB), on the other hand, favors a purely financial approach, aimed primarily at investors.

Nevertheless, dual materiality offers significant advantages for companies committed to sustainability and social responsibility.
With this approach, companies can identify gaps in their ESG approach.
This encourages them to improve their practices and strengthen their performance and sustainable development.
By knowing the expectations of its stakeholders, a company can also communicate in a more relevant and transparent way, reinforcing the trust of the entire ecosystem towards it.
In short, dual materiality helps them to align their actions with the needs of society and the environment, while remaining financially viable.

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