IPD index shows green buildings underperforming, but lack of data is a flaw, writes Jane Roberts
The backers of the UK’s first green buildings performance index are rethinking its composition and methodology after a frustrating start. The ISPI (IPD UK Sustainability Property Index) Monitor has not proved a positive tool for supporters of sustainable investing, after its constituent investments were shown to have underperformed less sustainable assets.
However, the number of assets qualifying for inclusion in the index is tiny, and the results are compared to the IPD Quarterly Index without taking account of any other variables that have an impact on overall investment performance. Some of the disappointment about the work done so far came through in the presentation of the ISPI Monitor Q1 2011 results, at the London headquarters of co-sponsor K&L Gates on 27 May.
Michael Brodtman, UK head of valuation at CB Richard Ellis, said that while it was a tribute to IPD that the results had been released, they were “rather random” and “incredibly frustrating”. Paul McNamara, head of research at Prupim, said that in the field of property environmental metrics generally “we seem to have reached an impasse. For far too long we haven’t seemed to have had any meaningful traction at market-wide level.”
He added: “Everyone agrees that meaningful metrics will be key to reducing carbon emissions from property, but the investment community has been wilfully naive in the entire area of sustainability.” Making the presentation, IPD head of sustainability Christina Cudworth agreed that the results so far were “not terribly useful”, and that IPD and co-sponsors K&L Gates and the IPF intended to “improve the Monitor in the next few months”.
McNamara said the background to arriving at this impasse was that lots of metrics, labels and standards had been developed over the past 10 years, mainly by environmental technicians, with little input from investors, and without asking: “What do we want these metrics for?” He suggested that “responsible investors” want to know: the environmental performance of their properties and portfolios; how they stand in relative terms to competitors; whether their environmental performance is improving over time; and whether it is happening faster or slower than others’. They will be keen to link environmental with investment performance metrics to understand their relative significance, and to understand the costs, scale and payback rate of any investment benefits.
Whole portfolio analysis needed
McNamara added that for this to happen, “we need to move into whole portfolio analysis, not cherry-picking assets – other-wise you can’t tell how you are doing versus your competitors. And we need to dramatically increase the data on existing stock.” Brodtman agreed that “it was nuts” for ISPI Monitor to have only 60 buildings. He added that CBRE will start collecting basic environmental data every time it carries out a valuation and will encourage other valuers to do the same.
“We have hundreds of people collecting information on hundreds of properties and it’s absurd that we weren’t collecting information on these matters, most of which are common sense,” Brodtman said. “For us, it is all about trying to get obvious, straight-forward information into the right place, which is IPD, where it can be monitored and analysed.” McNamara and Brodtman have both joined a new steering committee that IPD, K&L Gates and the IPF have set up to revamp ISPI. The group’s other members include Richard Jones of Aviva, Bill Hughes of LGP and Brodtman’s CBRE colleague John Symes-Thompson.
At the moment, IPD requires companies submitting data for ISPI to answer 21 questions based on six categories to screen the more sustainable properties. But fund managers only had enough information for 40% of the properties submitted last time. Making data easier for fund managers to collect is particularly important to encourage them to submit whole portfolios for analysis, McNamara says. Cornerstone Real Estate Advisers is the only manager that has managed to do this so far; this year the manager provided complete data for all three of its funds.
McNamara says the steering group “will have to spend some time trying to define that middle ground, with a quick and easy set of answers for each property – but one that is still meaningful. ISPI will have to be made easier to answer; that might be some form of check box, without recourse to statistics on things like how many kilo-joules of energy a property uses.”
Prupim to provide data
Prupim has created its own data set, which its fund managers have used to screen 90% of the properties it manages, and McNamara says Prupim will make this available to the steering group. Cudworth said the committee would approach other managers to submit whole portfolio data. Legal & General Property, Aviva Investors, Henderson and Hermes are expected to take a lead.
McNamara says: “The really exciting thing is that if we can get them to contribute whole fund data, then you have got a piece of grit to grow a pearl around.”Bill Hughes, head of property at LGP, says: “It is good news that IPD has agreed to reshape ISPI. We and others are willing to feed this project with valuable data and it is really important for other fund managers to be inspired and commit to this.”
IPD’s ambition, Cudworth says, is to reach the point where sustainability benchmarking is no longer only a separate market index, comparing one sub-set of properties with the whole market. “At the moment we can ‘only’ produce ISPI. In the long-run we think sustainability will be an extra part of our core portfolio analysis service.
“Eventually it would make sense to take an index from the whole portfolio analysis and when that becomes larger than ISPI, that would be the time to switch over.” McNamara adds: “The ISPI mark two I’m thinking of would have whole portfolios, with properties ranging from very brown to very green. Then you could compare ‘greenness’ against investment performance rather than just ‘green’, and by looking at the variables in the green and brown matrix get some fine-grained analysis about what features drive environmental performance. “We already have dimensions in portfolios such as prime versus secondary, strong versus weak covenants, long and short leases etc. I think green versus brown is emerging as another dimension.”
CBRE check list will tick green monitoring boxes
CB Richard Ellis, which has the single biggest market share of any valuer, plans to incorporate a sustainability inspection check list for all the UK properties it values. Head of valuation Michael Brodtman says the draft questions would relate to building characteristics rather than energy use, such as accessibility to transport, whether the property has an energy performance certificate and its rating, whether it is naturally ventilated, whether there was a waste management system and so on.
It would not cost money because the data comprised “things everyone knows”. “After all the trauma of the past few years, sustainability was the last thing on everybody’s mind,” he says. “Now is a good time to move this forward again. The data is not there for existing stock and investors have to be careful about how they spend their money. We have to get down to the detail to know what to do. “It is the start of something longer term, but the industry needs to get behind this.”