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This article highlights key takeaways from REITworks 2024, focusing on how sustainability and social responsibility initiatives are driving value for REITs. Learn how industry leaders are tackling climate risks, decarbonizing portfolios, and leveraging tools like Odyssey and Faros to enhance resilience and financial returns.
Last month, sustainability and social responsibility leaders from across the REIT industry came together to discuss how sustainability and social responsibility programs and initiatives can drive value for commercial real estate portfolios. The conference, which took place over two and half days, offered attendees informative sessions, meaningful peer exchanges, and networking opportunities.
Telesto Strategy – a strategy consulting firm focused on helping REITs comply with regulations related to and unlock strategic value from sustainability, climate, and ESG – played an active role as a sponsor at this year’s REITworks, contributing throughout the conference. Here are five takeaways from REITworks this year.
1. REITs are facing mounting pressure to take sustainability and social responsibility seriously – with a focus on outcomes, not just targets or inputs. Whether it is from investors applying “brown discounts” to their valuations of REITs that are not doing enough to hedge against sustainability-related risks, from voluntary and non-voluntary disclosure requirements (including the SEC, California, and CSRD), or from employees who are looking for a workplace where social responsibility is valued, external and internal parties are demanding more from REITs across the board. For example, a Federal Reserve study found that companies experience a 20-basis point increase in their WACC if they do not report Scope 3 emissions. Investors also highlighted the importance of providing granular, easily accessible data (not in PDFs) for them to better understand and assess a company’s risk profile and transition plan. Furthermore, roughly a quarter of companies are seeking sustainable real estate and are willing to pay a green premium. On climate risk, investors are starting to price-in the impact of stranded assets – that is to say, current asset holders should improve asset resilience, or they may face steep discounts when selling.
Andrew Alesbury, Managing Director at Telesto Strategy, echoed these concerns in a video interview at REITworks. Alesbury emphasized the need for REITs to take proactive steps to address rising climate risks, outlining a practical approach for integrating climate risk analysis. He highlighted the importance of assessing exposure to climate hazards, determining whether current exposure levels are tolerable, and developing strategies to mitigate high-risk scenarios through asset divestments or acquisitions.
2. There’s no easy answer to decarbonizing the built environment. Many REITs have already started (or completed) low-hanging decarbonization projects with yields exceeding the cost of capital. Going forward, more work is necessary to prioritize and roadmap initiatives.
From identifying which retrofits and interventions to prioritize across a portfolio of thousands of assets to finding the right way of engaging with tenants, there is no “magic wand” solution to decarbonizing your portfolio. Instead, it takes a combination of knowing, planning, and acting. First, you need to know where the greatest opportunities to decarbonize exist within your portfolio (which assets, which renovations). Then you need to plan how to best implement those interventions, working around critical constraints, like useful life of components and capital planning schedules. Finally, you need to act, which is both a combination of finding the financing to undertake renovations but also working with key stakeholders (operations, construction, tenants, etc.) to make it happen.
Leaders may find it useful to segment their emissions reduction roadmap into digestible initiatives more easily communicated to leadership, such as renewable energy procurement, onsite renewables, and asset-level plans. Emissions reduction leaders, such as winners of NARIET’s Sustainability Impact Awards, noted the growing importance of leveraging asset-level, physics-based energy and emissions modeling to inform both asset-level plans and portfolio strategy.
Odyssey, an AI- and machine learning-driven platform developed by Telesto and Optiml, streamlines this process by helping REITs identify and prioritize emissions-reducing interventions across entire portfolios. From optimizing energy use to improving capex planning, Odyssey allows organizations to set ambitious decarbonization targets while generating significant cost savings. Its data-driven insights enable REITs to make informed decisions, enhancing both sustainability outcomes and financial returns.
3. Understanding climate risk is not just about preserving business continuity; it’s also about insurance premiums. Sure, the probability is increasing that a significant weather event damages one of your assets to the point that its revenue generation potential is affected is possible in a world where extreme weather. But it is actually far more probable that extreme weather won’t disrupt your business continuity so much as it will cause reparable – albeit expensive – damage to your assets, and this could spell rapidly rising premiums being sought by risk-averse insurance underwriters. In an on-the-spot survey of REITs joining a panel on climate risk, insurance premiums was identified as the highest cost of climate risk to real estate players.
Faros, Telesto’s climate risk assessment tool, helps your organization identify emerging climate threats and protect your assets against operational disruptions and soaring insurance costs. By incorporating climate risk into asset acquisition and disposal strategies, Faros empowers REITs to hedge against future liabilities while ensuring compliance with evolving regulatory disclosure requirements. With its probabilistic forecasting, Faros models potential financial losses from climate hazards, allowing your organization to proactively manage risk and preserve asset value.
4. A few bad eggs can spoil the bunch – but a few targeted interventions can make a big difference. Risk experts noted that 80-90% of costs associated with climate risk are often driven by less than 5% of a REITs portfolio. Similarly, a lack of a credible decarbonization plan for the entire portfolio – even if held up by only a few properties – can lead investors to expect greater returns. A similar story exists for upsides – research by RMI found that increasing capital real estate investments by 1% can lower associated emissions by 15-50%.
5. Events like REITworks offer an indispensable resource. Thanks to Nareit, events like REITworks offer one of the richest sources of knowledge on how to get started and accelerate real sustainability impact for REITs. Whether it be learning firsthand from peers who have encountered similar challenges or connecting with expert advisors who have supported a wide range of REITs on their sustainability journeys, forums like REITworks are critical to helping spread knowledge across the industry. The forum also provides an opportunity for sector-spanning experts to share broader trends impacting REITs such as how the energy demand of AI is expected to significantly impact grid decarbonization and renewable energy procurement. It is also an opportunity to stay up to date on the latest trends such as automated demand response (energy systems that respond to grid supply and demand) AND physics- and AI-based decarbonization.
Telesto Strategy remains deeply committed to helping REITs accelerate their sustainability journeys and unlock new value through innovative solutions. With cutting-edge tools, like Odyssey and Faros, Teleso partners with organizations to decarbonize portfolios, mitigate climate risks, and stay ahead of evolving regulations, all while driving financial returns. By partnering with REITs to integrate sustainability at every level, Telesto enables them to not only enhance capital productivity but also increase resilience and position themselves for long-term growth in a rapidly changing landscape.
Other Telesto resources: Learn more about property-level decarb roadmaps using the power of machine learning. Find additional information on how to get started with ESG and build topical familiarity with our ESG Glossary as well as Telesto’s ESG Maturity Model.
