Why a Good ESG Score Can Still Hide a Bad Building

The uncomfortable gap behind the green label

Commercial property has become a test case for the credibility of ESG. Buildings are tangible, energy-intensive assets. Their meters record what they consume, their systems determine how efficiently they operate, and their locations expose them to physical and transition risks. In principle, this should make environmental performance easier to assess than in many other sectors.

Corporate ESG Ratings

Portfolio level

GRESB · S&P · MSCI

Weak link

Green-Building Certifications

Asset level

BREEAM · LEED · EPC

Weak link

Asset-Level Energy Data

Operational truth

kWh / m² / yr

In practice, the market relies on several layers of imperfect shorthand: corporate ESG ratings, green-building certifications and Energy Performance Certificates (EPCs). Each may answer a legitimate question. The problem begins when one is treated as if it answers another. A strong disclosure score is not the same thing as low emissions. A modelled EPC is not a meter reading. And a polished corporate rating does not guarantee that the underlying portfolio is operationally efficient.

The disconnect is not theoretical. Consider four assets from the study dataset:

Assets A and B hold similar GRESB scores, yet Asset B consumes nearly three times the energy per square metre. Asset D scores well on GRESB but holds the worst EPC rating and the highest energy intensity of the group.

That does not make ESG ratings useless. It makes them easy to misuse. The research suggests investors, lenders, policymakers and owners need to be far more precise about what a rating measures — risk, disclosure, design intent or actual impact — before allocating capital on its strength.

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A study designed to connect company claims to physical assets

The analysis combined multiple levels of information that are usually considered separately. Property holdings from UK listed real-estate investment trusts (REITs) and non-listed funds were geocoded and matched with the government's open non-domestic EPC dataset. That asset layer was then combined with portfolio information, financial performance and corporate ratings from major providers including S&P, Refinitiv, Sustainalytics, GRESB and CDP.

Source: Coakley, ESG in Commercial Real Estate (research dataset and analysis; data primarily through 2022).

This multi-level approach matters because sustainability claims can be diluted as information moves upward.

A portfolio score can average away poorly performing buildings. A corporate score can give substantial weight to policies and disclosure. By reconnecting those scores to individual assets, the research asks a more demanding question: do the ratings correspond with environmental outcomes?

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Finding 1: EPCs are a weak proxy for operational performance

An EPC estimates how efficiently a building should perform under standardised assumptions. A DEC is based on recorded energy use and therefore reflects the building as occupied and operated. Comparing the two for the same properties produced a correlation of just 0.14 — a relationship too weak to justify using EPCs alone as a measure of actual energy or carbon performance.

Correlation Strength Between Rating Systems

The distinction is more than academic. EPCs influence regulation, leasing decisions, capital plans and perceptions of stranded-asset risk. Yet operational outcomes depend on controls, maintenance, hours of use, tenant behaviour, occupancy, equipment loads and weather. A theoretically efficient shell can still consume heavily; a modestly rated building can be operated intelligently.

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Finding 2: Managed portfolios outperform the average — but hide wide dispersion

The national dataset showed a sizeable transition challenge. More than half of UK non-domestic EPCs were rated D or worse, while roughly one in ten fell into bands F or G. In the study's 2022 snapshot, that represented about 110,000 commercial properties and more than 45 million square metres of floor area exposed to the minimum standard then taking effect in April 2023, subject to the regulatory framework and exemptions.

EPC Rating Distribution: Managed Portfolios vs National Stock

• Managed Portfolios
• National Stock

Funds and REITs compared favourably with the wider stock. Only 6.9% of matched managed properties were F/G rated, versus 10.14% nationally, while more than 20% were A/B rated, against 13.17% nationally. Access to capital, professional management and shareholder scrutiny may all contribute.

But the aggregate disguises substantial variation between sectors and individual owners. Office and leisure portfolios were among the areas with weaker exposure profiles. For a lender or investor, the practical lesson is that the portfolio average is a starting point, not due diligence. Location, property type, lease structure, retrofit feasibility and the exact concentration of weak assets determine whether transition risk is manageable or material.

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Finding 3: ESG raters often disagree because they measure different things

Across major ESG providers, correlations were generally in the 0.4–0.6 range, broadly consistent with the literature's average of about 0.54. S&P and Refinitiv aligned more closely for the sampled REITs, at 0.80, but this remained below the roughly 0.92 agreement cited for S&P and Moody's credit ratings.

The divergence is partly methodological, not simply error. Some systems emphasise disclosure quality. Others focus on unmanaged financial risk, controversies or governance. A company can therefore improve one rating by publishing more complete information without materially reducing the energy used by its buildings.

Source: Coakley, ESG in Commercial Real Estate (research dataset and analysis; data primarily through 2022).

The study also found that larger REITs tended to receive better ratings, particularly from S&P and Sustainalytics. That could reflect better governance and resources — or an information-production advantage: large companies can devote more staff and systems to disclosure. Either way, investors should be cautious about interpreting a corporate score as a clean measure of physical impact.

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Finding 4: The return story is about resilience, not automatic outperformance

The financial analysis compared higher- and lower-rated UK REIT groups around two shocks in 2022: Russia's invasion of Ukraine and the UK mini-budget. Higher-rated groups often underperformed before the events and, following the invasion, did not immediately outperform. After the sharp mini-budget sell-off, however, every higher-rated treatment group recovered faster, with estimated post-event interaction advantages ranging from roughly one to 6.5 percentage points.

Post-Event Recovery Advantage (Higher-Rated REITs)

This is consistent with a plausible resilience channel: stronger governance, better access to finance and a more defensive company profile can help during a crisis. But it is not proof that ESG caused the recovery. The sample is modest, the grouping is based on median scores, and ratings themselves may favour larger defensive companies. The result should therefore be read as evidence of association, not a trading rule.

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What better real-estate ESG could look like

The answer is not another all-purpose score. It is a clearer measurement architecture in which each metric has a defined job and the most decision-relevant data remains visible.

Source: Coakley, ESG in Commercial Real Estate (research dataset and analysis; data primarily through 2022).

For owners, this creates an opportunity. Transparent operational performance can become a differentiator as the market shifts from design-led labels toward measured outcomes. Buildings that can demonstrate lower intensity, effective controls and a funded transition plan should be easier to finance, lease and defend against future regulation than assets relying on a historic certificate alone.

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The bottom line

Commercial real estate does not suffer from a shortage of ratings. It suffers from blurred boundaries between what those ratings mean. The research shows that corporate ESG scores, asset certificates and actual building performance are related only weakly or inconsistently. Treating them as interchangeable risks mispricing assets, misdirecting retrofit capital and rewarding disclosure without sufficient impact.

A credible transition requires a simple change in emphasis: start with the physical building. Measure what it consumes. Explain what drives that consumption. Identify the investments required to improve it. Then use governance and corporate ratings to judge whether the organisation is capable of delivering the plan. ESG becomes more useful when it stops trying to compress every question into a single number.

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This article is based on Daniel Coakley's MBA capstone, "ESG in Commercial Real Estate — An analysis of asset-level and corporate-level data for UK Funds and Real Estate Investment Trusts (REITs)," available as SSRN paper 4948019. The study combines UK property, EPC/DEC, portfolio, ESG-rating and financial-market data. Figures in this article are original redrafts from values reported in the paper.

Data cut-off: The analysis primarily uses data through 2022 and the April 2023 MEES position. It is not a statement of current 2026 regulation or portfolio performance; live decisions require current rules and asset data.