2 Important steps if you are considering starting an ESG Program
“The first step towards getting somewhere is to decide you’re not going to stay where you are.” —J.P. Morgan
So you are considering starting a sustainability program? It is no secret that climate change is high on the list of priorities for investors, and one strategy they have consistently included is reducing the impact on buildings. The purpose of this blog is rooted in the same premise, helping to educate that 39% of all global emissions are attributed to buildings, both in how we operate them and how we build them.
But that doesn’t answer the question, “how do I start a sustainability program?” Instead, it may only help explain why you might be thinking about a sustainability program. But there are other reasons for organizations to take sustainability seriously, and formalizing a program to deal with sustainability can be an important first step.
The first question we have to know is why. Why does your organization believe it is time to start a sustainability program? There are certainly many reasons, but what is your organization’s reason? There is clear and documented evidence that organizations with sustainability strategies use their resources more effectively, reducing their impact on the environment and increasing their profit through eliminating waste. Efficiency improvements, weighted brand loyalty, increased shareholder and employee satisfaction, positive public relations, compliance with regulations, or access to capital are all positive benefits enjoyed by organizations with sustainability programs.
Equally important is understanding the level of engagement the organization intends to put towards this strategy. Is this a sincere program, looking to make a meaningful impact, or is the intent merely to do the minimum requirement or worse, is it merely a public relations campaign only? There are some real cautions to be aware of. Greenwashing is a real issue that can negatively impact your brand’s reputation and have actual regulatory consequences. In 2016, for example, the Federal Trade Commission fined retailers Bed, Bath & Beyond, Nordstrom, JC Penny, and Backcounty.com $1.3 million for misleading environmental claims. While a growing number of consumers are taking environmental attributes into their decision-making process, if your program is green in name only, you might be better served by reading this article by the American Bar Association instead of starting a sustainability program.
Assuming your organization is sincerely looking to reduce its environmental impact, the benefits of such a program are numerous. In addition to the operational benefits previously listed, a sustainability program at its core is a plan for the continuous improvement of your business operations. It is a plan to identify and mitigate risk. It is a plan to reduce waste; it is a plan to increase net operating income. A strong sustainability program connects with prospective residents with similar interests and demonstrates financial responsibility to those more concerned with wasted operational expenses.
This alignment goes beyond residents and employees; in 2019, the Harvard Business Review interviewed 70 senior executives at 43 global institutional investment firms, including BlackRock, Vanguard, and State Street, as well as large asset investors such as the California Public Employees Retirement System (CalPERS), the California State Teachers Retirement System (CalSTRS). Among these leaders, Environmental Social and Governance (ESG) issues were almost universally at the top of mind. The rate of both funding and importance of ESG has skyrocketed since this last report, with significant financial resources dedicated to those investments that can meet the ESG goals of the investors.
Fannie Mae has introduced a suite of Green Loan Mortgage products that can benefit borrowers who invest in energy and water efficiency for those seeking lower interest rates and additional loan proceeds. The requirements tend to be most effectively managed when they are part of a sustainability program.
While the external reasons for developing a sustainability program may be compelling, your own organization’s core values and mission are often overlooked. Many organizations pride themselves on providing outstanding services to their residents. To provide amenities that are important to their residents and provide a compelling reason to select a particular community as your next home. While the exact language may vary slightly from company to company, the theme is resident experience. A value complimented by a robust sustainability program, particularly one that engages residents. A 2017 NMHC/Kingsley Associates Renter Preferences Report revealed that 65% of the respondents said they would be interested in a community with sustainability/green initiatives.
So, you may have very business-relevant reasons to introduce a sustainability program into your organization. However, before you run out and write a job description or hire a consultant, the first steps really require self-reflection. Outlining what is and what is not important for the organization. Are there immediate investor requirements that need to be met, reporting requirements, do you have green loan compliance requirements?
Once you understand why you need to take a look at how. How do you currently meet these needs now? Odds are, there are already some activities occurring that might be thought of as part of a sustainability program, whether accidental or planned. How are your needs being met now? Perhaps a better question is, are your needs being met now?
In an earlier article, we discussed the strategy of surveying the physical attributes of your portfolio. Do you know which properties have had LED lighting retrofits? Chances are you have data around how many units you have. Most organizations can calculate the potential income a property can generate based on its Pro-forma, but how many have potential physical characteristics that could improve efficiency? You may know if you are charging back utilities, but do you know if you can purchase the energy supply for those utilities at a below-market rate? Is there an opportunity to lock in your rates so you can control costs? In some states, you might be able to, but if you are purchasing energy supply, is it part of an ESG strategy, or does it just kind of happen.
Once we know what we have, we need to understand what we use. Time and time again, you have read both in my blog and have heard in so many other places, “What gets measured gets managed.” Without data, you cannot measure the performance of the property. Even if you had access to other property data to compare against, if you don’t have your own data, how would you know how you compare.
Unfortunately, operational expense efficiency is often measured only by performance against the budget. While an important element in any operation, the budget is only as accurate as the numbers placed in the budget. If you are using historical utility costs, even if you add kickers for rate increases, you are still including the inefficiency of those utilities as part of your budget. Inefficiencies that may represent 10-30% (or more) of waste. Energy or water that you are purchasing and literally not using, or at least not using effectively. You are likely watering the grass when it’s raining, on a grand scale, and if you are using the budget as your KPI, you likely don’t even realize it.
Cities were among the first to realize, if they don’t require buildings to report their energy and water usage, there is a really good chance that no one is paying attention to it. In 2010, for example, New York City became one of the first American cities to require the collection and reporting of energy and water usage in large buildings through Local Law 84. Since that time, that list of cities has grown nationwide, and even entire states such as California have passed similar laws.
To comply, you have to gather data, and according to the Department of Energy, the simple act of gathering energy data can lead to a reduction of up to 2.4% of energy use in a building per year. That isn’t doing anything; that is simply paying attention and experiencing a reduction as a result.
When I am asked, how do I start a sustainability program, this is where I typically start - why do you want to do it, and how are you going to get the data? These two questions are the foundation that the remainder of the program is built on.
Once you understand what you use, you can identify how you use it and where you might be using more than you should. You can compare against other like properties and compare how your property stacks up. You can leverage actionable tools such as Conservice’s S2 Platform and identify property by property how the property is performing. You can look across a portfolio and identify where the best opportunities are to reduce energy and water consumption. You can also compare against your peers with a robust and contemporary database. No company has the number of buildings in its platform to compare against, with over 300,000 buildings and over 6,000.000 units. This scale provides a more precise comparison and allows you to create a real impact in your portfolio. But that ability starts with data and leveraging the strategy of “why.” There are some very effective strategies that can vastly reduce environmental impact and reduce operational expense - but it starts with why and is followed with the fanatical quest for data.
You can help reduce the impact of the built environment next year by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Happy New Year!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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