Building the business case for ESG in the built environment
"It takes 20 years to build a reputation and five minutes to ruin it." Benjamin Franklin
In 2021, we have seen increasing pressure from investors for transparency and measurement regarding the impact of their investments, particularly when those investments are in real property. A little over a year ago, I initiated this blog to dive into that impact and the significance of that impact.
The built environment is responsible for approximately 39% percent of global emissions, thus the title and theme of this blog, 39. Of those emissions, roughly 11% result from embodied emissions related to the construction of the built environment, while the remaining 28% are the consequence of operational emissions.
When compared against the other sectors, these emissions are the largest impact today; however, that impact is growing rapidly. By 2060, nearly two-thirds of the global population is expected to reside in urban centers. Our population is anticipated to be approaching 10 billion at its current growth rate, which means essentially nearly every living man, woman, and child living today would be living in an urban center by 2060. This also means the number of buildings required to support that size of an urban population will have to double in that same time period. According to Architecture 2030, this will require 2.48 trillion square feet of new floor area. Essentially, we will be adding the entire city of New York City every month for the next 40 years.
If our impact is already greater than any other individual sector, that impact will only grow in the coming years. Investors see both the demand for new buildings as an investment opportunity and realize that the effort it will take to offset the impact of those new buildings will require innovation. Where there is innovation, there is an even greater opportunity as new technologies emerge.
For investors, this is an opportunity to participate in an opportunity to increase their returns and minimize the risks associated with stranded assets and the effects that our changing environment will have on the physical locations of assets. No one wants to be building buggy whip factories while the Model T is rolling off the assembly line. It really doesn’t matter what your politics are, follow the money, and you will see that ESG investments are no longer about party affiliation; this is all about maximizing returns and minimizing losses. The horse is out of the barn, and it is not going back. This report by Morgan Stanley dives deeper into investor interest in impact investing.
For operators, the built environment is about leasing and protecting the value of the asset. How do I keep the building fully occupied? How can I maximize the net operating income and extend the asset's life?
This requires operators to think about their customers. What is important to tenants? Why would they select my property? There are certainly emerging trends in strategies to attract and retain tenants, although that conversation is a much deeper and broader conversation than this article allows space to address. The bottom line is all of these strategies are centered around attracting or appealing to the tenant’s motivations. No surprise, really. If you can create a compelling property with more attributes than your competition that aligns with the tenant's needs and wants, you are more likely to attract and retain tenants.
General population attitudes towards climate change have shifted. Not only has each generation demonstrated an increased interest, but the evidence of actual effects also has increased in frequency. This increase in impact is amplified by a huge increase in access to information spurred by social media, traditional media, and the internet. No longer do you have to research to understand if climate change is occurring; you are literally bombarded about it nearly daily from all outlets.
The interesting thing is, we have actually understood the science about climate change for a considerable amount of time. This is not a new event or theory. In fact, over a century ago, newspapers published a warning that the impact of fossil fuel consumption would lead to increased levels of atmospheric CO2 and would result in increasing global temperatures.
We have had over a hundred years of study, peer review, and theory testing to understand that it is real, and it is us. The only thing really preventing access to this information was organized campaigns to hide the data and cast doubt over it. Those with a financial interest in suppressing the data for several decades successfully lobbied that there was no clear and convincing evidence. Actually, the effort was quite similar to the campaigns orchestrated by tobacco companies to hide the effects of tobacco and its health impacts.
In today’s world, while there is a great deal of misinformation, there is also increased access to factual information. The result has been increasing public acceptance of the impact of climate change which led to increased demand by the public to address climate change.
This is important to understand because the attitudes of the majority of the population have shifted. The majority of both global populations and the United States population believe that taking action on climate change will improve economic growth and create jobs. In contrast, relatively few state that taking action will reduce economic growth and reduce jobs, despite what some may tell you. The actual percentage in the US who share this belief when polled is 28%. The actual percentage in the US who actually believe climate change is not happening is even smaller at 12%; interestingly, the US still leads the world in terms of doubt (source).
As interesting as it is to look at data and try to figure out why a group feels the way it does, the bigger story here is the majority of the population believes climate change is real and believes we should be doing something about it. The majority of the population means the majority of the people who may be looking to lease your property. Back to leasing being all about addressing the motivations of the prospective tenant - if the majority of tenants believe we should be doing something about climate change, if your property or organization demonstrates it is doing something about it - you are going to satisfy the motivation of the majority of your prospects.
How do you demonstrate you are doing something about it? I have posted several articles around the foundations of building a sustainability program, but it starts with measuring what you manage. In other words, understanding your impact - benchmarking. This can lead to identifying opportunities and taking advantage of those opportunities. Relaying what you did and why you did it (as well as the result) is building the case that you are doing something about it.
The flip side of attracting tenants for operators is retaining tenants. As early as 2015, DTZ (Now Cushman Wakefield) released data documenting higher Kingsley Survey responses when measuring tenant satisfaction for tenants in green-certified buildings.
This research included the following findings:
Buildings with at least one sustainability certification had an average Kingsley score 7 points higher than buildings with no certifications.
Buildings with one certification had slightly higher Kingsley tenant satisfaction scores than those with no certifications, while buildings with two or more certifications had significantly higher scores.
ENERGY STAR buildings' Kingsley scores averaged 30 points higher than non-ENERGY STAR.
LEED EB buildings' Kingsley scores averaged 10 points better than buildings without a LEED EB certification.
There is clear evidence that there is a benefit to owning and operating buildings that are more sustainable. These include financial benefits and assets that are more attractive to prospective tenants, making it easier to lease and market. As ESG continues to build in importance, those owners who fail to address sustainability criteria may find themselves holding assets that fail to meet the most basic requirements before we even approach attractiveness. The resulting loss of market position could translate into reduced returns and value.
You can help reduce the impact of the built environment 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.
Stay well!
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. To get there, we must build relationships within our organizations and outside of our organizations building the critical mass needed to 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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