For several years, BlackRock has been emphasizing and encouraging investors to consider ESG. Larry Fink’s letter serves as an annual reminder of the commitment from the very top of the organization. However, last week word came out that BlackRock is linking its lending costs for a $4.4 billion credit facility to actually meeting ESG (environmental, social, and governance) targets (Lim, 2021). Similarly, Novartis, Suzano, and Chanel issued “sustainability-linked” bonds last September. Sustainability-linked bonds, while similar to traditional bonds, have one major exception: the companies pay a higher interest rate to investors if they fail to achieve a set of ESG goals, or other goals, prior to the bond maturity date. The proceeds from the bond can also be used to pay down existing debt, which also differentiates them from other types of green, social, and sustainability bonds (Broughton, 2020).
The signal is clear, ESG Factors represent a potential financial risk, and investors don’t want their investments placed at risk. The trend is catching on; in fact, over $288 billion was invested globally in sustainable assets last year.
This is not a new phenomenon; throughout history, we have examples of technological advances and efficiency progress resulting in a transition in our economy. From the Horse and Buggy to the Automobile, from Wood-fired machines to Steam power, to fossil fuel-powered, we have seen the economy move rapidly to the next technology leaving stranded assets with each transition. Investors do not want to be in the position of having capital invested in assets that are passed by with the coming transition to a cleaner energy economy.
While investors want to avoid risk, they also don’t want to miss out on the opportunities of investing in ESG focused companies. Opportunities? With lower costs of capital, higher valuations, and less vulnerability to systematic risks, investing in companies with robust ESG programs tends to be more profitable than those that don’t. An ISS Study in 2020 reaffirmed that firms with high or favorable ESG ratings tend to be more profitable. Organizations that focus on their people also tend to have more motivated people. It turns out, when you treat people well, they return the favor. They care more about the end results. Doing good produces good. Happy employees tend to stay, producing more competence with increased tenure. Diverse companies tend to have more input from a greater variety of people with different life experiences, leading to better, more thought-out decisions.
To understand who is actually doing what, the common denominator needed is transparency. Investors need to be able to evaluate the ESG platform, and if they cannot access it, they can’t evaluate it. Similarly, to provide transparency, it means you must have established KPIs to measure progress. Once again, data steps to the front of the priority list. No data - no ability to disclose. No disclosure - no transparency. No transparency - reduced investors.
While we are on the topic of data, one big misconception is that ESG carries a premium in cost. While there is a cost in obtaining data when that data is used to identify and eliminate waste, does that not reduce operational costs and boost net operational profit? Without taking in data, identifying where resources are wasted, you spend money you don’t have to spend, making you less profitable. If done correctly, ESG should reduce costs, not come as a premium.
There are other signs that the market is starting to shift towards a greater emphasis on natural resources. Take the futures water market that launched in California late last year. Just as we currently trade and lock in pricing, hedging, on energy in deregulated markets. This new water market provides an opportunity for big water users to similarly hedge against the rising cost of water to lock in potentially lower rates.
While a new concept, and one that has yet to prove its effectiveness, what these patterns do show us is increased interest in assigning financial returns against the consumption of natural resources, or more properly against the reduced consumption of resources.
Finally, more and more organizations are publicly announcing more aggressive sustainability goals. One such is example is the March Nuveen document, Real Estate’s Road to Net Zeron Carbon. This well-thought-out roadmap outlines Nuveen’s net-zero carbon goal by 2040, 10 years ahead of the Paris Climate Accord Goal.
Sustainability professionals need to be aware of these trends as the implications fall squarely in our court. Whether minimizing risks associated with climate change, identify opportunities for investors, helping our organizations meet their goals, or simply complying with local regulations or policies, it is no surprise that success relies on data and understanding your portfolio. Once again, the importance of gathering contemporary consumption information for energy, water, waste, and carbon becomes critical.
From 2008 to 2013, our industry watched as seven major US cities passed benchmarking ordinances (Washington, D.C., 2008; Austin, 2008; New York City, 2009; Seattle, 2010; San Francisco, 2011; Philadelphia, 2012; and Minneapolis, 2013). These ordinances were aimed squarely at requiring buildings to measure energy consumption and, in some cases, water which allows those cities to compare the performance of those buildings against other buildings. Since the initial law in 2008, as of May of 2020, over 32 cities and three states have enacted some level of reporting of energy consumption.
Similar to investors, who first asked for disclosure and are now seeking reductions, many of those cities are now following up those reporting ordinances with performance legislation that set specific reduction targets for the city’s buildings. New York, DC, St. Louis, and soon Boston will all have requirements in place that set a benchmark and a requirement for buildings to reach that benchmark in terms of energy consumption reductions or carbon load reductions.
Really, addressing these city ordinances is not significantly different from the approach to navigating the sustainability bonds that provide favorable capital costs for those investments or reaching the goals our organizations set around ESG.
First, we measure and track. While the first question is what is the consumption, the second question is what are we comparing the consumption against. With this benchmark in mind, we can determine if the building is trending to comply with the reduction goal or if it is not trending to comply.
Those assets that are not trending in the right direction follow a familiar cadence, identify the potential properties which are consuming more energy or water than we expect, and then audit those properties to develop site-specific strategies to reduce the consumption at those buildings. In each case, energy efficiency measures (EEM) can be identified as well as any incentive programs to help offset those costs. In each case, a return on investment is calculated and a simple payback in addition to capturing the overall effectiveness of the proposed EEM.
Once EEMs are implemented, it is critical to follow the performance post-installation to track the investment's effectiveness and track the asset's new trendline to determine if it is now trending towards compliance with the benchmark.
This process repeats itself: RETRIEVE (data) - RECOGNIZE (trends) - RESOLVE (issues) - REVIEW (performance). Following this formula, as a sustainability professional, you have a framework to address any compliance requirement, whether internal or external.
While this framework can be applied in nearly every instance, the individual steps may be a bit more nuanced and property-specific, but let’s take a closer look at each stage:
RETRIEVE
While commercial office managers may not struggle quite as much with this one, triple net industrial properties and especially multifamily properties can find this step a bit more challenging. To evaluate the property's impact, you need to obtain both whole-building data and owner-paid data, which obviously is a subset of that dataset. An increasing number of utilities will provide some level of aggregate building data, often anonymized. About a third of the utility providers, however, still want a release from each tenant. The green lease discussed last week can help in this instance. However, the process still requires coordination, and it takes some administrative skill to keep the database of releases and the corresponding tenant accounts updated.
There are legitimate privacy and security concerns associated with retrieving data. These can be addressed when the utility provides anonymized, aggregated data. Groups such as American Council for an Energy-Efficient Economy (ACEEE) advocate for increased access to utility consumption data, among other energy efficiency goals. The organization’s website includes a resource to track which cities are (and are not) providing access to aggregate energy data: Energy Data Access.
RECOGNIZE
The key to recognizing which property is performing well and which property is not is a robust data set to compare against. The larger the pool, the better. The idea here is to figure out what is normal. Obviously, the more properties to compare, the better you can determine what is normal. Once you identify normal, abnormal is easy.
There are a couple of easy trip-ups here, however. The first is over-reliance on Energy Star Portfolio Manager as a benchmarking tool. While the tool does provide a lot of good analysis, in fact, it excels at reporting back information about the individual property such as energy use intensity and it nearly universally the platform used for compliance reporting. However, if you are using it for benchmarking, you need to ask a few questions to understand what your data is being compared against. The total number of buildings in the data set used to compare against and the age of that data, for multifamily that means fewer than 1000 buildings are included for the comparison, and the data is from a 2011 Fannie Mae report. Now think about how the world has changed in the last 10 years; for starters - look at the light bulb you use now and compare that to what that bulb was most likely was 10 years ago. A lot has changed. I dove into this deeper a few weeks ago in Don’t be a Data Hoarder.
RESOLVE
Once you have used the data to point you in the right direction, the process of uncovering the opportunities that would best be suited for this site begins. This really should be an ASHRAE Level 2 audit which requires a site visit.
The reason I specify an AHSRAE Level 2 audit is the audit guidelines are outlined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE). While it is possible to have a useful audit that is based on ASHRAE Level 2 but not fully compliant with ASHRAE standards, the more you stray from those standards, the more likely you are to receive an audit that is more based on what the auditor is trying to sell you then what your building actually needs to do to reduce its energy and water consumption. It is not that you can’t, but if you choose to do an audit that doesn’t follow ASHRAE standards, ask questions. Identifying what your building actually needs to do to reduce its consumption is the primary goal here; this has to be stressed in the audit.
Whatever type of audit you choose to pursue, it needs to break down the building’s energy consumption by end-use and identify the areas with the greatest opportunities for improved efficiency. The analysis of Utility rates should also be included to see if there are opportunities to reduce costs and reduce carbon impact. The audit should include at minimum the Building Envelope, Lighting, HVAC, Domestic Hot Water, Plug Loads, Motors, Pumps, and, if present Compressed Air or Process Uses.
The end result should be a concise report and briefing with the Owner and Management Team that outlines possible Energy Efficiency Measures (EEMs), including no- and low-cost measures, modifications to system controls and building automation (if present), operational changes, and potential capital upgrades. The findings should include general expenses and overall performance metrics, identification of any incentive programs that may offset costs, as well as financial return metrics such as ROI and Simple Payback to evaluate the EEMs and decide the direction to go with implementation.
The ASHRAE procedures for Commerical Building Energy Audits can be purchased on the ASHRAE Website (bookstore).
REVIEW
Many companies are setting energy reduction goals for a point in the future, such as a 50% reduction in greenhouse gasses by 2040 or net-zero energy by 2050. Similarly, many performance ordinances are based on compliance at a point of time in the future, such as 2024 or 2030.
In all cases, reaching those goals requires ongoing management of the property's energy and water consumption (and the portfolio). Efficiency is not a done and don’t look back activity. Even buildings built to LEED Platinum standards over the course of 2-3 years can drift, resulting in poor performance, as discussed in this article: When the design isn’t enough.
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 minimize 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 tangible 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.
Follow us at:
Twitter: @BlogThirtynine
Instragram: ThirtyNine_Blog