The Most Important Step is the First
Portfolios change, but the way we bring properties into our portfolio can have a big impact on the success or failure of your ESG Program
In his book, “The Champion in All Of Us: 12 Rules For Success,” Steve Beckley makes the case that of all the steps we take when attempting to realize a goal, “The first step is the most important. it is the most crucial and the most effective as it will initiate the direction you have chosen.”
Beckley may be on to something when thinking about ESG and your program’s ability to meet your ESG goals. When initiating an ESG program, success depends on the focus of the strategy. This is why you will see multiple articles on my blog discussing the importance of understanding what you want your program to accomplish as the first step in delivering an ESG strategy. However, just as your corporate strategy must begin with the end in mind, so should each asset as it enters your portfolio.
When developing assets, the first step is design and programming. What is the function of the asset being delivered? What are the business requirements it needs to meet? This is a critical moment in which the asset’s future financial and environmental performance is impacted. If you design it to be inefficient, don’t be surprised when it is inefficient. If the development team engages the sustainability team after the ground is broken, they are engaging them too late to make the difference they could.
There are multiple points in the design and programming stage where the ESG professional can provide guidance and direction, which can reduce operational expense and protect the asset’s value, all while reducing the environmental impact. Meeting those organizational ESG goals starts here, on the architectural drawings and system requirements.
It is not enough, however, to advise your architect and engineering team that you want the delivery to minimize its impact on the community in which it is being delivered. The ESG professional needs to be engaged and collaborate with the development team. Education is critical, particularly early in the design process. You will notice trends if you have watched a building plan come together. Engineers tend to recommend the same systems in most of their designs. While the design may nuance a bit from project to project, by and large, the engineer delivers what they are used to delivering. Similarly, the architect tends to draw what the architect has drawn in the past. This is especially true in assembly drawings, where it is not unusual to simply reuse or minimally alter assembly drawings from past projects.
For this reason, it is vital for the ESG professional to champion efficiency and more sustainable approaches in the design, which entails educating the designers on the advantages of a more sustainable design. From the use of the lot to the design of the roof, the consideration of shading to leveraging natural lighting, there are multiple points in which the plan should consider the effect on operations the design will have.
The consideration of embodied carbon is part of this conversation. We often hear that the built environment is responsible for 39% of the world’s carbon emissions; in fact, that is why this blog is called ThirtyNine. But what is less understood is what percentage of those emissions result from operations versus those that are embedded in the construction of the asset itself.
Take insulation materials, for example. Increased R-values mean less energy loss. I often hear design professionals speak about what R-value the design must include, but rarely do you hear detailed conversations about the materials used to achieve that R-value. The general contractor is told to achieve the R-value. That task is provided to a subcontractor who determines how they will accomplish it, so long as it doesn’t interfere with other aspects of the construction process. In fact, most likely, the only consideration taken into account will be the cost of achieving that R-value. Yet, the embodied carbon of standard Extruded Polystyrene (XPS) board is so high that if we use more than ~R10 in a building through XPS, even 30 years of the associated heating savings will not offset the embodied carbon of the XPS. Alternatively, had the design specified Graphite Polystyrene (GPS), when installed in a home, a +R20 retrofit on an R4 home “pays back” in three months, and raising that value to R40 can be justified on a 30-year evaluation.
That same level of life cycle analysis should be extended to all building materials in the design, and with education and training, it can be a regular step in the design process. There are multiple tools, often free, such as the Embodied Carbon in Construction Calculator (EC3) tool that allow the assessment of materials during the design process.
For many organizations, assets are acquired, not developed. This does not mean that you do not have to consider the impact of the new asset on your portfolio, and it perhaps makes it even more critical since the opportunity to “design out” negative impacts is no longer an option. Frequently, assets are delivered on a first-dollar cost consideration alone, with little regard for the operational effects of those decisions. From value engineering to lack of commissioning, it is not uncommon for us to acquire assets that will challenge our ability to meet the goals we set for our portfolios.
This is why having a solid pre-acquisition assessment process is critical and should be a step in every standard due diligence process. We already conduct a Property Condition Assessment (PCA) on most deals - it is not necessarily a heavy lift to expand that process to identify carbon transition risks, physical and climate risks, as well as opportunities to improve efficiency and decarbonize the asset.
Similar to the collaboration and education that the ESG professional needs to have with the design team, the same effort should be made with the asset management team. From analysis, pro forma development, and buy or no buy decisions, the asset management team needs to understand all the risks and opportunities an asset presents - beyond merely determining the potential financial performance. It is increasingly essential that the buy or no buy decision includes an assessment of sustainability risks. This includes:
Carbon Transition Risks
These include risks to the asset associated with the ongoing shift to a low carbon economy due to impacts of climate change and can include consideration of fuels used for energy, the effects of carbon prices, and new regulatory requirements.
Natural & Physical Climate Risks
These include risks posed by natural hazards and the physical effects of climate change and can include assessment of potential exposure to floods, sea-level rise, earthquakes, wildfires, hurricanes, heat stress, or water stress.
Efficiency Opportunities
This is typically accomplished through an AHSRAE Level 1 walk-through of the asset and provides an overview of what potential efficiency measures may be impactful for the property. It should include a high-level opinion of the ROI of said measures and may consist of LED retrofits, HVAC or water heating equipment replacement, irrigation controls, installation of water-saving devices, etc.
Decarbonization Opportunities
These include an evaluation of the site’s potential for on-site solar installation, Electric Vehicle Charging, Energy Storage, Community Solar, Energy Procurement, or other opportunities that provide access to energy generated by renewable sources.
The key to the integration of sustainability assessment in the due diligence period is pre-planning. This starts with the development of a policy that outlines the role of ESG in asset allocation. Once the policy is in place, a procedure needs to be developed, well in advance of any acquisition which outlines the expectations of the ESG Assessment. This may include checklists and specific items that need to be included in the evaluation of risk and opportunity.
Just as it is important to outline what the expectation is, it is equally important to locate the partners that you intend to leverage to achieve the outcomes. This may be as simple as meeting with the organization providing the PCA to review their capabilities and determine if they can also deliver the ESG assessment. It may also mean bringing in a new organization to deliver portions of the assessment. There are some elements that lend themselves to desktop evaluation while others may require boots on the ground. We have to keep in mind that the asset management team is working against the clock, a bid for the asset needs to be delivered or the need to pass on the opportunity needs to be recognized expeditiously. The ESG Assessment should not delay the acquisition process, but rather better inform it. To accomplish this means planning ahead, and systemizing the procedure.
As properties come into our portfolio, either via development or via acquisition, these initial steps not only set up the property for future success or failure but can ultimately have a big impact on the overall success of your ESG Program and meeting impact goals that we set. A little planning up front combined with a lot of collaboration and education can go a long way in realizing the goals of your program.
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. 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
Instagram: ThirtyNine_Blog