A topic often discussed, but many questions remain. Let’s clear the air.
Sustainability data: more than energy in commercial real estate
At a June conference hosted by GRESB, the Global Real Estate Sustainability Benchmark, panelists debated whether “resilience” and “health and wellbeing” fit into the eponymously named organization’s mandate, if at all.
Panelists wondered aloud: is ESG – (“Environmental, Social, Governance”) shorthand for sustainability – separate from, part of, or subsumed by resilience? What about health and wellness for that matter? After all, if people are what ultimately matter, isn’t ESG just a framework for achieving our maximum wellbeing? In a world of increasing unpredictability, and where unpredictability threatens human welfare, isn’t resilience paramount?
That these concepts dominated a “sustainability” conference shows just how far, and how far stretched, the term has become. That is not necessarily bad. What it does mean is the conflation of sustainability with energy in the real estate sector is too narrow. The definition of “what matters” is much broader now than ever, and the debate around how to accurately measure just as lively.
The definition of “what matters” is much broader now than ever, and the debate around how to accurately measure just as lively.
What we do know is there are many measures of ESG performance in the real estate industry. Perhaps too many: 601 green building certifications programs exist globally, LEED and BREEAM being the most widely known. These groups and their peers certify claims of sustainability performance of a building’s design and/or ongoing operations and have myriad programs to accommodate buildings in various stages of development, of different types, and for sub-spaces like tenant areas. They’re as different as they are similar but all go far beyond energy.
Elevating up to the ‘portfolio’ level, the measures of sustainability performance are groups like GRESB and CDP. Each offers dozens of Key Performance Indicators that purport to capture the essence of sustainability performance. The idea behind enforcing standard measures of performance across buildings and portfolios is that they can then be compared. Winners and losers shake out and the market is supposed to do the rest…
But if it’s not merely about energy, what underlies all these measures of building- and portfolio-level sustainability performance? If you peel back the onion on green building certifications and portfolio rating schemes, you will see they all operate around a finite universe of specific primary data points, like efficiency projects performed at a building, building base characteristics, regulatory exposure, and ownership policies and procedures. Utility spend and consumption is, of course, one essential ingredient. Taken together with a few other categories of data, these sources comprise sustainability data in real estate.
So when you have a discussion on sustainability in commercial real estate, notice how talk of energy drops into the background pretty quickly: it’s foundational, but non-exhaustive. Notice how other quantitative measures such as projects, audits, certifications, and occupancy rates, and qualitative measures like corporate policies and procedures, come to the forefront. When you hear these concepts surface you’ll realize you’re having a holistic discussion around ESG. You may even hear “resilience” or “health and wellness” come into the conversation. If you do, reach for your drink and remember to ask: “how is that measured”?
Why does it matter?
More companies are taking action on the non-financial performance of assets with 82% of companies in the S&P 500 publishing sustainability reports in 2016, compared to 20% in 2011. So, we must ask, “Can we quantify sustainability?”
Yes! Building owners want to increase net operating income (NOI) by reducing operating expenses (OpEx) through driving down the controllable costs. Advanced sustainability programs align goals with financial reasoning through a cost/benefit analysis and calculating the Return on Investment (ROI) of individual projects. Sustainability initiatives that don’t pass financial hurdles don’t get funded. Simple.
Ultimately, sustainability factors are indicative of overall financial performance because high performing companies lower their risk. Studies have shown that these organizations also have higher returns and lower volatility in the market. If we want higher risk-adjusted returns for investors, we need to quantify sustainability and incorporate it into our business practices.