Green buildings are emerging from their origins in the non-profit or public sector into a legitimate investment option for institutional investors.

Equally important, due to the rapid emergence of sustainability as a driving force in society, which is driving dramatic government and corporate action, those investors who do not alter their real estate investment strategies to address the implications of society’s move to sustainability will not only miss investment opportunities, but expose themselves to substantial uncompensated risks and potential value declines in their existing portfolios.

Green buildings can be defined as those properties that incorporate design, construction and operating practices that significantly reduce or eliminate the negative impact of development on the environment and occupants through addressing such issues as energy efficiency, greenhouse gas emission abatement, water conservation, waste avoidance and worker productivity and health.

While a property does not have to be ‘certified’ as ‘Green’ to be sustainable, or incorporate sustainable features, the increasing use and acceptance of green building rating systems such as BREEAM (UK); LEED (US); CASBBE (Japan) and Green Star (Australia) has helped the industry by providing a common benchmark for sustainability.

Buildings which are either not sustainable, or cannot be retrofitted to a relatively high level of sustainability at reasonable cost, are exposed to substantial costs to meet future regulatory obligations, and lose out on the opportunity to take advantage of the substantial incentives that currently exist and are expected to become more prevalent in the future.

Local governments are moving beyond requiring sustainable buildings to house their own workers and enacting regulations affecting all the buildings in their communities. The US Conference of Mayors recently adopted a resolution calling for all buildings to be carbon-neutral by 2030. Many municipal governments in the US, including Boston, Washington DC and San Mateo County, have adopted specific regulations and incentives affecting private commercial buildings. London’s Climate Change Agency’s activities, Barcelona’s Solar Energy Ordinance, Berlin’s fuel switching subsidies and Copenhagen’s Energy Audit requirements are just a few European municipal activities directly influencing private sector buildings. These trends towards greater regulation and incentivisation of private sector buildings are accelerating.

State governments in the US have also ramped up their activities. In California, Executive Order S-20-04 requires state agencies to seek office leases in buildings with a US EPA Energy Star rating and directs California’s largest public pension funds to target real estate investments in resource efficient buildings. These directives were in place prior to the passage of AB 32, which sets aggressive carbon reduction targets that will lead to more aggressive regulation and incentives in the future. So many other states have passed similar legislation that for the first time, many of the largest energy companies and corporations in America are lobbying for carbon caps.

Federal governments in Europe have been active, and are becoming even more aggressive in reducing carbon. Seventeen of the largest US federal agencies, including defense and the general services administration, have signed a memorandum committing themselves to design, construction, and operation of high performance and sustainable buildings. More aggressive federal actions in the US and Europe are being planned.

The corporate sector, whose leasing and investment decisions will be increasingly influenced by the government actions summarised above, are also being driven towards sustainability by activist individual and institutional shareholders, the good will and responsibility of select leaders, and a growing belief in sustainability as a profit lever through product/corporate branding, new product development, and risk reduction in the supply chain. Additionally, improving evidence of the worker health and productivity and recruiting benefits of sustainable buildings are beginning to influence corporate leasing decisions.

Recent surveys document the rise of sustainability on the corporate agenda. In a survey of 198 medium to large multinational companies by The Center for Corporate Citizenship and Sustainability, 72% of the C-suite and board members mentioned sustainability and corporate citizenship as very or extremely important.

Three corporate led initiatives contributing to the rapid rise of sustainability on the corporate agenda in the last year or two are summarised below:

■ Carbon Disclosure Project: Over 225 institutional investors representing $31trn (€23trn) in assets have organised to request carbon disclosure from the world’s largest companies; over 900 of the world’s largest companies have responded to the specific disclosure requirements;

■ Global Reporting Initiative: Over 1,000 companies including many of the largest corporations in the world have committed to reporting following GRI guidelines for the reporting of social, economic, and environmental performance.

■ World Business Council for Sustainable Development: Brings together 180 leading international companies including GM, DuPont, Sony, BP, Royal Dutch Shell in a shared commitment to sustainable development through economic growth, ecological balance, and social progress.

The rapid emergence of sustainability in the government and corporate sectors presents many investment opportunities for institutions in a new emerging sector of the real estate market. Perhaps more critically, institutions must be on top of the implications of sustainability trends from a defensive perspective, managing the risk and protecting the value of their existing assets.

Scott Muldavin is president of The Muldavin Company and executive director of the Green Building Finance Consortium

 

 

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