Will ESG Move the Green Building Needle?

“Sustainable building upgrades are never an emergency,” says Sara Neff, head of sustainability for Lendlease Americas, explaining why some laggardly real estate companies don’t budget adequately for green building. “You can always put off a lighting retrofit.”

Maybe not anymore. With the gradual emergence of environmental, social, and governance (ESG) reporting as a way for U.S. real estate firms to communicate their viability to investors, nice-to-haves like lighting retrofits are becoming musts. The energy performance of these companies’ portfolios is a metric that’s increasingly used in ESG reports to show how they’re addressing current costs and managing the risks associated with future climate change legislation.

An upward trend

“The interest level in ESG continues to increase from all of our stakeholders, customers, policymakers, and community members,” said Ben Myers, vice president, sustainability, at Boston Properties. “Our employees really care about it. Our investors have more pointed questions about the company’s ambition and alignment with the climate science.”

Like Lendlease, Boston Properties is “1.5ºC aligned,” meaning it is using science-based targets to get its portfolio’s carbon footprint to zero. Lendlease has an “absolute zero” goal of no greenhouse gas (GHG) emissions from its operations by 2040. No offsets allowed. These ambitious companies—one national, one global—and others like them are setting a new bar for the real estate industry in the U.S.

Soon, the experts we spoke with say, other firms will have to be able to clear that bar or take financial hits through lack of investment and lack of access to capital. The World Economic Forum is even predicting that the “green premium” currently associated with forward-thinking real estate investment trusts (REITs) and other property-owning and -developing firms will shift to become a “brown discount”—a penalty for not greening the portfolio.

What’s involved?

For the real estate industry, there’s a lot of overlap between green building and ESG. Some examples of what Lendlease and Boston Properties are doing to align with their ESG commitments include:

• Electrifying both new and existing buildings
• Reducing embodied carbon
• Creating health initiatives (like pursuing WELL and Fitwel)
• Procuring onsite solar
• Requiring green leases
• Pursuing more green building certifications
• Managing climate risk with resilient design and retrofits

“Walking the walk, doing the retrofits, doing the assessments, measuring the carbon impact: that’s what you’re reporting on to the boardroom,” explained Neff.

Myers agreed, saying his job spans “from the boiler room to the boardroom.”

Disconnects

Not everything about ESG, even for real estate firms, touches on green building practices. And not all green building practices overlap with ESG. Some people freak out a little about that, according to Chris Pyke, senior vice president, product, at Arc Skoru (a for-profit affiliate of the U.S. Green Building Council).

“There are good things that we care about in green building—bird strikes, passive survivability—that are legitimately good and that don’t have ESG expression,” Pyke told BuildingGreen. Meanwhile, “the organization of corporate boards doesn’t have expression at the building level. That’s not a bug! … For the good of humanity, we need them both to exist.”

Yet there are some areas of disconnect that need work—in particular around carbon and resilience.

“We should be more focused on carbon,” argues Neff. “We’ve moved from energy to carbon in terms of what the conversation is environmentally.” Although she says “LEED is getting there,” she acknowledges the challenges. “Carbon is harder to measure, harder to manage: you can’t look at it; it doesn’t show up on a bill. … It’s hard.” Yet, she adds, “The rating systems need to align to the world of ESG,” which means speaking the language of carbon instead of the language of energy.

“You can have the greenest building in the world, but it doesn’t say anything about climate resilience,” adds Myers. “That is a key component that has not been addressed historically in green building certifications.”

Neff agrees, pointing out that “ESG has gotten its head around how we are thinking about financial risks from climate change,” but resilience lags in terms of metrics. “LEED is great at assessing the environmental impacts of a building, but LEED is not designed for climate resilience.” Despite this, “Everything we [at Lendlease] do has to go through a climate assessment.”

Are rating systems passé?

And what about LEED, anyway? How important are rating systems to ESG?

Although recent data suggest that demand for certifications is lagging even as green building adoption goes up, Neff says they are “one of the currencies of ESG in real estate.” (Neff disclosed that she is a board member at Green Business Certification Inc., the certifying body for LEED.) “You can measure how much of your portfolio is certified. Absolutely, certifications are very, very critical.”

Myers agrees. “If we’re developing a new project, we think the risk is too high to not be LEED certified in our markets,” he told BuildingGreen. Although he said he hears people raising the alarm about LEED fading from relevance, he says it’s not going anywhere when it comes to ESG. “Great, people should stop doing LEED,” he joked. “We’re going to continue, and it’s going to be a competitive advantage.”

But there are genuine cultural issues, warns Pyke. “Absolutely [green building and ESG] go together.” But there are tensions when “we have some investors who want to homogenize the building process. ... They want to reduce the dimensionality of this problem so the world gets simpler”—for example, by setting emissions goals and focusing exclusively on “pushing that down onto buildings.”

“That’s not what we’re trying to do with green building, which is integrative design for multiple objectives,” Pyke said.

Still, Myers is optimistic that the two will remain allied, saying, “Green building is absolutely foundational to ESG in real estate, and that’s never going to change.”