The ROI of Sustainability
Excerpt: Sustainability and Corporate Social Responsibility are increasingly becoming business as usual practices but as with anything, they need justification. Yet the return on investment can be difficult to calculate… and it’s not all money off energy bills.
Sustainability is an increasingly popular topic in all business sectors and more companies than ever are moving toward integrating sustainable practises and policies in their day to day operations. However, as with any project internally in an organisation, a business case and projected return on investment is normally required to justify investment and resource. But in the case of sustainability initiatives, it can be complex to calculate this return.
In the US, 40% of the country’s total energy consumption is accounted for by buildings, so most commercial property owners and developers recognise the importance of investing into sustainable upgrades to increase the longevity and decrease the maintenance bills of their portfolio. A survey by Partner carried out in 2015 demonstrated that commercial property professionals rated energy optimisation as the most promising area of investment within their portfolio. Indeed there are plenty of products on the market that now promise a financial return on investment within set periods from 3 years onward.
Opportunities for financial payback for investment within sustainability are stronger than they ever have been, with more benchmarking and practical examples available. Developing a business strategy based on the benchmarking of a property’s energy outputs will result in a considerably more efficiently operated asset. The knock-on impact of this yields higher rents, lower vacancies, faster absorption and lower operating costs. Depending on the country of operation and rebates and incentives available, the costs of implementing energy efficiency systems within properties can be negligible: government incentives should always be researched into.
To reconcile the complete picture of ROI of sustainability measures, factors other than finances need to be taken into account. Regulatory, social and market factors should all be considered. These include, but are not limited to:
Reducing operating expenses
The reduction in energy usage has an obvious result in lower utility bills, but there are other operational expenses that can be decreased by implementing sustainability measures.
Dependent on the area in which the property is, there may be government or state-sponsored initiatives and incentives to lower other costs. Low-Income Housing Tax Credit is one such examples, encouraging greener building usage by offering extra credit to properties with lower emissions. Incentives vary from country to country but can account for up to 35% of property tax savings – a large discount to overall expenditure.
Access to better funding.
Several financing programs available (from both public and private sources) have pre-requisite requirements that now stipulate or favour more eco-friendly building practices. Benefits can include discounted interest rates, additional loan proceeds or preferred pricing.
Greener lending programs often favour multi-property portfolios to encourage accountability and corporate social responsibility.
As building stock ages, it is often the case that improvements need to be made to meet newer energy and efficiency standards and requirements. Many countries and authorities are, as a result, introducing legal requirements for benchmarking and usage disclosure to ensure that property owners correctly quantify and calculate property performance – and improve it where required.
Requirements vary but stricter rules are already implemented in some cities. In New York, energy audits, retro commissioning and benchmarking is a legal requirement on all commercial buildings over a stipulated square footage.
Valuable demonstration of corporate responsibility
Building energy performance is now increasingly measured alongside other efficiency measures in one corporate social responsibility metric. There is now an expectation that all businesses will have in place CSR policies, procedures and reporting. CSR is now considered as mainstream as investment, leasing and financial decisions are.
Institutional investors alongside potential staff and existing stakeholders all increasingly expect a solid commitment to be made to CSR and sustainability. Indeed external pressure fast making this the ‘norm’ in business practices is resulting in the creation of assessment and consultation companies who specialise in assessing, recommending and implementing sustainability best practices and measures. Property owners having a favourable portfolio-wide sustainability assessment carried out is becoming an increasingly important metric to attract investors, who are receiving pressure from their capital stack to demonstrate commitments to green practices.
It is no longer just investors demanding greener spaces, but also tenants and estate agents. Greener, more eco-friendly buildings will often be worth paying a premium for, and so it is important that property owners stay on top of the latest developments in the sector to benefit from this.
Indeed the ROI on sustainability is not just savings on energy bills – and keeping at the forefront of green initiatives is the most certain way to benefit from payback all ways round.