Sustainability: What is it worth?

The 2013 CEO survey conducted by UN Global Compact and Accenture revealed that 93% of executives believe “sustainability is key to the success of their business”. Such surprisingly high acceptance levels leave no doubt that sustainability is now a mainstream board consideration. While sustainability has long since been on the business radar for industries with significant environmental and social impacts, its systematic integration into business as usual for property investors and developers is relatively recent.

In fact, some might argue, it’s not even happening yet. So why the disconnect between executive beliefs and business practices in the property sector?

The answer may be that, despite a widely held belief that good sustainability performance should underpin financial success, evidence to this effect remains challenging to compile. One can, of course, point to generic studies that track the performance of sustainability indices (eg FTSE4Good or DJSI) against the main stock market constituents and systematically point to outperformance.

But then again, is it any surprise that companies attentive to these issues are inherently well managed, and forward-thinking, and therefore more likely to demonstrate consistently strong performance all round? It is also possible to point to certain studies that link rental values or capital values with strong performance against one or more sustainability impact areas. But increasingly the debate has moved away from discovering an elusive “green alpha” and towards an inexorable “brown discount” if certain assets don’t meet the market norms.

The reality is also that the investment case for sustainability is one of the hardest to defend

The reality is also that the investment case for sustainability is one of the hardest to defend. Boardroom decisions rely on financial tools and metrics that measure return on investment against typically short time horizons (eg less than three years). Such tools help quantify the direct impact of an investment on the bottom line, making it easier to prioritise initiatives. However, conducting cost benefit analysis for sustainability initiatives is not that straightforward. Many of the quantifiable benefits are likely to be on a longer-term horizon (eg more than five years), and many more still are of a more intangible nature.

Examples of these would be enhanced brand value, improved stakeholder relations, continued licence to operate, and differentiation from market peers. Some of these, such as continued licence to operate, are indeed very significant for a property developer seeking approval for a scheme from a local planning authority. But, unfortunately, few such benefits are being measured or tracked by property investors and developers.  This means the sector is still at the strategic stage of considering sustainability as an inherent cost to business rather than as a source of commercial advantage and opportunity.

What might the property industry learn from other sectors in this regard? The retail industry is an interesting one, as a number of retailers have pioneered different methodologies to quantify the value they derive from sustainability. M&S, for example, has estimated a cumulative net benefit of £320m over the last six years by simply measuring capital costs against operational savings for each and every one of the hundreds of sustainability initiatives outlined in their Plan A. The multinational company Kering (whose brands include Puma and Gucci to name but a few) has adopted a sophisticated environmental profit & loss accountancy framework, which places a monetary value on each of its environmental impacts, covering water use, waste, greenhouse gas emissions and land use. This has enabled Kering to drill deep into the supply chain, and to challenge preconceived assumptions of where it should prioritise sustainability investments across different product categories.

In the past 18 months in the UK, we have witnessed a number of property investors and developers aiming to capture their total impact on the economy, society and the environment. For instance, Hammerson and British Land have both made public statements around the social return on investment (SROI) of some of their retail schemes. More recently, the Crown Estate launched its “Total Contribution” framework to assess the impact of its business in terms of number of jobs created, contribution to the UK economy, enhancement of personal wellbeing and net emissions averted through activity on their portfolio. Such initiatives suggest that momentum is building for the measurement and articulation of total value to society, economy and environment from real estate businesses.

However, until socio-economic and environmental metrics become fundamental components of every property investment proposal, capex decisions are unlikely to be aligned with sustainability objectives. When these factors (which have hitherto been treated as externalities) are firmly integrated within discounted cashflow models, ROI appraisals, and CBA frameworks, the industry will have begun to embed sustainability into mainstream business strategy, rather than considering it a separate strategic focus area.

Julie Hirigoyen is UK head of sustainability at Jones Lang LaSalle