An Investment Perspective on Green Building Market Transformation

An Investment Perspective on Green Building Market Transformation
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This week the Green Building Certification Institute (GBCI) - the independent certification organization for LEED, WELL, PEER and other sustainability standards, announced that it has acquired the Global Real Estate Sustainability Benchmark (GRESB). As CEO of this organization as well as of the U.S. Green Building Council (USGBC), I'm excited to now have Nils Kok on our team as he continues in his role as CEO of GRESB. He and I are both deeply excited, about bringing together these two platforms, as we believe that GRESB's investment perspective on green building will spur the transformation of the built environment to become more efficient and sustainable.

When I co-founded USGBC 20 years ago it was because we started to recognize that the world wanted to create superior buildings and communities; green buildings that benefit people and the environment. But we also had a challenge: the real estate industry didn't agree on how to define "better buildings." They couldn't agree on what constituted better energy performance, better water performance, better resource use performance, better indoor air quality performance. We faced the problem that decision makers couldn't differentiate the best from worst performers in the marketplace. Developers and investors want to build and buy better buildings and we, their customers, really want them. But there was no agreed upon way to identify, value and acquire such buildings.

Fast forward 20 years and it's clear that we have come a long way, and it's largely because of LEED, the rating system we created to provide a common language to define green buildings. We trained hundreds of thousands of architects, engineers and related professionals to understand and apply this language on more than 62,000 green building projects around the world, covering more than 11.4 billion square feet of space. The LEED label helped communicate this information to decision makers, and independent research from the nations best universities found that buildings with these labels commanded significant market advantages: premium rents, faster leasing and high sales prices. In sum, we have managed to define a category of buildings that benefit people and the environment, and, time and time again, we find that these buildings are more desirable and worth more.

But even with all our success, there were still pieces missing. Most often, the process of green building has occurred one building at a time through the great actions of individual project teams. At this scale, individuals or small teams champion smarter ways to design, build and operate buildings. This encourages thoughtful, integrative design and attention to the multiple sustainability dimensions that constitute a modern green building. However, the attention to one building at a time can only take us so far, so fast. And, many decisions about our buildings and communities are made not just by architects and engineers, but also by the individuals and institutions providing the essential funding and capital that underlie each project.

In fact, we increasingly realize that the preferences and priorities of real estate investors are central to shaping our built environment. In turn, many investors have started to recognize their power to not just make a positive difference, but also to improve the risk-adjustment returns of their real estate investments. Investors now know they can ask for buildings and, even entire communities, which provide superior conditions from an investment perspective, while simultaneously benefiting the environment. Yet, surprisingly, we're back to some of the same problems that launched the green building movement 20 years ago: a persistent lack of information about the sustainability characteristics of real estate. By and large, investors simply don't know enough about what they're investing in to identify and prioritize real estate that demonstrably benefits the environment, the occupants, as well as returns.

LEED and similar green building rating systems around the world certainly help. They provide a common language to differentiate average from exceptional. However, the real estate portfolios owned by REITs, private equity real estate funds and other investable real estate products, are more than sum of their individual buildings. Consequently, investors need additional information to guide their decisions.

In 2009, economist Nils Kok and a small team of his colleagues launched the Global Real Estate Sustainability Benchmark (GRESB). Dr. Kok was propelled by the same simple, profoundly important vision that drove LEED: powerful market transformation with clear, comparable information about the characteristics and performance of real estate around the world. For GRESB, this vision was applied to the vast real estate portfolios that underpin pension funds, insurance companies, endowments, and similar sources of wealth.

The GRESB team created new tools to provide unprecedented transparency into the sustainability performance of global real estate holdings. GRESB then applied advanced analytics to condense and compare information to make it meaningful to investors. The result was quantitative, actionable sustainability data that empowered institutional real estate investors to bring data about environmental performance, social responsibility, and corporate governance into their decision-making. These data help institutional investors promote superior buildings, not just one at a time, but across entire global portfolios.

Today, this simple vision has been wildly successful: the pool of investors that use GRESB's data collectively control $5.5 trillion dollars in investment assets, and, in 2014, they received information on 637 real estate funds including nearly 60,000 individual buildings. Green building certifications are an important part of the information that GRESB supplies to investors, but there is much more, including sustainability practices, policies, risk management, operational performance (including energy, water, carbon and waste), and stakeholder engagement.

Together, GRESB and LEED provide the tools and a common language needed to define superior sustainability performance for individual properties and entire global investment portfolios. This synergy will take the green building movement to a new level of scale and impact. We can begin to see the contours of a new era of transparency and data-driven decision-making bringing us closer to our long-standing goals: superior buildings and communities that benefit people and the environment, and, the bottom line.

We're excited about this coming together of GBCI and GRESB, and now we can begin to discover its benefits across the full spectrum of real estate. We have the tools to accelerate green building transformation for individual spaces, whole buildings, neighborhoods and entire portfolios. We have the information to build green equity indices, to support REITs and real estate fund managers and developers to issue green bonds and inform the capital market about the shades of green of their investments. We believe that this investment perspective marks the beginning of the next great wave of green building market transformation.

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