Brainstorming with a Property Developer CEO over Energy Efficiency

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About 60% of total energy efficiency investment lies within the property and building construction sector, yet on occasion it seems that 75% of the resistance to building in energy efficiency into new development lies within the C-suite of such companies. This is a hard, pragmatic sector to operate in and risk aversion can be a necessary survival trait as the market fluctuates.

Having grown up around family run property development and estate agency owners  I had been a useful addition to site construction crews on projects as a teenager and subsequently regarded as the black sheep of the family for becoming a corporate environmental manager.  My description of myself as a ‘green businessman’ cut very little ice in their commercial eyes.  Only when I had honed my skills on guiding large infrastructure development through planning systems within the UK power, renewables and water sector did they become interested.  I was now a useful source of advice on EIA, legislation, planning laws and explaining to them why floodplains, ancient woodlands and habitats were being actively protected by communities from their next money-making scheme.

So, this mentoring meeting on sustainability in business with the CEO of a sizeable house building company was following a predictable route.  He was interested in what I had to say, but wary of what I was saying.  His organisation with many others were being bombarded with the ‘sustainability’ message, but few commentators had helped him  drawing linkage to what it meant for him personally and for those actively leading organisations now at the forefront of climate change adaptation hopes.  He was intelligent and strategically far-sighted to understand that the way they operated now had to change, but needed help and more rational reasons to actively jump onto the sustainability wagon.

We agreed that as a ground rule sustainability initiatives had to either add +£1 to the operational profits or save £1 expended in risk.  The core strategy had whatever to add a minimum of +£1 to his balance sheet.

So, we sat down and brainstormed!

First, we addressed the direct benefits of energy efficiency regarding climate change so that we could park that issue first and go on to explore other potential benefits of energy efficiency. We agreed that the building & property development sectors has an important role to play via aggressive efficiency improvements within new build (and existing) as a contributor to limiting the pace of global warming.  As evidence to this we referenced a recent International Energy Agency’s (IEA) market outlook on energy efficiency that claimed that a concerted drive in energy efficiency policies could assist the world in achieving ca 40% of the emission reductions needed without requiring new technology.

We discussed the options open to his company to improve energy efficiency design. There was a lot they could do but the blockage in his mind was just how they could boost financial returns, as any benefit advantage to the buyer was dependent on increased borrowing costs, energy-efficient material costs and added construction time costs to his organisation. These added costs would have to be passed on to the buyer at the detriment of a higher purchase price.  He recognised that the buyer could eventually recover those added costs in lower energy bills, but in risk terms the marketplace still revolved around ‘location, location, location, and mortgage cost.  The only clearly marketable attribute was the attractiveness of a ‘green’ home to his target market – relatively successful, dual income, young and mid-life professionals.  An advantage yes, but unquantifiable in the sellers marketplace or when seeking added capital for a scheme.  Little progress here towards his +£1!

I then turned the discussion over to the evaluation of alternative and more sustainably innovative options to identify added value finance and business model benefits based on added energy efficiency.

Site design and placement

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Asked if he ever took the alignment of new property’s into account, the answer was ‘No! the priority was housing density and profit return on a site!’.  So we discussed placement for solar efficiency with housing density + return.  Exploring an idea where a development was maximised for the fitting a mass photovoltaic scheme in its design as the site was constructed.  The factory unit or property houses benefitting from the scheme, but ownership of the asset remained with the development company for an initial period before transferring over.  How did he feel about his organisation branching out and becoming an ‘energy company’ exporting into the local grid?  Monetising the potential energy benefit as part of the development return had attraction he agreed:

  • It could reduce the risk profile – for even if the buildings were empty, they still produced capital returns post construction.
  • A house build-carbon reduction-renewables scheme could appeal more to the third-party financier marketplace in the future.
  • Such a scheme could have a predictable return on investment, and the cost in solar installation was still reducing in price.
  • The energy units were reproducible on a scale that potentially made the added installation costs attractive.
  • there was still the option of possible energy efficiency grants.
  • The concept could help in demonstrating lower cost starter homes, and
  • It had a marketable factor for those seeking a mortgage and concerned about rising externalities.

The non-energy benefits (NEBs) of energy-efficient buildings.

It was becoming clear from our session that householder or tenant energy cost savings were not always enough to drive sustainability strategies into the property market.  A robust business case and ROI argument needs to consider additional factors in assigning that +£1 to the developer.

I raised the concept of ‘stranded assets’ as the organisation had a property letting arm within its business portfolio.  What was the risk of these properties decreasing in value or becoming stranded if energy efficiency standards dramatically rose in the future?  The scenario we discussed was a significant shift in Government policy in response to the +1.5oC temperature target.  What would be the impact if this became a hard and fast target in government or global energy policy reaction?

  • Could such changes render ‘bought cheap and done up’ properties a future financial liability?
  • Would investors continue to lend real estate capital for properties they deemed at future risk of becoming stranded liabilities?
  • What strategic criteria should now define a ‘cheap’ property in terms of its energy efficiency or retrofit profile?

These were new questions he hadn’t considered before and needed to be considered as future risk scenario.

Moving on from the risk of stranded assets we agreed that the top non-energy benefit for his organisation would lie in increased asset value within their holding portfolio and within individual buildings within that portfolio.  One obvious advantage was the desirability to rent of individual properties as a reflection of energy efficiency.  Anything that increased the longevity of tenants or reduced the lapse time between losing one tenant and gaining another could have a significant NEB return we agreed.  A financial return that was much greater than the energy cost savings implemented into the fabric of that building originally, if a building remained empty for too long.

If a building provided tenants with a greener, more pleasant place to work/live and which also contributed to operational costs, its desirability and occupation periods enhanced during its life. Within the portfolio, we also agreed that such buildings would have a lower risk exposure to future regulatory energy efficiency challenge and the expense of retrofitting. Thus:

  • increased rentability,
  • lower gap periods and
  • reduced regulatory risks

attached to high performing energy-efficient commercial/residential properties were all NEBs that need to be considered within future business strategies he agreed.

The session had I hoped started to alter the perception of this CEO, over his strategic options and how sustainability could assist in safeguarding the business’s longevity.  It had also raised scenario that could go forward into the boardroom for further debate and consideration.  That was a satisfactory start, because sustainability in business is dependant on industry leaders feeling comfortable in taking the lead on sustainability initiatives in a pro-active manner rather than reacting negatively when the opportunity has passed or when new regulation demand change.

However, the wider strategic impression I was left with after our session was that energy efficiency and investment practices remain unaligned in the UK property marketplace. The buildings sector clearly has a significant role to play in offsetting future carbon releases and in mitigating future carbon use, yet the regulatory energy policy and investment routes remain confusing as to whether they can ultimately drive a +1.5oC climate change future or just contribute locally to energy efficiency.

The regulatory preference over the last decade has clearly been aimed at direct grants and subsidies for home owners.  Whilst successful in general, how much greater would have been its success if it had been aimed at achieving greater standardisation in energy efficiency within the new build developments over the last 10 years?  This may reflect political caution when dealing with the sector or that policymaking is still more comfortable with the small subsidy model as they are easier to administer and communicate out to society.  Yet there is clear evidence that when scaled up, energy efficiency schemes are easily replicable and just as easily scalable.  They also have a verifiable ROI, help offset the switch to a low-carbon economy, low carbon cities & their air quality, and can build employment capacity within the construction service marketplace.

Let us be braver in future as the potential monetary value and benefits of energy efficiency can be just as great to developers, financiers and government as the societal value of a households energy reduction savings!

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At Leading Green, our approach to sustainability in business consulting encourages our clients to look closely at their own internal leadership strengths.  Helping them adopt an inquisitive state of mind and supporting them in how sustainability can support their long-term business strategy.

 

Environmental Impact Assessment: Just another Project or a 1.5-aligned infrastructure strategic opportunity?

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The Future Challenge

Enormous amounts of upfront capital, rather than slow incremental investments, will be required within the next three decades if we are serious about delivering innovative infrastructure solutions and partnerships that limit climate change to 1.5C above pre-industrial levels.  An earlier and better integrated understanding of climate change risks and impacts should help trigger this transformation.  However climate change and impact assessment professionals in general are rarely used to support the early investment phases of projects and seldom work closely with investors to significantly influence the climate change outcomes of a bespoke project.  Perhaps now is the time for a change?

Accessing the necessary finance for the development and delivery of large infrastructure projects is increasingly being tied into climate change impact funding, wider ESG considerations and increasingly the requirement to demonstrate the sustainability of the proposed investment upfront.  However, whilst there is a growing understanding of physical climate change, environmental and social impact risk within the investment community in the ‘development’ phase and also within the engineering community during the ‘delivery’ phase, the role of the Environmental Impact Assessment (EIA) professional, and in particular specialists in climate change impact assessment (CCIA), should be becoming easier.  Yet there is often no strategic linkage in projects between what climate change conversations are influencing either community and the substance of those conversations in terms of funding impact.  Too often client communication, project management and procurement barriers halt the transfer of knowledge and break the continuity of professional advice.

Climate change is visibly starting to manifest itself in our lives through physical risks such as altered weather patterns, changes in rainfall intensities, coastal flooding through sea level rises, wildfires and drought.  The need to stabilise the global climate through collaboration between nations, and the activities on-going in human societies must soon start to deliver a pathway towards net-zero emissions as quickly as possible – globally by 2050 at the latest, if we are to stand any chance of addressing the issue and mitigating the risks.  The scale of the challenge means that there is very little time for investors, financiers, governments, client businesses and their infrastructure service teams to enact a radical shift in how critical infrastructure projects are brought through to delivery, and how climate risks are incorporated within the strategic decision steps necessary.

Large financing and pension investment institutions are already taking action as reflected within their reporting of climate risks, evaluation of portfolio exposure and in their consideration of impact assessment funding.  Insurers and the banking community are also being urged to adopt strategies that tie in scenario analysis within their business governance systems. Yet we still need greater debate of climate change risk and how it can be passed from funding concept into operational delivery.  This is where the EIA community has specialist knowledge and skills that can benefit both parties to a greater extent than at present.

Investment pressure and regulatory initiatives will undoubtably help place climate change considerations as an integrated component of any eventual capital release. No doubt making investor seekers aware of climate-related risks and how they are expected to present business cases that address and manage them will ultimately assist the longevity of their desired asset or development project.  How long it takes them to appreciate this as a ‘benefit’ is an interesting question!

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Yet with these changes happening slowly within the investment community, it is rare for the engineering project development team, and in particular the EIA/CCIA professionals to have been briefed on or be aware of what evaluation, commitment or agreement has previously been determined during financing talks, or what are commitments funders seek to implement within the terms of their own policies or agreements.  Both engineering and environmental teams often start from ‘scratch’ and whilst committed to project delivery may have different views on how that final outcome sits within the clients needs, the local environment, its legacy impact on that environment and its contribution to the client’s corporate sustainability policy or a 1.5-aligned climate change scenario.

This lack of information and awareness of the entire funding and delivery cycle wastes time, leads to unnecessary conflict, delay construction, consents and permits, and ultimate delay delivery time schedules.  The cost of obtaining upfront capital can be enormous – in some mega-projects it can cost the investment seeking government or private sector $billions, and yet the acquisition of detailed environmental information is often left to a distant point downstream.

It is acknowledged by many EIA professionals that when they are called into the financing and design debate. it is often too late to make a larger positive contribution – opportunities have been missed and the design process has become fixed on a solution that may be optimal to build but is not necessarily optimal in terms of its operational/construction carbon footprint, risk reduction and importantly deliverability through the consent and permitting process.  Indeed whilst vast sums are spent upstream during financing a project, money for environmental (and social) evaluation is often begrudgingly allocated into the delivery budget.

Budgeting for Climate Change advice

The EIA budget is often a small element of the entire budget – <0.25% during financing and <4% during construction delivery, yet its contribution is ultimately critical to success:

  • No statutory approval – No Project!
  • If the project is pushed through by governments for political reasons, the objection of its citizenry and the verification of adverse environmental impact can still terminate the project.
  • Even when they are pushed through regardless, the life and efficacy of the asset can ultimately be compromised – e.g. siltation behind dams reducing energy production, secondary impacts to other national industries and interests, reductions in agricultural productivity, etc can all mitigate against the ROI.
  • Too Climate change adverse – Future stranded asset!

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It makes sense therefore, that if we are serious about climate change risks to future well-being, and now accept that vast amounts of early upfront capital, rather than incremental investment, will be needed within the next 30 years to bring forward innovative solutions that help limit climate change to 1.5C, then we need to bring climate change experts into the funding discussions earlier.

Key investment decision makers with responsibility for capital will need additional help and support in evaluating climate change scenario risks and their associated impacts early on within their strategic evaluations.  Climate risk cannot be left to a random % point allocated into the risk pot by economists.  As the bullet points above demonstrate, they ultimately will be key to the projects life-cycle and longevity, and not just limited to project delivery.  The active steps taken from the start by implementing EIA and climate change risk advise and thinking into the project can have a significant positive effect on whether the project is sustainable or ultimately a stranded asset.

In these decisions, the financing and funding communities will need early impact assessment advice to a much greater extent than the Engineering project manager will when it is commissioned several years further down the project pipeline.  It is always a wise decision to invest upfront in the management of strategic risk, yet too often it seems that those with the most to lose fail to engage with the one group of experts that are comfortable in determining the significance of climate change impacts, the risk to delivery and whether the design strategy ensures future longevity of investment return.

Calling in the impact assessment community and the tools that define EIA ensures that the knowledge that will arise downstream in the delivery phases when seeking consent is brought upstream and earlier into play when strategic options are still open to debate. The EIA costs will have to be banked at some point in the process, it therefore makes sense to access its strategic information at the funding phases, and have it still available during then delivery phase.

In a recent series of workshops run by Leading Green, the five key areas in which senior IA professionals feel they can make the greatest contribution, benefit and leadership to a large infrastructure project were identified as:

  1. Embedding sustainability and env/soc thinking into decision-making, and being influencial in promoting environmentally (inc climate change) inclusive design.
  2. Defending the project outcomes when EIA & consenting elements are impacted on by engineering parameters.
  3. Ensuring that the voice of the EIA team are heard by the project team.
  4. Safeguarding client (internally) and stakeholder (externally) interests, and
  5. Leading thinking regarding operational and decision-making phases.

Points 1, 4 and 5 clearly have a strategic advantage to investors during the investment phase, whilst points 2 and 3 reflect the continued need for safeguarding client interest when the needs of the engineering project team  to deliver raise risk elements that threaten statutory delivery or the overall legacy risk profile of the investment.

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So my advice is simple, start waking up to the role of EIA early as a design tool and investment guide for the funding decision maker.  In particular how it can assist you deliver a 1.5-aligned infrastructure strategic opportunity.  It makes much more strategic sense than letting your consultant project delivery team view its role solely as an additional project step and a ‘compliance’ tool for regulators!

 

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Leading Green offers its clients specialist advice, training and project management services in 3 key areas:

  1. Client Project Board representation & specialist environmental support in Infrastructure Investment Programmes & Projects (investment planning, site acquisition, project planning, construction and delivery) for large-scale built infrastructure and asset management programmes – Governance, Risk Management, EIA/ESIA & SEA, climate change adaptation strategies, sustainability and stakeholder risk management.
  2. Support to Executive & Operational leadership teams as they develop and deliver environmental and sustainability strategies.
  3. Environmental Leadership & Sustainability in Business training programmes.

Looking after the sustainabily minded long haul investor

I have been intrigued for some time over the question whether a more active approach to incorporate sustainability into their business thinking within listed organisations helps them shape a longer term communication with thier investors, and ultimately the type of investors they attract.  In particular, is one of the strategic benefits of sustainability leadership the attraction of longer term minded investors who can help an organisation break out of the short-term quarterly demands of stock players, which I feel hinders the development of more comprehensive sustainability plans and business strategy.

There is an increasing number of large investment funds out there in the world who have started to fully comprehend the global threat of climate change to their  investments and the need for concerted action by national and business policy makers to take a more active approach to the mitigation of atmospheric releases of carbon and  climate-related risks.  Governments cannot do this alone and the business community has a key role to play.  The question is – are there printed words on climate change matching thier in-house activities and the culture being set by corporate leaders?

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I was therefore intrigued to read of an initiative led by the Swedish pension fund AP7 and the Church of England Pension fund, who with the support of other 160 members of the Institutional Investors Group on Climate Change (IIGCC), who collectively manage about €21 trillion ($24 trillion) in combined assets wrote a letter to the CEO’s of 55 companies – all identified as the worst carbon emitters in seven industry sectors.

The investment group had also taken note of whether the companies involved had a corporate position that matched their lobbying on climate policy, their influence on policy-makers and on whether their CSR publicly stated corporate climate policies matched those of the trade associations they were members of and who acted on their behalf.

The Letter to the CEO’s

The letter addressed to the chair of each company said:

“We would ask you to review the lobbying positions being adopted by the organisations of which you are a member.  If these lobbying positions are inconsistent with the goals of the Paris Agreement, we would encourage you to ensure they adopt positions which are in line with these goals………”

In addition they clearly set out their expectations as investors on climate change lobbying, which I feel sends a strong and very interesting message out into the global marketplace.

We believe that companies should be consistent in their policy engagement in all geographic regions and that they should ensure any engagement conducted on their behalf or with their support is aligned with our interest in a safe climate, in turn protecting the long-term value in our portfolios across all sectors and asset classes.
Specifically, we expect those companies that engage with policy makers directly or indirectly on climate change-related issues to:

Support cost-effective measures across all areas of public policy that aim to mitigate climate change risks and limit temperature rises to 2 degrees Celsius. This support should apply to all engagement conducted by the company in all geographic regions, and to policy engagement conducted indirectly via third-party organisations acting on the Company’s behalf or with the company’s financial support.

Establish robust governance processes to ensure that all direct and indirect public policy engagement is aligned with the company’s climate change commitments and supports appropriate policy measures to mitigate climate risks. Within this, we expect companies to:

  • Assign responsibility for governance at board and senior management level.
  • Establish processes for monitoring and reviewing climate policy engagement.
  • Establish processes to ensure consistency in the company’s public policy positions.

Identify all of the climate change policy engagement being conducted by the company either directly or indirectly, across all geographic regions.

Assess whether this engagement is aligned with the company’s position on climate change and supports cost-effective policy measures to mitigate climate risks.

Act in situations where policy engagement is not aligned. For third-party organisations, actions could making clear public statements where there is a material difference between the company and third party organisation’s position, working with the organisation to make the case for constructive engagement, discontinuing membership or support for the organisation, or forming proactive coalitions to counter the organisation’s lobbying.

Report publicly on:

  • The company’s position on climate change and policies to mitigate climate risks.
  • The company’s direct and indirect lobbying on climate change policies.
  • The company’s governance processes for its climate change policy engagement.
  • The company’s membership in or support for third-party organisations that engage on climate change issues.
  • The specific climate change policy positions adopted by these third-party organisations, including discussion of whether these align with the company’s climate change policies and positions.
  • The actions taken when the positions of these third-party organisations do not align with the company’s climate change policies and positions.

These are interesting questions, not only do they start to get to the heart of how an organisation goes about its CSR or ESG activities, but also the extent to which corporate disclosure really reflects the culture that is being initiated internally by its leadership group.  I welcome the initiative and the thinking behind the initiative’s leaders in AP7 and the #Church of England pension funds.

Out of curiosity the 55 companies written to can be found here.

 

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At Leading Green, our approach to sustainability in business consulting encourages our clients to look closely at their own internal leadership strengths. Helping them adopt an inquisitive state of mind and supporting them in how sustainability can support their long-term business strategy.