A $2-million project that snowballs into $20 million is rarely characterized as a triumph, which, green building proponents maintain, is precisely why a financial lens alone is inadequate for assessing the merits of capital spending. In recounting his company’s role in the recent refurbishment of one of Morguard’s class B office towers in midtown Toronto, Morgan McDonald, director of operations with Ledcor Renew, emphasized that the project team did not begin with a “pre-baked plan” of upgrades to be accomplished.
“What we did show up with was a pre-baked process that we thought would get us there,” he told attendees at the 2016 Canada Green Building Council (CaGBC) national conference earlier this year. “It turned into a large and substantial project, which wasn’t necessarily what it was (seen as) going in.”
The owners now boast a class A asset — including an entire new floor of rentable space created when requirements for the mechanical penthouse shrank down to just one storey — in a market currently enjoying some of the lowest vacancy rates in North America. A focus on overall building performance outcomes rather than payback on individual measures, along with a multidisciplinary project team given rein to be creative, are credited for the results.
“The really great thing about the project was that it recognized that we have so many different metrics that people are looking for,” added Neil Pegram, Morguard’s national corporate sustainability and responsibility manager, as he sketched out a rationale for embedding environmental, social and governance (ESG) considerations in capital investment decision-making.
In a panel discussion, Pegram, McDonald and Francisca Quinn, managing partner of the consulting firm, Quinn & Partners, tackled the topic of integrating sustainability into property planning with some sympathy for the constraints of convention that investors/owners, property/asset managers and suppliers/service providers typically bring to the exercise. These key project players can face obstacles and carry biases specific to their roles, but they all have a similar interest in a profitable result whether that’s defined by a return on investment, added asset value or enhanced reputation and opportunities for future contracts.
Quinn pointed to recent Boston Consulting study findings that 75 per cent of surveyed institutional investors agreed ESG is important, but only 60 per cent of property/asset managers believed that investors cared about the issues. That disconnect may partly explain what Pegram calls the “blame game” in which each party ascribes reasons for inaction to the other’s reluctance. Meanwhile, suppliers are often a step or more removed from top-level discussions about spending and are reliant on surrogates within prospective client companies to understand and represent their interests.
“Sometimes you’re just selling to the wrong person or missing the budget cycle,” McDonald noted.
Metrics make the case
Panellists examined each stakeholder’s perspective and offered examples, like Morguard’s repositioning project, of successful ventures. All three underscored the importance of various industry benchmarks, such as the Global Real Estate Sustainability Benchmark (GRESB), REALpac’s energy and water benchmark program or Energy Star Portfolio Manager, in providing information for target-setting and enabling consistent, standardized comparison of company and building performance.
Definitions of value that include a building’s carbon footprint and the well-being of its occupants can still be something of a stretch for an industry that has long singularly focused on financial parameters, but a growing archive of data that demonstrates the connection between sustainability, operating costs and investment returns is convincing many owners/managers that sustainability has real if not always explicitly quantifiable paybacks.
“Accepting that ESG is part of the value chain, that’s a big change that has really only happened in last 10 years,” Pegram said.
That concept is steadily gaining adherents among institutional investors, many with mandated obligations for social responsibility and disclosure. As building owners and potential purchasers, it’s simply prudent for them to weigh all relevant information.
“Looking at ESG is smart,” Quinn asserted. “That’s how you can typically make better decisions.”
Nor does it preclude acquisitions that are less-than-stellar in their current state.
“Some people might think it’s going to be limiting what they can do or what they can buy, but it’s also a way of identifying bad performers that can be turned around. It’s about having more information so you can make a better informed decision and you don’t get a surprise at the end of the day,” she said. “There’s a lot of investor education that needs to be done in this process.”
Pegram concurred that many asset managers could be more proactive about highlighting ESG results in the vast reams of data reported to clients — reasoning that ESG indicators are an element of fiduciary duty. He recommends creating a context for sustainability reporting, embedding it in property planning discussions, linking it to risk management and backing it up with measurement and verification to prove payback and build support for future investments.
“If you are an asset manager, your job is effectively to be an advisor,” he reflected. “What we are saying is that when you buy a building, we are going to require you to have insight into that building that’s not only financial.”
Number crunchers may inherently endorse sustainability when it is expressed as operating cost savings or asset value, but Pegram acknowledges there is a learning curve with differing levels of comfort for what might be perceived as “crazy solar things” and other emergent technologies. Company-wide goals for LEED, BOMA BEST or other certifications are useful in motivating decision-makers to try new approaches, which then, ideally, prove their worth.
Again, data collection will be key to winning converts. However, less tangible benefits, such as boosting image or appealing to a type of employee whom tenants are seeking, can also come into play.
“At the end of the day, the work we are doing is really change management,” Pegram mused. “We’ve got to meet them (other parties) where they are at.”
Accordingly, the status quo still presents some of the toughest competition for suppliers/service providers. “The subtext is: I am really comfortable with what I am already doing,” McDonald suggested.
Suppliers can be the acknowledged or even the lone technological experts for some kinds of innovative products and equipment, placing them in a delicate dual role of educator and entrepreneur. McDonald counsels some business communication basics.
“I used to design crazy solar things,” he quipped. “You have to anticipate that they (clients) are not going to understand and will have questions. Clarify cost, process and timing, and do that early. You need to understand impact, good and bad, from the client’s perspective. There are probably some negatives that you should be honest and transparent about.”
Clients come with varying needs, levels of sophistication and pressures of their own to juggle. Sometimes return on investment is the driving factor and sometimes presumed corporate image benefits will seal the deal. Savvy suppliers should be prepared for either likelihood.
“Have as many metrics as possible and they’ll pick the ones that resonate the most,” McDonald advised. “Some solutions are just not going to get past some clients because it’s not a fit, but sometimes the boring stuff can be bundled with the sexier stuff.”
Barbara Carss is editor-in-chief of Canadian Property Management.