Impact Real Estate: Beyond Real Estate Sustainability
The Dutch Mountains, courtesy of Dezeen
The link between finance, real estate and climate has never been more clear - or more important. On the climate end, there’s more carbon in our atmosphere than at any time in human history. Half the CO2 emitted in the last 300 years has been emitted since 1980. We’re at 417 parts per million (levels that haven’t been seen in 3 million years), and if we go over 450 parts per million, it will be catastrophic and irreversible.
If you take a look at the investment world, you’ll find the world’s wealthiest investors are responding to the crisis in a number of ways. Increasingly, the larger funds are divesting from fossil fuels and a staggering 83 percent of business leaders say that ESG factors will be increasingly critical to M&A decision making in the next 12-24 months. The impact investment industry, the most progressive end of ESG, is now worth US$715bn, up an astonishing 42.4% from one year earlier.
As for global real estate, the total asset value is in excess of US$228 trillion, making it the world’s most important and largest asset class - a more valuable asset class than all of the world’s stocks, shares and bonds combined. In addition, the global real estate industry plays a heavy role in about 40% of all global emissions. And while eco-friendly, green and sustainable measures are not unheard of in the industry, it has earned a reputation for being slow to adapt and innovate, remaining a long way behind where it needs to be.
The U.N. has declared the 2020s a “Decade of Action”, where we must “advance a shared vision and accelerate responses to the world's gravest challenges”. Decarbonizing the entire global economy by mid-century will require transformative change, and this will have massive financial consequences for the real estate industry.
The only way we have a future is if it is clean and purposeful. So, isn’t it worth assessing a more progressive approach to the world’s largest asset class?
What is low impact development?
The term “impact investing” was coined in 2007 and refers to investments designed to create a positive social or environmental outcome. Impact goes beyond ESG because it seeks to proactively take measurable action to improve situations, doing good for society and the environment while also providing the scope for attractive returns.
There are plenty who are cynical about the idea of financial returns and regenerative efforts co-existing. Yet there’s plenty of evidence to the contrary:
BlackRock co-founder Larry Fink recently told clients that "climate transition presents an historic investment opportunity”, showing how focused the investment world is on this climate transition.
The Business Roundtable - a group of nearly 200 CEOs representing America’s largest corporations - have changed the role of their business, saying they have an opportunity and an obligation to serve society and the environment as well as their shareholders.
Schroders, a leading global investment manager that has been quick to embrace and advance the ESG mandate within the finance world, has recently launched an impact investing real estate fund, surely the first of many.
While impact may not yet be deeply embedded in business at large, it’s certainly trending strongly in that direction.
Low impact development stems in many ways from this idea of measuring the impact of your investment. A low impact means that the development is actively measuring and managing its impact in order to minimise the negative effects and try to work to maximise the positive outcomes from the development.
Low impact development could include a mix of green design and sustainable real estate construction methods. A reason to encourage green building designs would be that they’re better for the planet while being increasingly in demand from a project’s audiences..
What is the Impact of development on the environment?
It’s important not to gloss over the underlying drivers of the massive and transformative change in our economic system that lies ahead. How do we know that these aren’t mere trends?
Take a look at some of the sobering stats about our world today:
We are already consuming at a level that needs 1.5 planet earths to sustain itself.
The number of extreme weather events has quadrupled since 1980.
Tropical forests are being lost at 30 football pitches every minute.
The 5 warmest years on record have all occurred since 2015.
Average wildlife populations have dropped 60% in 40 years.
The Poles are warming at a pace three times faster than the planetary average, causing disintegration of glaciers that cool our planet and irreversible damage.
These numbers are not going to get any better, they’re only getting worse. This is the crisis of our lifetimes and it will dominate our futures - the global response will only grow with each passing year.
What’s the difference between Green, Sustainable and Impact?
There are increasing focuses on green building initiatives to minimise environmental footprint, such as switching to renewable energy sources or reducing your carbon footprint by switching to LED lights.
Sustainability is a broader concept, expanding upon green initiatives and incorporating levels of social and governance as well. Sustainability may also look more deeply into things: e.g. green building might focus on using wood that contains no VOCs, while a sustainable approach would also look into who’s supplying the wood and ensuring they have a carbon plan.
Impact is the next step beyond sustainability. Instead of minimising damage, it’s actively planning for how to create and effect positive change.
One critical aspect of impact is that it’s less vulnerable to greenwashing as it leaves almost no room to hide. Impact is the least vague term, as it relies on a commitment to measurement and transparent reporting.
In simple terms, a business measures its social and environmental impact today, sets a goal for how to improve, and then publicly reports every year on their progress towards their goal. It’s simple, which is exactly what it needs to be to ensure companies cannot hide behind complex or vague methodology.
The growing BCorp movement shows how these principles can be adapted to all industries and sectors, and the prominence of large companies such as Danone, Patagonia and Ben & Jerry’s shows that scale is not a barrier to responsible corporate citizenry.
What does Impact look like in Real Estate?
From a quick look at all the lists of best new hotels 2021, it’s clear to see that sustainability has already become a baseline expectation, not a differentiator. This, in itself, is a huge achievement and needs to be applauded. But it also means that green alone simply isn’t enough.
While sustainability tends to focus on minimising carbon footprint, with the ultimate goal of carbon neutrality, impact will actively benefit the environment. Your existence needs to result in the regeneration of that which surrounds you. This doesn’t happen all by itself, it takes commitment, planning and capital. But isn’t that the kind of project that will stand out? Planning for the social impact assessment of development projects can carry multiple forms of ROI.
There’s a tremendous opportunity here, because there are not many great examples of impact projects in existence today, yet it is inevitable that the area will have significant growth over the coming years.
Why aim for low Impact development in Real Estate?
There are a number of compelling reasons to seriously consider integrating a positive impact focus into your sustainable real estate project.
Investors are already moving in that direction
Moving forward, investors will price the environmental and social impacts of companies into their investment analysis. More than $30 trillion is flowing today into ESG and impact investments, equivalent to more than a third of the world’s professionally-managed assets, and leading investors are already doing their best to integrate climate change, employee diversity and customer health into their investment decisions.
Indeed Delos, a global leader in real estate innovation and wellness, was created by Wall Street investors who clearly saw the size of the financial opportunity within the real estate industry. Their Well Building Standard aims to deliver buildings that are better for the environment and for their inhabitants, and it has delivered the company an US$800 million valuation in just 7 years from inception.
Future environmental designs optimise asset values
A 10 year study of LEED and ENERGY STAR certified buildings in North America showed that green buildings translate into an 8-10% increase in asset value. Green buildings showed rent premiums and higher occupancies, which translated into improved sales prices.
By contrast, there’s a growing body of evidence that assets falling behind in sustainability will suffer from increased vacancy rates and plunging valuations. With investors distancing themselves from unsustainable companies, it’s not a stretch to see banks becoming increasingly reluctant to finance carbon intensive buildings in the near future.
The movement towards sustainability is directly correlated with value increases and risk reduction, providing cause to consider whether impact commitments, beyond baseline sustainability, could deliver further upside.
It increases both employee engagement and performance
In a recent study, seventy-five percent of Millennials said they’d be willing to take a pay cut to work for a company that is environmentally and socially responsible. Another study shows that providing a greener environment with better air quality, resulted in employees showing increased productivity and performing 61% better on cognitive tasks than in the standard office conditions.
Legacy Vacation Resorts, a Florida-based BCorp offering resort and timeshare accommodations across four different states, has incorporated a number of initiatives to support their team members both within and outside of the business. They truly value the impact of community development.
From income advances to help their employees build credit, to offering responsible investing within employee pension plans through to giving access to individual employees to purchase LED lights at the company’s wholesale cost. Integrating these initiatives leads to higher job application rates as well as higher retention, and shows the positive impact of resort development.
It makes financial sense
In the words of Ronald Cohen (who literally wrote the book on Impact), “Transparency is coming, whether business likes it or not. The largest companies are getting ahead of it. If companies don’t start assessing their impact today, they will look terrible in the near future when investors get transparency.”
Governments across the world are already aligning taxation policy with sustainability measurement. Building your project for regenerative not degenerative results will save you money sooner than you may expect. That’s part of the reason why we as a company are committed to becoming Climate Neutral Certified.
It’s your point of differentiation
We’re still in the earliest throes of this movement, and real estate as an industry is notoriously slow to adapt and change. If the path forward is inevitable - and consumer demand has already moved significantly in the direction of supporting considerate brands - then there is a huge commercial opportunity for real estate projects across the spectrum.
Take a look at the media attention Serenbe, an innovative residential wellness community outside Atlanta, has received for investing time and thought in a more impactful product. Or take a closer look at Itz’ana - our recent luxury residential development where we integrated carbon neutral and solar initiatives to drive successful international sales campaigns.
It builds ties with your community
For destination projects, and resort and residential projects in particular, community integration plays an integral role in their ongoing success. Impact demands the project incorporates the needs of local stakeholders, and sets the project up for better local relationships which can be critical to everything from permitting and staffing to retention and destination marketing.
Taos Valley Ski, in Northern New Mexico, is the world’s first BCorp ski resort and has incorporated a wide variety of initiatives - from giving free ski lessons to local children, procuring locally, and volunteering within local organizations, through to creating a net zero airline to protect the environment. This active focus on community integration has built strong ties and given the company an excellent reputation both in the region and beyond.
Development impact and you
Around the world, we’ve been reminded over the past twelve months that the only constant in our lives is change and that our systems are more vulnerable than we ever imagined. To achieve the global transformation laid out in the UN SDGs will require a commitment to change instead of a reluctance to face it.
It will require the ingenuity of entrepreneurs, the resourcefulness of companies and the willingness of investors to tackle big problems. Whether you aim towards low impact development though is always entirely up to you.
Remember that all taxation and business policy will inevitably be altered to align with improved ESG performance and to penalize degenerative practices - indeed it’s already moving rapidly in that direction. Impact developers can find major opportunities through progressive action in real estate sustainability, or remain unprepared for the imminent threats that lie just around the corner.
Investing in impact is an investment in resilience and a more equitable and prosperous future. Surely an impact evaluation of development projects will soon be the norm? Getting ahead of it simply makes sound financial and business sense. Speak with us about your project to find out more about how we can help you deliver a positive impact and stronger profitability.
An earlier version of this article was originally published by Proven Partners on another platform. It has since been updated and expanded
