Making a business case for sustainable buildings

Building sustainably is good for the environment, but how can it be good for business? In the nearly two decades since green buildings hit the market, return on investment has proven to be massive. Sustainable building owners the world over have reported ROI at nearly 10% for new projects. Lifetime operating costs are lower, and most importantly, people are healthier and happier inside sustainable buildings.

We talked about these ideas with Sam Adams, CEO of Vert Asset Management, a firm on a mission to make sustainable real estate investing easier. Vert’s philosophy is centered on people, planet, and profit—what Adams calls “the triple bottom line.” Vert’s investment criteria include a commitment to lower emissions and energy consumption, connection to community, and a host of other environmental and social factors.

Adams indicates that the real cost benefit for companies to build sustainably comes from gains related to human capital. Discussing office buildings, Adams cites that the increased employee productivity, retention, and wellness common in sustainable buildings actually create a more profitable company. “The surprising thing is that the magnitude of that benefit dwarfs the magnitude of energy savings, water savings, and maintenance cost savings typical of green buildings,” he says.

Adams further described the landscape of sustainable real estate and highlighted a few overlooked reasons why sustainability should be a top business consideration.

Why is a sustainable real estate the right investment choice?

Sam Adams: Quite simply, it’s often a better investment. There are now many empirical studies by the academic community and industry practitioners that have demonstrated a correlation between green buildings and things like higher rents, higher valuations, lower operating costs, lower maintenance costs, higher net operating income, and even lower credit risk on mortgages. There’s a definite connection to profitability with sustainable buildings.

But sustainability isn’t just about profit, it’s also about people and planet. The really neat thing about sustainability in real estate is that a sustainable building is better for people. It’s healthier. It has better air quality, lighting, and temperature control. It has more communal and outdoor spaces. And of course, it uses less energy, has better emissions, creates less waste, which is good for the planet as well.

What might happen if we don’t invest in sustainable buildings?

Sam Adams: There’s the psychological part—being part of the problem as opposed to being part of the solution. I think that’s one of the main motivations for investing in sustainability of any kind. Generally, if you’re investing without regard to sustainability, you kind of put your dollars towards the status quo.

From an investment perspective, there’s a whole pile of risks that you might end up with if you don’t focus on sustainability. For example, there’s energy price risk. If a building or real estate investment uses more energy, it’s more exposed to energy price shocks in the future. A building that uses more water is exposed to droughts, water shortages, or water price spikes. A building that has more waste or emissions could be subject to some regulatory changes or fines. What if there’s a discovery that there are hazardous materials in your building? There are these known risks that you have to watch out for.

One of the hottest topics in sustainable investing right now is climate risk. This is very applicable to real estate. Have you considered flood risk? Have you considered sea level rise? Have considered heat risk or storm risk? All of those things are impacting the built environment in a massive way.

How do you talk to clients or prospective clients about issues of sustainability?

Sam Adams: The reason we want to make sustainable investing easy is because we want more individual investors and intermediary investors to do this. There’s a lot of concern and misunderstanding about sustainable investing and what it is. We spend most of our time educating people on what sustainable investing is in general, and we knew this when we set up the firm.

The interesting thing that we found is that sustainability in real estate resonates with people very quickly because people spend 90% of their time indoors. So even though the real estate piece is usually a small portion of an investor’s overall liquid investment portfolio, it can be a big part of their sustainability conversations.