Global index sees green in being green

The 'Old World' is now the green continent, study finds

by BEN FARNELL, Of Counsel, Baker & McKenzie | May 19, 2015

In our globalized world, finding a home for your cash is not simply about being the first to spot the market opportunity or uncovering untapped value. It is also, increasingly, about doing the right thing (and being seen to be doing so).

New research from global law firm Baker & McKenzie argues that these are not mutually exclusive ideas. Moreover, we propose that pursuing a sustainable investment strategy is the surest way to unlocking corporate value and future-proofing a real estate portfolio against CSR (corporate social responsibility) and regulatory compliance risk.

Baker & McKenzie’s Global Sustainable Buildings Index 2015 was published in March with the sustainability-conscious real estate fund manager in mind. It takes a detailed look at the carbon saving and green regulatory environments in 16 countries and compares these in a series of ‘heatmaps’ to help guide sustainable real estate investment decision-making.

The sustainable real estate market in the UK is already a multi-billion-pound industry. With the recent passing of the new Energy Efficiency Regulations 2015 setting minimum energy efficiency levels for private-rented property, [effective] April 1, 2018, the case for a significantly greater focus on sustainability factors in real estate investment decision-making is becoming ever more compelling.

There is a growing recognition that occupying and investing in real estate in a sustainable way not only leads to significant energy and cost savings, but is now almost an essential part of "future-proofing" against climate change, as well as sometimes inconsistent government regulation. Even more important is the emergence of sustainability as a key investment metric in its own right.

[Today], global corporations are recognizing that sustainability reporting is a fundamental element of their corporate value drivers, with global publications such as the Global Real Estate Sustainability Benchmark (GRESB) establishing an international framework for investors to compare the sustainability credentials of potential real estate investment partners.

Global Sustainable Buildings Index 2015 is designed to complement and inform the efforts of global and local real estate investors and is the result of global research targeted at increasing our understanding of the key differences between the green regulatory and policy frameworks of different jurisdictions.

We argue that sustainability is not simply an issue for real estate funds with a specific green investment mandate, but that all investors and occupiers need to be aware of the risks, and also, crucially, the opportunities, which these considerations present. By understanding how countries are addressing the sustainability challenge, fund managers and investors can be better informed to make the decisions which reflect their own values and sustainability aspirations.

The findings of the index are intriguing.

It clearly demonstrates the decisive influence of EU regulation and policies in the sustainability sector. We conclude that those countries with the highest overall ‘dark green’ rating (Above, France, Germany, the Netherlands, and the UK) are consistently among the first adopters of EU directives on sustainability into national law, and that it is the ability of the EU to maintain a progressive policy agenda (without short-termist political considerations) and to enforce this through legally binding legislation across borders that has transformed European sustainability. Investors in EU countries can, therefore, look forward to increasing green regulation, with some differences in national implementation, but with a high degree of confidence in the direction of travel.

“Sustainability is not simply an issue for real estate funds with a specific green investment mandate... (We all) need to be aware of the risks, and also, crucially, the opportunities, which these considerations present.”

— Ben Farnell, Baker & McKenzie

The index suggests it is no coincidence that those countries with the highest overall dark-green rating are also some of the largest economies within Europe. This economic advantage, amplified by the global financial crisis – and polarized by the struggles of individual countries to deal with an overblown real estate sector – has led to a clear delineation between these dark-green jurisdictions and the ‘mid-green’ results for jurisdictions in southern Europe.

It is to these dark-green jurisdictions that corporations may wish to look – not only for thought leadership, but also to take advantage of the increasing diversity of incentives and financial products available for green building investment and retro-fitting.

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At the other end of the curve, countries such as Mexico, Brazil and the UAE are at the start of their sustainability journey, with fewer incentives for green leadership and fewer ‘brown’ penalties, although it is perhaps here in these ‘emerging’ territories, where the greatest opportunities lie for an investor to stay ahead of that curve and demonstrate sustainability leadership, both locally and internationally.

On the other hand, an uncertain political landscape can create a drag on investment. Australia, for example, demonstrates a clear ambivalence between, on the one hand, thought leadership on green leases and the sustainability of public buildings and, on the other hand, confusion around legislating for binding emissions targets, with the consequence that investing in sustainable real estate becomes a less certain prospect.

Local factors can significantly affect the overall assessment of a country’s performance against the selected metrics. For example, geographic factors heavily influence the availability of renewable energy creation options. [And] political structure can be a significant factor in the overall assessment of a country’s sustainability credentials. The U.S., Canada, and Brazil, in particular, have demonstrated that a lack of federal oversight can have an enormous dampening effect on what are, in some cases, very advanced thinking at a local or state level.

Our index concludes that the role of the commercial sector should not be underestimated. While legislators have a key role to play, it is in those jurisdictions where industry focus groups and representative bodies are most active that we are seeing the most progressive attitudes toward pursuing a broad spectrum of sustainability agendas.

The work of organizations like the World Green Building Council is fundamental to the promotion of green building ideas and for lobbying national governments to be early adopters of policies and targets. Such groups enable members to have their say in driving the green agenda, and the policies that result empower those organizations to invest in energy efficient buildings and retrofitting, creating a virtuous circle between policy-makers and the real estate industry. We believe that sustainability is the paradigm of our times and, if that is the case, as investors in real estate, we all need to be aware of the opportunities it represents.