Some builders have avoided green building for fear of costs. Turns out, it could help them make money

Environmentalists have long urged developers to design more green buildings, but faced with the high immediate cost of sustainable materials and design, many have ignored pleas and opted instead to build to more traditional standards. However, a new study by the University of Cambridge, commissioned by the Carbon War Room and based on data from the Global Real Estate Sustainability Benchmark (GRESB), sheds new light on the costs of going green, suggesting the trend may be more lucrative than once thought.

Cambridge’s study revealed a strong relationship between the sustainability of buildings and the stock market performance of real estate investment trusts, or REITs. Reviewing the data of more than 442 GRESB sustainability ratings, which span 2011 to 2014, researchers determined higher sustainability ratings were correlated with better returns on both assets (ROA) and equity (ROE).

“The message has never been clearer: in real estate, smart business managers are investing in sustainability,” said José María Figueres, chair of the board of Rocky Mountain Institute and Carbon War room.

The report showed that for every 1 percent increase in GRESB score, ROA would accordingly rise 1.3 percent and ROE 3.4 percent. To illustrate its effect on ROA, researchers gave the following example:

Assuming an average annual 5% ROA and a GRESB rating of 50 at baseline, a GRESB score of 55 (10% above baseline) is associated with an ROA that is 67 basis points higher, while a GRESB score of 60 (20% higher) yields an ROA that is 133 basis points higher.

The initial study examining the link, if any, between stock market performance and sustainability provided less clear results, showing an “insignificant relationship between a REIT’s GRESB score and stock performance.” But when accounting for risk, researchers discovered “a significant and positive effect on stock market returns.”

Complementing Research

While the Carbon War Room study offers a buffet of appetizing stats, it’s hardly the first to connect the dots between sustainable building and longer-term returns on investment (ROI). Franz Fuerst, faculty member in the Department of Land Economy at the University of Cambridge, said that while previous studies have “established links between sustainability and improved cash flow at the building level,” Cambridge’s study “widens the lens to the level of institutional investors.”

In a separate 2013 study titled “The Business Case for Green Building,” researchers from the World Green Building Council make yet another case for green building. In its conclusions, the group attempts reconcile the realties of sustainable building with the financial stigmas surrounding it.

Their research found:

• In markets where green has become more mainstream, there are indications of emerging ‘brown discounts,’ where buildings that are not green may rent or sell for less, helping to boost affordability in places in desperate need, such as Boston and San Francisco.
• Energy savings in green buildings typically exceed any design and construction cost premiums within a reasonable payback period.
• Green design attributes of buildings and indoor environments can improve worker productivity and occupant health and well-being, resulting in bottom line benefits for businesses.

An Obvious Link

While Cambridge’s study provides no data to definitely establish a concrete causal relationship between green building and ROA and ROE, the evidence it does provide makes a strong case – strong enough that the study’s authors and contributors are convinced of its implications.

“The positive relationship between GRESB scores and REIT performance documented in this report strengthens the foundational argument that engagement and focus on sustainability performance is critical to achieve a long-term competitive advantage for real estate investors and owners,” said Nils Kok, co-founder and CEO of GRESB.

Fuerst of Cambridge said plainly that the study did, in fact, establish a link between sustainability and performance, though failed to further define the connection.

“Using datasets provided by GRESB, we evaluated key financial indicators of REITS and uncovered a clear link between building portfolio sustainability and stock market performance.”

Despite the ultimate cause, the study’s findings, as well as the results of other, similar reports, found that, “REITs with stronger performance on indicators such as energy use, greenhouse gas emissions, water consumption, waste management, labor conditions and anti-corruption have higher returns on equity, higher returns on assets and stronger risk-adjusted stock performance.”