Any discussion of sustainability turns sooner or later to the question of the business case. Whether the focus is on environmental sustainability (like renewable energy), or intellectual sustainability (like improving education) or financial sustainability (like reining in “too big to fail” banks) we want to understand the business case. Do investments in sustainability pay off in real dollar terms? Or are they investments we make for moral reasons or marketing reasons, but without a clear and convincing financial payoff?
Business cases involving sustainability evolve over time. As projects mature, more evidence is collected about the real costs and the real benefits. Usually the business cases get more positive as the data accumulates, and the metrics become more accurate and nuanced. This trend is evident in the case of sustainable building design.
Recently, the U.S. Green Building Council announced new research into the economic benefits of LEED certified buildings. LEED is the council’s system for rating the sustainability of buildings. It measures whether a building is environmentally-friendly and people-friendly. More than 20,000 LEED certified buildings have been erected worldwide since the standards were first published 14 years ago. As a result, a lot of data is available on the economic performance of sustainable buildings.
When sustainable buildings first came on the scene, many developers, tenants and managers saw LEED as more of a marketing tool than something with a real business case. A LEED certified building, they reasoned, would attract tenants in an otherwise crowded and competitive market. And it would support higher rents – partly for prestige reasons and partly because the operating costs for a LEED building are much lower than for a conventional building. Indeed, the intangible benefits materialized as expected: In a recent study by Deloitte, 69 percent of respondents who launched green building projects said that their goodwill and brand equity “increased significantly” as a result. But these factors are hard to quantify, and no one will lend you money on this basis.
Once LEED buildings starting going up in large numbers, however, it became possible to measure the actual dollar payback. The business case rapidly got more tangible and more positive. The first pleasant surprise is that the spread between erecting a conventional building and erecting a green building narrowed. A 2007 survey showed that about half of building planners thought the so-called “green premium” would be at least 5 percent. More recent studies show that a well-planned new green building can be done with a premium of 1-3 percent or less in many cases, while retrofits run higher, typically in the 1-10 percent range.
The business case got even better as LEED buildings entered operation and real data on energy savings and water savings came in. A green retrofit by Adobe Systems in San Jose, California, illustrates the payoff. The $1.4 million retrofit saved so much money that it paid back in less than a year, with a 121 percent return on invesetment. That's as close to free money as you’ll find anywhere.
Of course, as the data poured in, the conceptual models to evaluate building economics had to evolve. Traditional thinking focuses on first costs – the cost to build the building in the first place – rather than life cycle costs, the costs to operate the building over the years. Green building practices may be close to break even on a first cost basis, but the real payoff comes in when viewed through the lens of life-cycle costing. Unfortunately this requires an effort to educate tenants, commercial real estate agents, investors and others who may not fully recognize the tremendous operating savings that LEED buildings can generate. That takes time and effort.
But wait, there’s more.
As green buildings have continued in operation, researchers began to study the impact of sustainability on tenants. Tenants, it turned out, were more healthy and productive in LEED buildings. Their air is cleaner, the lighting is better, more daylight reaches interior occupants, temperature is better controlled and toxins like formaldehyde are kept out. Fortunately for the researchers, some of the LEED buildings were used for purposes like schools, where standardized testing can compare human performance in LEED buildings with performance of similar populations, on similar tasks, in non-LEED buildings. One meta-analysis complied the results from dozens of individual studies and found that while results varied widely, the benefits from improved ventilation ranged as high as an 11 percent gain in productivity, and improved lighting led to productivity gains up to 23 percent. Deloitte’s survey of managers who oversaw green retrofits confirmed the gains; 87 percent of respondents reported an increase in productivity and 75 percent saw an increase in employee health.
The steadily improving business case for green buildings reveals a pattern seen in many other areas of sustainability. The business case for sustainability evolves predictably, regardless of the setting:
The Stage 1 Business Case: Sustainability is viewed as something that doesn’t have a tangible business case. Even so, a few pioneers forge ahead, basing their move on marketing considerations or on the moral commitment to do the right thing.
The Stage 2 Business Case: Data begin to accumulate on how much it really costs to start acting sustainably. It’s often less than what was originally expected, and it goes down as suppliers gain experience and capture economies of scale. Meanwhile, immediately measurable benefits pile up, like energy savings in the case of green buildings. In the Stage 2 Business Case, projects typically surpass breakeven on financial grounds without having to be justified by intangibles.
The Stage 3 Business Case: Here, data accumulates on secondary benefits (like human productivity and health in the case of green buildings.) Often, the Stage 3 Business Case is strongly positive as costs continue to fall, and project leaders become ever more skilled at capturing the secondary benefits.
This predictable pattern in sustainability economics prevails across many projects, from green building to renewable energy, to quality of education to access to health care. Some of these are in the early stages of business case evolution; others are farther along. But in every setting where sustainability is debated, some people say it cannot be done – while others are already doing it, and reaping the reward.