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NEW: Water, Water Everywhere and Not a Drop to Drink: Adding Water to the Sustainability Equation, Betsy Otto, American Rivers
NEW: Sustainable Infrastructure Solutions, Chris Lotspeich, The Second Hill Group
NEW: Living Buildings and the Competitive Advantage of High Performance, Brandon Smith, Cascadia Region Green Building Council
Green Chemistry: Turning the Ship, John C. Warner, University of Massachusetts Lowell, Center for Green Chemistry
Life Cycle Assessment: A Tool for Sustainable Manufacturing, Tom Swarr, United Technologies Corporation; Jim Fava, Five Winds International
The Quest for a Manufacturing Model that is Sustainable, Mike Bertolucci, Interface Research Corp.
Sustainable Investing and Portfolio 21, an interview with Carsten Henningsen, Progressive Investment Management
Green Energy 3.0: This Time, It Is Different, Jackson W. Robinson, Winslow Management Company
Green Insurance Products, Stephen G. Bushnell, Fireman’s Fund Insurance Company
Providing Incentives to Coffee Suppliers to Produce High Quality, Sustainable Coffee, Ben Packard, Starbucks Coffee Company
Talking Until You’re Green in the Face: Environmental Communications Comes to the Fore, Don Millar, The Element Agency
On the Power of Purchasing and the Potential of 1%, Terry Kellogg, 1% For The Planet
Promoting Green Products and Services: Cure for Asthma and Global Warming?, Arthur B. Weisman, Green Seal, Inc.
Power of Local Government Dollars, Michelle Wyman, International Council of Local Environmental Initiatives, USA (ICLEI-USA)
The Green Wave
Climate Change as a Driver of US Market Behavior, Truman Semans, Pew Center on Global Climate Change
Ford Motor Company and the Green Wave, Dan Esty, Yale Center for Environmental Law and Policy
Has the Era of Green Business Finally Arrived?, Joel Makower, GreenBiz.com
Turning the Ship: Environmental Transformation of the U.S. Economy, Brian Kuehl, Harvard Loeb Fellow and The Clark Group, LLC
By Betsy Otto, Senior Director, Healthy Waters Campaign, American Rivers
You know the old joke: “Buy land, they’re not making any more of it.” Well, the same might be said about water. Only one per cent of the total water resources on earth are available for human use. Seventy per cent of the world’s surface is covered by water, but 97.5 percent of that is salt water. By 2025, UNESCO estimates that two-thirds of the world’s population - about 5.5 billion people - will live in areas facing moderate to severe water stress.
In his famous 1960s essay, Garrett Hardin coined the term “tragedy of the commons” for his notion that free access and unrestricted demand for a finite resource ultimately dooms the resource through over-exploitation. Water has always been artificially cheap to end-users. It’s priced well below its value because we think of it as infinite, a virtual free good. When it’s gone, however, it’s priceless. We have the geographic good luck to live in a water-rich part of the globe so we take plentiful fresh water for granted.
Even in the dry western U.S., we have long borrowed from far-away mountain snow packs and rivers to fill swimming pools in San Diego, irrigate golf courses in Phoenix, and fill industrial pipelines in El Paso. These dry cities consume far more than the 10 inches or less of rain they actually receive in a year. It is simply not sustainable. Even in the East water shortages are becoming a serious problem. Some regions in the U.S. have seen groundwater levels drop as much as 300 to 900 feet over the past 50 years. A recent Government Accounting Office (GAO) report noted that most state water managers expect either local or regional water shortages within the next 10 years under average climate conditions. Recent climate change reports suggest anything but average conditions.
Water, Energy, and Climate Change
We have been living beyond our water means, and climate change is going to make the problem worse. Global warming is disrupting natural water cycles, mainly the form, amounts, and timing of precipitation. The recently released International Panel on Climate Change (IPCC) report notes that more intense and longer droughts are occurring, particularly in the continental interior and the Southwest. Paradoxically, the frequency of heavy precipitation events has also increased, bringing massive flood damage and disruption. Precipitation in the mountainous West will shift away from winter snow – nature’s time-release water system – to rain. Putting in new dams to catch more of the winter rain is not the answer. That requires huge expenditures of capital, energy, materials, and thus, adds to greenhouse gases. Endangered salmon can’t swim through a dam. Rainstorms are more erosive than snowfall, carrying heavier loads of sediment that bind with pollutants and are expensive to remove from water supplies. We will have to adapt to the coming changes, but we can make it easier on our ourselves – and cheaper – if we start getting serious about using less water.
There is a very powerful water-energy nexus, but it is not well understood. It consists of two interrelated feedback loops: first, huge amounts of energy are required for basic water and wastewater treatment; and, second, enormous amounts of water are required to make energy. It takes a great deal of energy to develop, pump, treat, and distribute water for municipal, commercial, and industrial use (we’ll put aside for the moment, the enormous water-energy demands of agriculture). It takes a great deal more to deliver and treat wastewater before it is disposed. California water agencies currently spend more than $500 million per year in energy costs alone. In the United States, municipal water and wastewater systems use 75 billion kilowatt hours — 3% of total U.S. consumption of energy, as much as the entire energy-intensive pulp and paper sector.
The second feedback loop is in the water required to make energy. The electricity industry is second only to agriculture as the largest user of water in the United States. Electricity production from fossil fuels and nuclear energy requires 190,000 million gallons of water per day, or 39 percent of all freshwater withdrawals in the nation.
So, what does all this mean for business? As more water is required to meet our growing energy demands, water sources for cities, commercial buildings, and industry will be further strained. The Electric Power Research Institute (EPRI) estimates that energy use for water supply and treatment in the U.S. industrial sector is expected to triple between 2000 and 2050 because of growth projected in inudstrial activity. It takes more energy to pump water from greater depths or greater distances as water tables drop and communities and industry have to look around for other sources. So every time any sector uses a little less water, we save not only water, but also energy and greenhouse gas emissions, and we help to prevent even more extreme climate disruptions to our water.
Businesses that reduce water use will save in water, wastewater, and energy expenses, and they will minimize their exposure to water supply shortages and future price spikes. New water technologies and processes offer a significant new market for business – everything from EPA-certified water efficient appliances and plumbing fixtures to low water-use industrial processes, and green building approaches like grey water reuse, green roofs and rain gardens.
The Good News: Water Efficiency Works
The Pacific Institute estimates that 317 billion gallons of water, or 39 percent of California’s 2000 water use levels, could be cost-effectively saved in the commercial, institutional, and industrial sectors every year. Investment payback on many water efficiency methods can be less than one year. Water efficiency not only reduces water demand, but postpones investment in infrastructure expansions, protects water quality and natural water levels and flows, as well as providing other environmental benefits.
Business can take steps to reduce water use in many ways:
• Intel operates semiconductor fabrication and assembly/test facilities in seven countries around the world. Water is a primary production input used to clean silicon wafers during fabrication and packaging, and ultra pure water must be used. Several of Intel’s plants operate in locations where water resources are limited. In Albuquerque, NM, Intel used an integrated water management system to increase water purification efficiency and to improve water reuse. The site has offset over 50% of its freshwater needs through water reuse.
• Abbott’s bulk pharmaceutical manufacturing plant located in Puerto Rico took various steps to maximize reuse of 2.5 million gallons per day of treated wastewater from the facility’s on-site treatment plant. Reclaimed water is now used within various plant systems that require large amounts of water, and collectively, these steps have reduced groundwater withdrawals and wastewater flows by over 1.3 million gallons per day.
• Southern Company’s electric generating plant in Cobb County, Georgia had a plant chemistry sample once-through cooling system that used 200,000 gallons of county water per day. A new system was installed that uses condensate water as the cooling water and river water as the “heat exchange” water. Plant water use was reduced by 140 gallons per minute, a savings of over 75,000,000 gallons per year, enough to supply 2,000 Cobb County homes’ annual drinking water needs. And at a cost of $2.10 per 1,000 gallons, the new system resulted in a savings to the plant of over $150,000 per year.
• Johnson Controls worked with St. John’s County, Florida to upgrade the county’s water metering technology. A development boom required hook-up of 3,500 to 4,000 new customers per year to the water utility, but physical reading of water meters was no longer feasible. Through a performance-based contract, Johnson Controls committed to a $7 million dollar loan to replace 18,000 aging meters with a new fixed-based, radio-read system connected to a central control room.
• As part of a broad green infrastructure program to minimize stormwater flows into its overburdened sewer system, the City of Chicago provides grants of up to $5,000 to homeowners and commercial building owners to install green roofs (roofs with plants that absorb rainwater and cool the building). Starting with 20,000 square feet of its own City Hall building in 2001, the city now has three million square feet under green roofs – more than any other city – and 24 companies have responded to the demand to install green roofs. Monitoring data show that the city hall green roof is as much as 30 degrees cooler in summer than surrounding conventional roofs.
• U.S. EPA recently launched its new WaterSense water efficiency labeling program for appliances, landscape irrigation products, and plumbing fixtures, based on the highly successful EnergyStar program. EPA estimates that if all U.S. households installed water-efficient appliances, the country would save more than 3 trillion gallons of water and more than $17 billion dollars per year, and reduce the need for costly water supply and treatment plant investments.
Barriers to Change
So, if investment in water efficiency provides such an obvious payback, why aren’t more businesses doing it? There are several reasons. First, water costs too little. In many places there is little awareness of the growing scarcity of water or the impacts of large withdrawals and discharges into municipal sewers because there is no price signal to conserve. Water and sewer charges in much of the country are priced below even basic O&M costs because it is politically difficult to raise rates and over time receipts fall behind expenses. And that doesn’t even include the burgeoning cost to replace aging infrastructure (the American Society of Civil Engineers recently downgraded the nation’s water infrastructure from a “D” to a “D-“). Some utilities even have disincentives to conserve, charging industrial and commercial customers “declining block” volume discounts for withdrawals and waste discharges.
So a first step is for more utilities to structure rates to encourage efficiency and conservation. Then, if we begin to capture the other “externalities,” like energy costs and global warming, through carbon taxes or cap and trade schemes, water efficiency efforts should get a boost.
The second reason that water efficiency is not as widespread as it should be is the lack of knowledge and training by engineers and other technical professionals within utilities and companies themselves. Many engineers and water experts were (and still are) being trained like it was still the good old days when energy and water were cheap and limitless and their use had no consequences. They don’t even think to do manage water differently, and they aren’t trained to know how.
Finally, there may be regulatory barriers that need to be overcome. For example, an industrial plant that succeeds in reducing water use by 80 percent but still discharges the same amount of pollutants in its waste will have a hard time meeting its water discharge permit without the benefit of the extra water dilution. Industry will need to look for ways to reduce the pollutant concentrations in its processes, and regulators will need to be willing to reconfigure permits to allow higher concentrations in exchange for the environmental benefit of reduced water withdrawals.
At the end of the day, if more businesses invested in water efficiency, the effects would be huge for not only for the individual enterprise but also for public infrastructure and even the global environment. We have an opportunity to make a difference by using water more carefully. It’s smart business and it’s good for the planet.
By Chris Lotspeich, founder and Principal at Second Hill Group
The built environment is where most sectors of commerce most directly impact the Earth. Every business has a building, and must pay overhead to keep the roof up. Buildings account for roughly 40% of U.S. energy use and pollution. Industrial facilities contribute roughly another 30% of these impacts. This discussion explores best practices in sustainable infrastructure—here defined as commercial and industrial buildings and facilities—and considers the barriers to growth and wider adoption of these approaches.
Sustainable infrastructure performs the same functions and serves the same purposes as conventional structures, but with a smaller ecological “footprint.” Because it is more resource-efficient and incorporates fewer toxic materials and better ventilation, sustainable infrastructure provides healthier indoor and outdoor environments.
Optimized design and operation reduces environmental impacts throughout a facilities’ life cycle and across the supply chain of materials, components and operations. Cutting-edge practices are represented in high-performance installations that deliver energy and water services such as light, comfort, lavatories and production output at reduced cost and pollution. The best facilities mimic natural systems in their resource efficiency, elegant frugality, innovative design, and invigorating interiors that foster greater occupant health and productivity.
The most exciting developments in this field are the expanding range of exemplary installations of all types and applications; the continued adoption of green design into mainstream practice, exemplified by the rapid market penetration and sustained triple-digit growth of the LEED green building standard; and the growing acknowledgement of the compelling economic benefits and strong business case for sustainable infrastructure. The next two years will see more of the same.
Green design is hot, and it’s not just for buildings anymore: industrial facilities are reaping the benefits, and even earning LEED certification. Factories and similar installations are often energy- and resource-intensive, providing larger-scale opportunities for improvement than commercial buildings. These advances do not require new technology, but instead careful attention to design integration. Among the most impressive recent examples is Texas Instruments’ new microchip factory in Richardson, Texas that reduced energy use 20%, water use 35% and emissions even more, yet cost one-third less to build. Similar examples of leapfrog improvement have been demonstrated in other industries ranging from wineries to refineries.
The green building industry is perhaps the most successful example of an industry reorganizing itself for dramatic performance improvements without a government mandate. In the late 1990s a broad coalition of stakeholders formed the U.S. Green Building Council (USGBC). Interest in environmentally-friendly design and construction was not new and numerous innovative projects existed. But there was no consensus about what building techniques and technologies were “green” and no standard guide to the most effective and broadly replicable approaches.
In 2000 the USGBC created the Leadership in Energy and Environmental Design (LEED) rating system, which provides a menu of design features and accepted best practices that earn points toward certification. Within three years 6% of new commercial buildings in the U.S. had applied for LEED certification. Applications continue to grow by about 200 percent annually.
Today LEED represents the thickening wedge of new ideas entering the market mainstream. It defines the most effective approach for first-time practitioners of sustainable design. LEED evolves and expands but is not perfect. Some applicants try to reach the lowest score needed for certification and no more. Most folks in the industry still have little experience with green techniques. Yet LEED has unquestionably changed the game for the better.
The rapid market penetration of this innovative approach has been driven not so much by environmental considerations as by the added value of better buildings. Green buildings need not cost more than conventional versions, and can even cost less with excellent design. LEED buildings cost an average 2−7% more to build, ranging from little or no extra cost for lower-scoring buildings to 20% more for the highest-scoring examples. The primary variable in initial cost is the skill and attention of the design-build team. Typically 85% of a facility’s life-cycle cost is for operations and maintenance. On average green design cuts O&M costs in half due to energy and water savings, so additional up-front costs are soon paid back. There is evidence of a “green premium” boosting sales and leasing revenues, but the data varies on a case-by-case basis.
The most compelling financial result is an average 5% increase in occupant worker productivity (in cases up to 16%) in a wide range of contexts. This is the most valuable, though least predictable, green building benefit. Labor costs are roughly one hundred times higher than energy per square foot, so a 1% productivity increase would pay the entire annual energy bill.
Best practice buildings use local, renewable and nontoxic materials; are tailored to their specific location and purpose; maximize use of available daylight and climatic conditions; and use only as much fuel as is necessary to provide a pleasant, healthful interior environment. Comfortable, passive structures that draw all their energy from earth, water and sun exist in every climate.
The Challenges with Standard Buildings
Why do standard buildings perform so poorly in comparison? The primary obstacles to improvement are organizational rather than technical, economic or legal. If a camel is a horse designed by a committee, then most facilities are camels. Buildings are manufactured products designed and built in a collective production process comprising a sequence of discrete steps: conception, architectural and engineering design, construction, occupancy, and demolition. Participants come from different disciplines, departments, and companies, each with their own self-interest. Most participants engage in only one or two steps in the process and rarely meet all other participants, even those whom their decisions affect. No one alone determines the outcome, yet everyone influences the result.
Consider four participants in a standard building process: owner, architect, construction contractor, and tenant. Most owners are concerned with minimizing capital costs and complying with building codes rather than specifying environmentally beneficial standards, particularly for a structure they intend to lease or sell. Even if the architect can do green design, she has little incentive to work harder for her low bid or fixed fee to sell the idea to clients who don’t ask for it. The contractor seeks maximum profit from his low bid and therefore has an incentive to install the least expensive equipment regardless of how inefficiently it operates. The tenant has little say in the matter and is stuck with high utility bills. The result is a relatively inefficient building that costs more to own and operate.
Even within the same company, managers from different departments face competing incentives. Quite often one department (e.g., production) funds a new facility from its budget, while another (e.g., facilities) pays the utility bills from a different pot of money. If a project manager’s bonus is tied to completing construction on time and under budget, she is more likely to cut corners and slash initial costs—even if that means buying cheaper, lower-quality heating, cooling and lighting systems that cost someone else more to run.
Much of this wasted energy and money results from minimizing first cost instead of cost of ownership in fast-track design and construction. High-efficiency design and equipment can cost more up front. Penny-wise, pound-foolish shortcuts and cost-cutting degrade performance and increase energy bills for a facility’s lifetime. Design firms often use outdated rules of thumb and copy old plans to save time and effort, and rarely measure and improve the performance of previous designs unless asked. Mechanical systems are sized for peak loads that rarely occur, and often lack the ability to efficiently vary their output to heat or cool the facility in real time. This frequently results in oversized equipment that runs inefficiently at partial loads.
Efforts improve infrastructure after it is built are hindered by nonsensical financial hurdles. Upgrades are commonly held to higher return on investment (ROI) standards than are purchases of new equipment. Most facilities cap retrofit payback periods at two years or less—effectively a 50% ROI at least, compared to 10%–15% ROI (or up to a 7 year payback) requirements for new capital assets. These standard practices undermine competitiveness and shareholder interests. Even if a facilities manager improves efficiency and reduces his utility bill, his reward might include a reduction in his budget the following year.
A Better Way
These obstacles can be overcome with management strategies that align the incentives of design-build process participants to reduce total cost to facility owners and occupants. These include specifying environmental and cost performance criteria; rewarding greener design and operation; integrated design workshops that gather process participants as a first step; and increased awareness of proven best practices.
It is possible to produce a good, environmentally efficient building without any individual championing the cause. But success in green building is more likely when an entrepreneurial leader shapes the design-build process. This person is usually the owner, but it could also be a project manager, an environmental expert, or an architect—a change agent with the credibility and authority to steer the process and work in a new way with a wide variety of people, the majority of whom have little or no experience with green design because it is not yet common practice. These champions are pursuing not just product innovations—the buildings themselves—but innovations in the process and in organizational behavior. And they achieve these by making a few important changes, most of which do not involve fancy new technologies.
One of the most effective techniques is a charrette, an integrated design workshop convened at the earliest phase of a project. In this setting, participants from every stage of facility design, construction, occupancy, and even demolition or recycling come together to learn about new approaches and technologies, and to explore how their decisions affect one another and the performance of the building. Guided by the owner and expert consultants, the group can identify opportunities for improvement and obstacles to progress, overcome resistance to unfamiliar technologies and techniques, and work to align conflicting incentives.
Implementation plans should define the desired outcome and quantify it wherever possible. Specify premium-efficiency equipment, oblige participants to satisfy LEED criteria, and require building system performance to exceed benchmark metrics for energy and water efficiency, renewable and nontoxic resources, and other aspects.
Owners can change the way designers and builders are compensated to reward green design, acknowledging that it usually takes more time and effort than standard practice. Performance-based fees reward measured savings in the building’s operational costs compared with conventional designs.
Integrated whole-systems design yields particular leverage. Careful attention must be paid to the interactions between the component parts of the facility’s systems. High-tech windows with special coatings and gas insulation cost more than conventional glass but better maintain interior temperatures, saving on more expensive cooling and heating capacity. Efficient lighting emits less heat, reducing air conditioning requirements. Using larger ducts and pipes, which cost a bit more up front, reduces friction in the flow of air and fluid, enabling the use of smaller fans and pumps. The result is a heating and cooling system that is less expensive both to build and to run. Life-cycle costing or cost of ownership analysis helps preserve design integrity and focuses on long term value rather than myopic component-level cost cutting.
Considered individually, many of these changes are incremental improvements. Taken together, they add up to radical product and process improvements. Entrepreneurial leaders in sustainable design identify the key leverage points in the building and in the process where a coordinated suite of small changes will yield the greatest synergy. Sustainable infrastructure does not result from business as usual. But business as usual is getting greener, one facility at a time.
Chris Lotspeich is founder and Principal at Second Hill Group, an independent consulting and research practice on business, environment, energy, and security issues. Chris was a 2002–2003 Batten Fellow at the Darden School of Business at the University of Virginia. From 1994 to 2001 he was a Senior Associate at Rocky Mountain Institute in Snowmass, CO, where he worked on six continents and led numerous resource efficiency surveys at industrial facilities and on a Navy warship.
By Brandon Smith, Chief Operating Officer, Cascadia Region Green Building Council
When most people think of saving the environment, they think of saving the Amazon from slash and burn farming or preserving habitat for species facing extinction. What they should be thinking about are buildings because buildings are the largest single contributor to environmental degradation and, therefore, the single largest opportunity to reduce our environmental impact. Buildings are the nexus for massive sectors of the global economy including energy, water, transportation, forest products, plastics, minerals and metals.
In the US, buildings account for:
Building design significantly dictates the ongoing impact of society’s use of energy, water and materials. As Winston Churchill said, “We shape our buildings; thereafter they shape us.”
This paper will explore high performance green building in the following ways:
The most successful companies building and managing green buildings are integrating green building strategies into their corporate DNA, so it is not ancillary to what they do, but actually guides their decisions and future strategy. More information about the benefits of high performance green buildings can be found at www.usgbc.org.
The Emergence of LEED®
LEED® (Leadership in Energy and Environmental Design) is a voluntary, independent, third-party, environmental rating system for buildings developed by the non-profit, US Green Building Council. LEED® measures a building’s performance in the areas of energy, water, materials, indoor environmental quality, and site characteristics. The LEED® rating system has made significant inroads into the construction industry faster than ever thought possible. How did this happen? Why has LEED® been so successful?
The success of LEED® can be attributed to two factors:
Moving from Early Adopters to Mainstream
In less than a decade the commercial construction and real estate industry has transformed from one that was indifferent and even hostile to environmental metrics to one that is scrambling to understand them and how to position itself to seize an opportunity whose significance is only beginning to become apparent. Is green building really more than a trend? How successful has LEED been, and what is next? Most importantly, how can forward thinking companies position themselves now to create a competitive advantage, not despite, but because they are positively impacting the environment?
While at the end of 2006, LEED® represented less than 5% of new commercial construction, consider that LEED® was only launched in 2000, and that the typical commercial construction timeline is 2 – 5 years from design to completion of construction. While the first version of LEED® was developed for the new construction market, versions have now emerged for operations of existing buildings and tenant improvements, making certification available to the largest segments of the built environment. There are currently 735 commercial LEED® certified buildings and 4,927 more seeking certification .
All 50 states in the US have buildings participating in the LEED® program. Building types include condominiums, bank branches, hospitals, schools, office buildings, retail outlets, government facilities, mixed use projects and many more. Various LEED® initiatives including legislation, executive orders, resolutions, ordinances, policies, and incentives are found in 53 cities and 17 states in the U.S. , and green building continues to be published with greater frequency in mainstream publications like The Wall Street Journal, The New York Times, USA Today and The Washington Post.
Between 2002 – 2006, the amount of LEED® registered space has seen a net increase of 838% over 4 years from the 2002 level of 80 million square feet to the 2006 level of 750 million square feet . Green building is clearly entering the mainstream and doing so quickly. The fact that green building is primarily market driven and not chiefly a result of federal legislation and incentives implies that the recent growth is more than a passing trend. Companies, organizations and governments are realizing that green building is a smart financial decision and the growing momentum is creating economies of scale, which are lowering the costs of green building products and services and enabling green building practices to become more widespread.
The Cutting Edge – Living Buildings
While LEED® has been an extremely effective tool for shifting the design and construction industry toward more sustainable buildings, LEED® certified buildings, even at the highest level, are by no means truly sustainable if sustainability means the balance of human and natural systems. LEED® has been and will continue to be an extremely important and useful tool for shifting the market, but it is not a representation of true sustainability in the built environment. So, what is next?
In November 2006, the Cascadia Region Green Building Council launched the Living Building Challenge, which “is attempting to raise the bar and define a closer measure of true sustainability in the built environment.” The Living Building Standard requires that a building:
The Living Building Challenge has already unleashed significant creativity and innovation on the part of developers, architects and engineers striving to meet the challenge, and a number of projects around the US are targeting Living Building status. If we are to truly reconcile the existence of the built and natural environments, we must move to the Living Building model and beyond. In so doing, we will also create more valuable buildings both financially and for society at large since a Living Building will not burden society with the externalities of pollution, environmental degradation, and the over-consumption of resources.
Barriers and Opportunities
The most significant barriers to green building are separation of capital and operating budgets for institutional owners, perception of cost/risk, lack of education, and, most importantly, the failure to recognize and account for the increased value of green buildings.
With institutional owners like universities and government agencies, one often finds a strict separation of capital and operating budgets. The capital projects department cannot invest in high performance strategies with higher first costs even if there will be a significant return on investment because this department cannot access any of these operational savings for the construction budget. The most successful models addressing this issue have set up a loan scenario where the capital projects department can invest in high performance features with the loan being repaid through operational savings.
The most crucial driver in the private sector is the value equation for green buildings and the way that the financial community recognizes or fails to recognize the value of these projects. One often hears that green building costs more, which may or may not be true, but the question not being asked is “What value am I receiving for these expenditures?” Developers do not put in granite countertops or marble floors because they are the lowest cost option, but because they add value to a project. Also tied to this question of value is the perceived risk of high performance green technologies and strategies, which do not conform to “business as usual.” Increased risk means higher cost of capital and “fear-based” premiums from project teams who are unfamiliar with a certain product or technology. These issues point the lack of education about green building strategies and technologies, many of which have been used for decades in other countries. As the real estate and construction community becomes more familiar with green building, the perceived risk of these strategies will be reduced and their adoption increased.
Related to the question of value is the consideration of who is receiving the value - the developer, the tenant, the lender, the investors, society at large or some combination thereof? To address this issue, it is crucial that building owners consider the structure of leases. Who benefits from productivity gains, energy and water savings and to what extent? If a developer invests in significant energy saving measures, then they need to participate in those savings to recoup that investment. However, the tenant also needs to benefit from the savings or they will have little incentive to conserve energy and water. Triple Net and Gross Net leases do not effectively address this issue.
Perhaps the largest opportunity to make significant change in the sustainability of the built environment lies with the real estate finance community. There is overwhelming anecdotal evidence and an increasing amount of research to support the idea that green buildings have more value than conventional ones due to lower operating costs and healthier indoor environments. To address this issue more formally, a significant effort is underway called the Green Building Finance Consortium (GBFC). GBFC is a group of leading corporations, real estate companies, and trade groups whose mission is to enable the private real estate sector—corporations, investors, lenders, and developers—to appropriately recognize the value and risk of investment in green buildings. The implication of this current gap in market knowledge is significant. Companies that understand the value proposition of green building before the general market can position themselves to be leaders in the field and adjust their portfolios to take advantage of an impending market shift that is already past the tipping point. The soon-to-be quantified recognition of the financial value of green buildings by the market will cause many of the other barriers to fall away and lead to the more widespread adoption of green building strategies. Companies that position themselves to take advantage of this shift now, will be prepared and benefit from the market transition as opposed to being negatively impacted.
The Way Forward
What can companies who own and manage real estate do today to strategically position themselves to take advantage of the green building market, incorporate green building practices into their businesses, and promote widespread adoption of green building?
Welcome to the official Blog of Turning the Ship: Environmental Transformation of the U.S. Economy.
Starting February 5, 2007 our contributors will be posting their articles here. For detailed information about the program, please visit www.turningtheship.com.