Integrating green building designs in ESG disclosures
Government recognition / support
In an effort to promote building energy efficiency, the Hong Kong government in its latest budget plan for 2018-19 has provided tax incentives for buildings that adopt energy-efficient installations and also “reach specified standards under a green building certification system”[1]. In addition to the gross floor area concession incentive in place since 2014[2], there are practical and financial incentives to adopt green building certifications in Hong Kong.
On the other hand, ESG reporting has been mandated in 16 stock exchanges around the world, including 8 in Asia[3]. Driven by green financing, which can be viewed as a catalyst in the transition towards a greener economy, ESG or sustainability reports are becoming increasingly important documents contributing to the investment decision making process.
One popular tool that combines green building and ESG reporting is the Global Real Estate Sustainability Benchmark (GRESB). GRESB validates, scores, and benchmarks ESG performances of real estate and infrastructure assets.
Despite a supportive policy environment and growing market demand, property developers in Hong Kong too often settle for meeting the minimum requirements and in doing so, miss out on the business opportunities such as diversification of investor portfolio and access to new sources of capital.
The ESG of buildings
Practitioners in the real estate industry should elevate the virtues of green building criteria to senior decision makers to ensure the benefits are understood and acted upon. For information on the benefits of green building, refer to the latest publication of the World Green Building Trends 2018.
Here summarized are three simple concepts- based around environmental, social and governance (ESG) considerations- that combine the essence of green building with ESG reporting requirements in real estate benchmarks such as GRESB.
1. Environmental considerations: Energy use, water use, and material (inclusive of waste) management
According to the World Green Building Council (WGBC), the definition of a green building is: “a building that, in its design, construction or operation, reduces or eliminates negative impacts, and can create positive impacts, on our climate and natural environment.”[4]
Energy, water, and material are three critical environmental factors in the lifecycle of every building that would have a big impact on the natural environment. The ultimate objective is not only optimizing resource consumption such that impact is reduced, but also that the building itself is contributing positively to the natural environment, as per the definition by WGBC.
Property developers, architects and engineers need to approach designing buildings with the same mentality. For facility managers, the same mentality should apply in seeking out ways to make sure building is operated and maintained to the design intent.
For example, the uses a combination of oxide fuel cell (produce electric power from chemical reaction with steam and air) and solar panels contribute energy in excess of actual energy usage, feeding excess energy back into the grid. It also uses a combination of greywater recycling, water treatment and efficient plantation schedule help reduce facility’s potable water usage by 85-90% of a comparably sized office building. This building is not only doing less bad to the environment, it is actually doing more good.
2. Social considerations: indoor well-being
A building is designed for occupants, and therefore should consider occupant’s health, comfort, and safety. Here are three qualities of a green building that contribute to the well-being of the human body:
- Good air quality. Pollutants such as particulate matter and volatile organic compounds (VOCs) may trigger nausea, headaches, respiratory irritation and allergies. With proper maintenance and the timely replacement of mechanical ventilation filters, these pollutants can be kept at a minimum. For office buildings, an easy step to check whether the building has good air quality, inquire building management whether they have participated in any Indoor Air Quality (IAQ) certifications.
- Adequate fresh air quantity. If a person often feels tired in a confined space, one of the reasons may be due to the accumulation of carbon dioxide in the room. Open windows or turn up the fresh air ventilation to dilute the level of carbon dioxide concentration.
- Access to daylight. There are measurable physiological benefits to receiving natural daylight. Exposure to appropriate amounts of natural daylight will help in the alignment of the body’s internal clock – known as circadian rhythm [4]. Having a good circadian rhythm will improve sleeping quality.
3. Governance considerations: good management of facility operation and maintenance.
To demonstrate good governance on the building operations, facility managers need to develop metrics to monitor the health of a building. In addition, in order to measure how a building can do more good, property developers and operational managers should be expected to establish quantifiable targets and demonstrate efforts in moving the industry toward positively impacting the environment.
For a building to be truly “green”, it must function as a seam between humans and the natural environment. The ESG of buildings listed above is not meant to over-simplify the complexity of the building industry; rather, they serve to raise awareness and initiate discussions on good practices in reporting. The future of ESG reporting in the real estate development will move beyond entity-level disclosures, as investors are becoming more demanding in terms of transparent, accurate, and timely account of asset-level performance, as information on asset-level performance may provide insights into potential and possibility[1].
For real estate industry practitioners, incorporating the concepts of the ESG of buildings into strategy and decision making processes are paramount in demonstrating to investors and stakeholders the awareness of and commitment to sustainable development.
For more information on the ESG of buildings, the green building movement, GRESB, and how to improve your ESG reporting by integration of green-building related disclosures contact jonathan.tong@elevatelimited.com
[1] https://gresb.com/performance-based-future-real-asset-esg-reporting/
Further reading
WELL buildings https://www.wellcertified.com/
GRESB https://gresb.com/
World Green Building Trends 2018 https://www.worldgbc.org/sites/default/files/World%20Green%20Building%20Trends%202018%20SMR%20FINAL%2010-11.pdf
Sources
[1] https://www.info.gov.hk/gia/general/201803/01/P2018030100661.htm
[2] The Buildings Department issued a PNAP APP-151, detailing the requirements to a 10% GFA concession, one of the conditions of which is that a BEAM Plus certification be obtained
[4] https://www.worldgbc.org/what-green-building
[5] https://www.sleep.org/articles/circadian-rhythm-body-clock/
[6] https://gresb.com/performance-based-future-real-asset-esg-reporting/