Transparency hasn’t always come easy to real estate.
Despite the efficiency and liquidity advantages that transparency brings to the marketplace, real estate continues to cling to its private roots when it comes to revealing details about individual assets. The same applies to the world of real estate sustainability. Despite all those plaques on the front of buildings proclaiming LEED certifications, it is has been hard to know how well those buildings actually perform. That’s about to change as states and cities throughout the country enact new rules requiring property owners to disclose their environmental performance.
Austin, the District of Columbia, New York City, San Francisco and Seattle along with the state of California and Washington State all have approved new regulations that require most investment property owners to report their energy and water use among other measures. Additionally, regulations are under consideration for Colorado, Connecticut, Maryland, Massachusetts, New Mexico, Oregon, Tennessee, Vermont and the city of Portland.
It is too early to tell how these new rules will work in practice as many have only just gone into effect or are about to, as is the case in California, apparently after officials once again pushed back enforcement of its law – AB 1103– from Jan. 1 to July 1 of next year. But there are several hallmarks that these new disclosure laws share. All of them are pegged to the EPA’s EnergyStar Portfolio Manager and they all either require reporting on an annual basis or disclosures are triggered by significant events at buildings, such as a sale, refinancing, major lease transaction or construction activity. Another feature of all but one of these disclosure laws, except Washington State, is that building owners face fines or criminal penalties if they fail to disclose their property’s energy performance.
While no one wants to get their photo taken at their neighborhood police station for failing to meet real estate environmental disclosure requirements, some property owners might be willing to absorb a fine rather than disclose this information. Why? Many property owners are finding it hard to live up to the expectations of their LEED certification and that the long term performance of their buildings may fall well short of the expectations of their tenants, investors, lenders and the marketplace as a whole. This will only be exacerbated as the standards rise for green building certifications and owners find that that their buildings no longer achieve platinum, gold or silver results.
And, don’t expect the public agencies collecting this information to keep it a secret. Speaking as a former journalist, this information will get out and would that really be so bad? No.
A working paper published earlier this year by the Harvard Business School, “The Consequences of Mandatory Corporate Sustainability Reporting,” concluded that “Disclosure of [Environmental, Social and Governance] information forces companies to manage these matters effectively in order to avoid having to disclose bad ESG performance to their multiple stakeholders.” Furthermore, the authors said that “an implication for companies is that reporting could change the way they conduct business. If better ESG performance provides a competitive advantage and leads to higher economic value, as it has been argued, then reporting could enhance the economic value produced by a firm.”
While this report was targeted to all companies, the same applies to the real estate world. Lisa Colicchio, director of operations and sustainability for CB Richard Ellis, has been closely watching the emergence of energy reporting mandates.
“With respect to the energy mandates, really the intent is that you print out a report and tell big brother about your energy use,” she said.
Building owners should use the information gleaned in mandatory reporting requirements to make smart investments to reduce their resource use and operate more efficiently.
“In the end when you are trying to make these investments, then you are driving down your total energy and you are making that building more competitive,” Colicchio said.
She pointed to the example of Australia where building owners will have to post their energy use on the front door, like restaurants post their health department grades in many cities. Once that information becomes so widely accessible, the data will create value for real estate investors and set the market for valuing green buildings, which is one piece of information that everyone wants.