Both residents and shareholders enjoy the right returns when real estate companies collaborate and innovate for environmental solutions.
Did you know that buildings are responsible for 20 percent of CO2 emissions and 40 percent of energy use? According to a 2016 report by the World Economic Forum, emissions which are caused by buildings and new construction are expected to grow. In order to achieve the average two degrees Celsius limit for global warming, however, building emissions must be reduced by nearly 40 percent by the year 2030.
Because of increasing demand for new homes, the situation is dire. The Oxford Economics’ Global Cities 2030 report shows that rapid human population growth will need 260 million new residential properties and 540 million square meters of office space in the largest 750 cities by 2030. Yet what we build today will have long-term implications for humankind and the planet. According to the fifth assessment report of the Intergovernmental Panel on Climate Change, “The very long life-cycles of buildings create risks of energy use ‘lock-in’ with the effects of low ambition today playing out for decades.”
For almost eight years, ESMT Berlin has been facilitating the Sustainable Business Roundtable, or SBRT. Adidas, ING, Siemens, Unilever, and other international member companies have created a viable corporate agenda for sustainability. In contrast to these companies, businesses in the real estate sector have been rather slow to adopt new and sustainable ways of operating. In fact, according to research published in 2017 by Corporate Knights, only three of the Global 100 Most Sustainable Corporations in the World are real estate companies. Moreover, according to the 2017 Global Real Estate Sustainability Benchmark (GRESB) survey of over 850 real estate entities, the average score for environmental, social, and governance performance was 63 out of 100. While comparatively higher than the previous year’s score (60), it is still too low to achieve sustainability.
What is holding the real estate companies back and how can ESMT, a business school, change the situation? Last year in October, the Center for Sustainable Business at ESMT and students embarked on an action-oriented research project with the real estate company ZIEGERT. Their recommendations illuminate the path towards sustainable real estate.
Engage stakeholders proactively for risk reduction
Anyone who has lived in a major city in the past twelve months – be it Barcelona, London, or San Francisco – has been exposed to discussions on gentrification, a reality of increasing rents and social resistance to tourism or international migration.
In Berlin, ESMT’s hometown, “Yuppies raus!” (Get out, yuppies!) and “Ich bin Berliner. Du nicht!” (I am from Berlin. You aren’t!) are graffitied on walls. In this discourse, the real estate companies are perceived as villains; according to one Berlin news report, individual real estate agents have even been targeted with death threats and wanted posters. Municipalities are heeding the disgruntlement voiced by residents. They have introduced legislation to curb appreciation of real estate rents. In Berlin, approximately one-third of its central districts now belongs to so-called social conservation areas, in which property developers must go through a special type of project approval process in order to demolish, modify, or change the use of residential buildings.
Examples of business projects that have been stalled or left unfinished due to stakeholder engagement issues are numerous. Companies often assume the best case scenario and engage stakeholders in later phases of project development. This is especially true for companies operating in domains that visibly impact stakeholders’ lives, such as the energy or infrastructure sectors. But all types of companies have found themselves in similar situations. HEINEKEN, for example, tried to install four wind turbines at its Netherland’s brewery site to generate more renewable energy. It took seven years to accomplish because stakeholders opposed having wind turbines in their neighborhoods.
“When firms fail to establish good relationships with their stakeholders, it can lead to increased conflict and reduce stakeholder cooperation,” wrote Tensie Whelan and Carly Fink, of the Center for Sustainable Business at NYU’s Stern School of Business, for Harvard Business Review. “This can disrupt a firm’s ability to operate on schedule and budget.” To avoid such risks, real estate companies need to focus on building good relationships with key stakeholders. ZIEGERT, for example, initiated projects with Berlin community groups that focused on education, integration, and culture. The company moved from confrontation to dialogue with directly affected stakeholders, who could then give input on improving development plans. As a result, wrote ZIEGERT in its latest condominium report, “new structures no longer land like UFOs in their respective neighborhoods.”
Foresee stakeholder needs
Besides risk reduction, proper stakeholder engagement can create other benefits for businesses, such as an ability to learn from stakeholders, co-generate creative solutions, and get their support. “If you anticipate, and you get into dialogue, and you listen more carefully to those signals, and you become engaged with people, then you will learn a lot of things which you can apply more generally,” said Robin Aram, former vice president of external relations, policy, and social responsibility at Royal Dutch/Shell. “You’ll get closer to your customers and indeed your business will do better.”
In the real estate industry, learning from stakeholders creates great opportunities to innovate. Anecdotal evidence from the collaborative ESMT-ZIEGERT research project indicates that real estate clients are very interested in sustainability solutions – be it sustainable paint in their apartments, sustainable retail spaces for their supermarkets, or – in the case of one ESMT professor who recently purchased a Berlin home – outlets for electric cars in their garages. “This would have made me buy an electric car.”
The opportunities for positive social and environmental impact in the real estate sector are even greater. Earlier this year, for example, the German-based global food discounter Aldi announced its plans to build affordable housing atop their Berlin supermarkets. Offering developments for better and sustainable living/working in cities is on the agenda of many municipalities. Indeed, real estate companies have a great opportunity to drive topics like smart cities or e-mobility, but this will require collaboration with players as diverse as retailers, car manufacturers, and mobile broadband providers. If done well, such initiatives have the potential to shape sustainable consumption and sustainable cities.
Generate shared value
Berlin is growing. Its diversity, its growing entrepreneurial scene, and its high-quality education have attracted almost 50,000 new inhabitants each year for the last five years. Its real estate investors and brokers, who are blamed for increasing rents and related social problems, are facing growing resistance. Yet residents and real estate companies need to agree on approaches to these challenges. For real estate companies, there is only one way – to create shared value for all stakeholders: economic, environmental, and social. If the companies focus solely on generating economic value, the so-called tragedy of the commons – whereby independent economic actors nevertheless collaborate in their mutual destruction – becomes inevitable. On the other hand, “doing good” alone is not going to generate competitive advantage in the long run.
“Business value and social or environmental values can go hand in hand,” writes corporate sustainability scholar CB Bhattacharya. “Simply put, companies can no longer afford to be where they had their glory days and maximized business value while depleting socio-environmental value. To have the license to operate, creating positive social and environmental value is a must.”
Moreover, “businesses can generate economic value by identifying and addressing social problems that intersect with their business.” (Whelan, Fink) These can be identified through a detailed mapping of the problems that trouble individual and business clients, communities, local authorities, and other stakeholders. Company employees can also play a valuable role in the process; they need to have a say as to what the issues are and what they can do.
Take, for example, Sweden’s first net zero residential neighborhood as developed by Skanska, a multinational construction and development company. Its success, as illustrated in Figure 1, shows that companies can reap direct and indirect benefits from sustainability and generate value for stakeholders. Directly, companies reduce costs through efficient use of resources and emission reductions. Their customers enjoy financial savings by occupying energy-efficient properties that also generate higher sales values. Indirectly, companies can improve their economic performance and foster innovation by working closely with stakeholders (for example, in the Skanska case, a discount on land and an improved relationship with municipalities). Sustainable buildings are associated with better wellbeing and health, indirect benefits for residents.
No single player in the real estate sector can have a positive impact without collaboration. Businesses and other stakeholders must cooperate to solve complex problems.
ESMT’s Center for Sustainable Business has launched a platform to do exactly that – facilitate dialogue among the different players of the real estate arena – investors, developers, and sellers alike.