Evolving the Valuation Conversation Around Sustainable Buildings

Expectations for new buildings, from amenities to environmental footprint, have increased significantly in recent years. As part of this escalation, sustainability continues to move up the corporate priority list and investors are rethinking value, making the threat of a so-called “brown discount” more tangible.   

A new report by JLL, “Return on Sustainability: How the ‘value of green’ conversation is growing up,” highlights the urgency for investors to move beyond the conversation around the “value of green.” The focus is now on the long-term return on sustainability. 

“The bar is being raised on what it means to be green,” said Guy Grainger, JLL’s global head of sustainability services and ESG. “Now that the business case for sustainability is undeniable, the time has come to evolve the valuation conversation.” 

While investors initially doubted the value of certifications like LEED in the U.S. and BREEAM in the U.K., evidence now shows that green certifications result in a rent premium of 6% and a sales premium of 7.6%. These so-called “green premiums” are proving materially significant, JLL says. 

However, there’s another facet to consider. JLL’s research shows that buildings that don’t evolve to meet sustainability standards will suffer financially – resulting in a “brown discount.” 

This discount on value may manifest in a variety of ways. Occupancy and rent rolls may suffer, for example, and lenders may become more reluctant to provide debt on product that hasn’t kept pace. 

Furthermore, new dimensions are quickly emerging to influence the value conversation. Climate risk and resilience, carbon emissions and occupant health are increasingly contributing to conversations around defining “best-in-class” in the built environment. 

JLL’s April 2021 survey of nearly 1,000 executives, investors and corporate occupiers found that: 

• 83% of occupiers and 78% of investors believe climate risk equals financial risk. 
• 79% of occupiers anticipate that carbon emissions reduction will be part of their corporate sustainability strategy by 2025. 

• 42% of occupiers believe that their employees will increasingly demand green and healthy spaces. 

Sustainability and wellness-focused certification systems will need to adapt to meet this new moment, says JLL. Up until now, a highly rated, green-certified building hasn’t necessarily been a building with the lowest carbon footprint. 

Certification standards will soon change as LEED, BREEAM and others launch new carbon-centric benchmarks, defining carbon footprint and incorporating additional elements in the calculation. As investors and companies make environmental and social commitments, they will increasingly need to consider their real estate portfolio to meet climate goals.  

Time is tight. According to the Paris Agreement, to avoid the worst impacts from climate change on the global economy, emissions must be reduced 50% by 2030, and the world must reach net zero carbon by 2050. JLL’s paper urges those who shape the built environment to take action to avoid asset stranding and to push for sustainable, resilient and healthy places, even without the perfect case study or data.