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CFOs should spend more time on the green credentials of real estate.
Christopher Watts, CFO Europe Magazine
November 4, 2008
Three years ago, when Roche UK tired of having its 1,100 staff working at four sites just north of London and decided to build new headquarters at the site, it was visionary. The £50m (€63m), three-storey building features timber-framed walling, ground-water cooling from 100-metre-deep boreholes and an ammonia refrigeration plant that is carbon-neutral and ozone-free. "We knew during the design stage that UK building regulations were due to be updated," says Andres Brabeck-Letmathe, finance director of the UK arm of the Swiss healthcare company. In anticipation, he says, the firm "enhanced the building design to not only meet but, wherever possible, exceed these requirements."
It used to be bottom line woes that drove CFOs such as Brabeck-Letmathe to scrutinise their real estate assets; soon it's just as likely to be the growing burden of legislation that draws finance chiefs' attention to their property management. "I see a growing wave of legislation," says John Connaughton, head of sustainability advisory at Davis Langdon, a UK consultancy.
Most notable is the EU's Energy Performance for Buildings Directive. The directive wants to cut the energy usage of the 160m buildings across the region. These buildings use more than 40% of the EU's energy and create more than 40% of its carbon dioxide emissions. The EU reckons there's room for cost savings of almost 30%, and is aiming to cut 45m tonnes of emissions by 2010 — contributing to the EU's Kyoto commitment to slash emissions by 330m tonnes by that time.
The directive was finalised in 2002 and is set to find its way into national legislation by this January. The directive stipulates minimum energy performance for new buildings and requires property owners to provide an Energy Performance Certificate (EPC) when a building is constructed, sold or let. The certificate indicates the energy efficiency of a building and its installed systems such as air conditioning and lighting, and includes recommendations to improve a property's energy performance. (See "ABCs of EPCs" at the end of this article.) But in time, EU-based companies will be required to measure their buildings' occupied energy consumption (as opposed to the non-occupied efficiency measured in the EPC). And Brussels is already working on a beefed-up directive, which could require that owners implement energy-saving recommendations made by assessors. Then there's a raft of national schemes. Just one example is the UK's Carbon Reduction Commitment, a legally binding emissions allowance scheme, which will be phased in from 2010 for sectors that are not energy intensive but rely heavily on their premises, such as hotel chains and supermarkets.
It's plain that policy makers are hoping the wave of legislation and regulation will act as a catalyst for change in real estate management — with a sharp focus on energy efficiency. "The purpose [of the legislation] is to transform the real estate market," says Sarah Ratcliffe, co-head of Upstream, a sustainability practice of property firm Jones Lang LaSalle. Further down the line, it's likely that companies will be required to report carbon emissions formally — including those from their real estate — adding further momentum to the market shift.
For executives mulling over new building, going green might be the obvious option. For many companies, though, the issue is not as black and white. The bulk of Europe's buildings are more than five years old and need major investment to bring them up to scratch. And firms that lease their premises, or share bigger premises with other firms, for example in large shopping malls or in office blocks, may have little say in making their buildings more efficient.
The Green Light
Still, a number of forward-looking CFOs have bitten the bullet. Consider The National Trust, a UK charity that preserves the natural and built environment, which opened its green headquarters in Swindon, about 90 km west of London, in 2005. Its £17m building, on the site of a Victorian engineering foundry, includes roof vents that let daylight in and let stale office air out. CFO Andrew Copestake modestly insists that the National Trust is hardly at the vanguard. "Greening is becoming the norm rather than the exception," he says.
The good news is that doing the right thing for the environment often doesn't demand much extra investment. "Good environmental performance needn't cost much more in the case of new builds," says Davis Langdon's Connaughton. He reckons the cost of constructing a green building is no more than 5% greater than a comparable non-green building. As he points out, "Many of the 'wins' here are free." Chief among them is "passive" building design, which makes the best use of natural light, fresh air and the thermal properties of building materials. By contrast, he says, some technologies, such as rooftop wind turbines, may be costly to install and yield only marginal benefits.
Green buildings can contribute significantly to operating efficiency. Roche UK has incorporated energy-saving basics into its headquarters: automatic blind controls, automatic lighting, partial natural ventilation and high efficiency fixtures, such as low energy lighting. Brabeck-Letmathe says these have paid dividends in terms of energy usage, with annual savings of more than 50% compared with its previous premises. The National Trust says it saves £550,000 in operating expenses yearly.
There are other attractions. Finance executives say green buildings can increase productivity and contribute to corporate sustainability. What's more, National Trust's green headquarters "has helped raise our profile," says Copestake, adding that while the nonprofit manages many tourist sites across the UK, its headquarters has become an attraction in its own right. Public tours around the new site take place every Friday and are free of charge.
Christopher Watts is a freelance journalist.
ABCs of EPCs
Just like new refrigerators, large buildings now have an energy efficiency rating. One of the three main elements of the EU's Energy Performance of Buildings Directive is the requirement for building owners to provide Energy Performance Certificates (EPCs). EPCs are based on an analysis — carried out by an accredited assessor — of the fabric of a building and of installed systems, such as ventilation and lighting. The certificate, valid for ten years, shows a rating from A (very efficient) to G (very inefficient) and a carbon dioxide-based figure between 1 and 150+. The lower the figure, the lower the expected carbon dioxide emissions from the building.
John Connaughton, head of sustainability at consultancy Davis Langdon, draws parallels to white goods. Following a 1992 Brussels directive, retailers were required to display energy efficiency ratings on fridges. It didn't take long for manufacturers to respond to consumer preferences by improving energy usage in new models, and upgrading or scrapping inefficient products. Connaughton says he expects to see the same in real estate, with property owners and developers forced to deliver improved energy performance.