2.1 Introduction

Sustainable buildings are more than brick and mortar that operate independently. They impact the level of negative environmental externalities that will be produced from the construction, operations and maintenance, and renovation of built space; how humans will navigate and use the space; and how companies will make profit off of the building space. Chapter 1 introduced the concept of sustainable property management and its three spheres. Chapter 2 provides more detail on these three spheres and why each one is important. The inclusion of all three spheres provide a broader perspective to understanding sustainable property management. The environmental, social, and governance (ESG) framework is also put forward in detail in this chapter to provide a framework for this broader perspective.

2.2 The Environmental Sphere

The environmental sphere of sustainability is about addressing the built environment’s impact on the ecological environment. The consequences of the built environment on ecological degradation are exemplified through increased carbon (a greenhouse gas) emissions and the resulting rising temperatures, and melting ice sheets and rising seas. One way to measure the impact of our actions on the Earth is to calculate the carbon footprint of the action. Carbon footprint, according to Oxford Learners dictionary, is “a measure of the amount of carbon dioxide that is produced by the daily activities of a person or company” (Oxford Learners Dictionary, n.d.). As the Earth does not have an active voice other than exemplifying ecological degradation, building consumers advocate for the Earth when they demand sustainable building initiatives, and decision-makers within property companies advocate when they implement sustainable building policies.

While some U.S. state governments are beginning to require GHG reporting for certain entities, it can be beneficial to get ahead of the requirement curve and calculate building GHG emissions for all real estate assets owned and/or managed. There are various methods to measure a building’s carbon footprint such as the Greenhouse Gas Protocol, an international standard that helps account for, report, and mitigate GHG emissions in a standardized framework. As the most widely used GHG emissions tracking tool, 90 percent of Fortune 500 companies use this framework for reporting to Carbon Disclosure Project (CDP), a non-profit company that runs the global disclosure system to manage environmental impacts (World Resources Institute, 2021).

There are three GHG emissions scopes based on proximity and control over emissions:

• Scope 1 measures direct emissions from a company’s activities
• Scope 2 measures indirect owned emissions based on purchased energy from a utility provider
• Scope 3 measures indirect not owned emissions that occur in the product lifecycle

Once measured, a building’s carbon footprint can be benchmarked against similar buildings to get a sense of how the building performs in relation to its peers. Once measuring and benchmarking are completed, management and mitigation of GHG emissions are possible.

Real estate asset stakeholders must also consider the part of the Earth and current landscape they are operating within, as property management is inherently a place-based discipline.

Example: Place-Based Property Management Consideration

Figure 2.1 illustrates increased temperatures in the southwestern United States, a relatively dry region. These increased temperatures can drive evaporation and make this relatively dry region even drier. This makes water conservation an important issue in this region. Also, the context of where the real estate asset is located must be taken into consideration. If the real estate asset is located in an urban context, there may be more opportunities to take advantage of public transportation opportunities to reduce carbon emissions versus a suburban real estate asset that is located in a car dependent community with little to no public transportation opportunities available.

2.3 The Social Sphere

The social sphere of sustainability is about addressing the built environment’s impact on society. Buildings are built and run by human ideas and design, not by themselves. Even with building automation, if the automation fails humans have to go and fix the problem. So while the building itself is indeed tangible, the operations of the building and the impact on humans are interdependent on each other. Think about a stay you may have had at a hotel, hospital, or even an apartment. The facility itself may have been nice and looked nice, but it is likely that the people you interacted with are what truly made your stay pleasant or unpleasant. For example, were they friendly when you checked in and responsive if you brought to their attention any operations or maintenance issues of the facility? Therefore, sustainable property management is also about people as they create the building experience and make the building run in a certain way.

There is a significant disparity across people when it comes to accessing the benefits of sustainable buildings. It has been shown that socioeconomic status significantly affects the adoption of sustainable buildings (Zhou, 2016). Environmental privilege, which allows groups with power to construct and use environmental amenities for themselves and deny those amenities to less privileged groups, showcases place-based inequities. Therefore, environmental justice is an important concept to think through regarding diversity and inclusion ramifications on people, as property management is an inherently place-based discipline. As defined by the United States EPA, environmental justice is “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies” (U.S. Environmental Protection Agency, 2023). Furthermore, since low-income households experience more than double the energy burden of the median U.S. energy burden, and three times the energy burden than higher income households, the energy efficient features of sustainable buildings can be proportionately more beneficial for these households and increase diversity among users of sustainable buildings (Drehobl & Ross, 2016).

The social sphere of sustainability relates to Maslow’s hierarchy of needs as illustrated in figure 2.2, because personal lower-level needs related to standards of living need to be addressed before addressing higher-level needs. For example, the lower-level need of alleviating suffering from being too hot needs to be met first through access to air conditioning. If access to air conditioning is not readily available, people will be focused on acquiring air conditioning, not on the environmental degradation impacts from the air conditioning unit, even if the air conditioning technology being used is from a generation ago and is far worse for the ecological environment.

Universal design is another important concept to think about when it comes to accessibility of sustainable buildings. According to the National Disability Authority, universal design is “the design and composition of an environment so that it can be accessed, understood and used to the greatest extent possible by all people regardless of their age, size, ability or disability” (National Disability Authority, 2020). Building ownership and management have a responsibility to follow certain laws to ensure people of all abilities have access to sustainable buildings and the associated occupant benefits. There is also an opportunity to showcase commitment to diversity and inclusion by going above and beyond these laws to ensure increased sustainable building accessibility, such as adding information about the building accessibility features on the building webpage, having a link on the building webpage to report physical or digital barriers within and around the building, and including people with disabilities in property management operations and maintenance decisions.

2.4 The Economic Sphere

The economic sphere of sustainability is about addressing the built environment’s impact on profit. Profit is a central goal of an investment property and a necessity for building operation continuity. Although environmental and social impacts are becoming more of a focus, the main driver of most property management businesses remains the financial health of its building assets under management. Profit affects all building asset stakeholders including investors, owners, the property management company, the employees, vendors, tenants, and the community. Profitability can impact owner returns, access to financing, level of investor interest, capital that can be invested into the property to increase its appeal to prospective tenants, and business growth, to name a few. Profit fosters economic sustainability through decisions to ensure both short-term and long-term profitability as well as efficient uses of resources.

In 1970, Milton Friedman, a well-known American economist known for his strong belief in free-market capitalism, wrote an article titled “A Friedman Doctrine—The Social Responsibility of Business Is to Increase its Profits.” In this article, he argues that the priority of business executives should be to make money for the shareholders, and social responsibilities should not cut into this money-making priority (Friedman, 2007). He does note that it should personally be the employees, customers, or stockholders that choose to spend their money on certain social issues if that is what they would like to do, and that it is a government function to impose taxes as agreed by the preferences of the public to spend on various programs.

The philosophy of Milton Friedman aligns with what is known as shareholder capitalism. Figure 2.3 lays out the tenet of shareholder capitalism where the key stakeholder is the shareholder and the social responsibility of the company is seen as increasing company profits. On the other hand, Howard Bowen, also an American economist, wrote the book titled Social Responsibilities of the Businessman in 1953 which laid the foundation for corporate social responsibility (CSR). CSR is a business model that takes into account the economic, social, and environmental impacts the corporation has on multiple stakeholders versus solely the owners of the company.

The philosophy of Howard Bowen aligns with the idea of stakeholder capitalism as depicted in figure 2.3. This is where corporations are focused on serving the interests of all their stakeholders equally with the social responsibility seen as increasing the well-being of people and the Earth. CSR gained traction in the United States in the 1970s as evidenced with the policy statement issued by the Committee for Economic Development. In this policy statement, the changing social contract between businesses and society is discussed with the idea that there are broadened expectations of businesses, as they exist because of public consent and should serve the broader needs of society as well (Committee for Economic Development, 1971). By the beginning of the twenty-first century, most large companies in the U.S. had created CSR policies (Madrakhimova, 2013).

The goals of CSR policies have been to hold companies accountable for their actions. However, as stakeholders have been increasingly demanding more transparency of companies in the economic, social, and environmental dimensions, it has been difficult to compare CSR efforts across companies due to the lack of standardization in reporting. Also, companies have been criticized for marketing CSR efforts based on empty claims or for doing something once and not following up the CSR effort consistently. These issues have spurred the creation of the ESG framework, which prioritizes reporting, and standardizes and quantifies these types of efforts by companies to make sure initiatives are actually happening and continue to happen.

2.5 The Interdependence of Sustainable Property Management Spheres

Individual sustainability spheres do not exist alone but in a system where they are interdependent on each other. An action within one sphere will affect other sustainability spheres. Systems theory, which is a framework that was developed in response to the increasing complexity of problems in the world, can be applied to sustainability in the property management context, as systems theory is a “way of thinking that allows for the study of interconnections among systems and accounts for the nature of ‘open systems’ which interact with their environments” (Montuori, 2011, p. 414). In other words, there is interdependence in sustainable property management with the idea that various stakeholders and buildings operate in an open system and they all influence and interact with each other. Table 2.1 provides various interdependency examples of sustainable building interventions across property types to further illustrate this concept as well as to illustrate that positive, neutral, and negative impacts may vary across spheres.

Table 2.1: Sustainable intervention interdependency examples.

2.6 A Broader and Measurable Perspective

ESG reporting, introduced in chapter 1, provides a broader and measurable perspective for stakeholders of property management companies interested in sustainability. Shareholders are increasingly demanding this transparency to make investment decisions because it matters to them as a way to ensure long-term financial performance. Consumers are also increasingly demanding this type of reporting to make purchasing decisions. Additionally, employees are increasingly using this type of reporting when deciding which companies they want to work at based on their priorities. Some countries and institutional investors require ESG reporting.

ESG reporting is becoming increasingly prevalent globally (it is estimated that as of 2018, ESG is integrated into $17.5 trillion of professionally managed assets including public equity, fixed income, and real estate sectors [Global Sustainable Investment Alliance, 2018]) and is also becoming more common in assessing real estate performance. Global Real Estate Sustainability Benchmark (GRESB), the framework introduced in chapter 1 and used to assess and standardize ESG performance in the real estate industry, jumped from approximately 750 participant members in 2016 to approximately 1,000 participant members as of 2020 who reported on their ESG efforts. Figure 2.4 illustrates a sampling of key ESG issues according to the Principles for Responsible Investing, a leading global proponent of responsible investment.

The GRESB framework is the ESG reporting benchmark used for real estate assets. There are three assessment components within the GRESB Real Estate Assessment: management, performance, and development. The management component gathers ESG information at the organizational level, while the performance component gathers ESG information about asset portfolio performance, and the development component gathers ESG information during design, construction, and major renovations. The GRESB Development Benchmark consists of the management and development components and is used for development projects, while the GRESB Real Estate Benchmark consists of the management and performance components and is used for standing investments.

For the purposes of this textbook, the focus is on the GRESB Real Estate Benchmark since this benchmark focuses on existing real estate assets. Within this GRESB Real Estate Benchmark, there are 30 points attached to the management component and 70 points attached to the performance component for a total of 100 possible points (GRESB, n.d.). Figure 2.5 illustrates that 65 percent of the management component points focus on governance criteria while the remaining 35 percent of the management component points focus on social criteria. For the performance component, 89 percent of the points are focused on environmental criteria while 11 percent are focused on social criteria. Figure 2.6 displays the aspects within each component and the points associated with each respective aspect. Specifically under the management component, leadership, policies, reporting, risk management, and stakeholder engagement are aspects, while risk assessment, targets, tenants and community, energy, GHG, water, waste, data monitoring and review, and building certifications comprise the performance component. Therefore, sustainable buildings support this ESG reporting, which is more in demand, while also being influenced and influencing other factors affecting the ESG ecosystem.

Example: Sustainable Property Management ESG Report

Relating ESG issues to sustainable property management, figure 2.7 illustrates the components of a 2020 ESG Report example from Mill Creek Residential Trust, an owner and manager of multifamily rental real estate (Mill Creek Residential, n.d.). Within section 1, Mill Creek ESG, the company’s core values are defined and five stakeholder groups are identified and composed of partners, residents, associates, neighbors, and global society. Also, seven ESG focus areas are defined including resident experience, environmental performance, certifications, associates, innovation, risk and crisis management, and neighbors. Topics included within these ESG focus areas are the well-being of residents and associates, energy and water use, LEED certifications, ethics and diversity of associates, data security, charitable giving, and local relationships.

In section 2, Mill Creek Communities, the resident experience component contains topics such as fair housing, transportation and active design, sustainable building best practices, acoustical design standards, renovations, smart and sustainable homes, promise and peace of mind guarantee, and resident feedback. The environmental performance component topics include design energy efficiency, renewable energy, operating energy and water use, carbon footprint, and net zero energy, water, and waste. The certifications component discusses the green building certifications the company utilizes in their business. In section 3, Mill Creek Residential, the associates component is comprised of culture and ethics, learning and development, health and safety, and diversity, equity and inclusion. The innovation component includes information on the innovation committee and ESG leadership. The risk and crisis management component discusses crisis preparedness, their Covid-19 response, data security and data privacy, water and fire protection, fire amenity safety, risk management performance, and climate resilience. The last component of the report is about neighbors and includes the topics of local relationships and charitable giving.

ESG reporting has been shown to provide benefits to multiple stakeholders. In locations where ESG reporting requirements are mandatory, availability and quality of ESG reporting for consumers is increased, negative ESG incidents decrease, earning forecasts by analysts become more accurate, and stock price crash risk declines (Krueger et al., 2021). Companies also participate in ESG reporting to comply with regulatory agreements, strengthen their corporate reputation, illustrate their management of risk, and answer the call for investor disclosure requests (HXE Partners, 2021). Furthermore, at companies that voluntarily incorporate environmental and social policies, stock market and accounting performance are higher than peers’ (Eccles et al., 2012). While there are obstacles to incorporating ESG reporting, such as the measurement complexity of some ESG performance as well as information on ESG metrics originating from multiple systems across the company, there is certainly a business case for ESG reporting from multiple stakeholder perspectives (Boffo & Patalano, 2020; PWC, 2021). However, because one of the key responsibilities of property managers is to operate the asset in accordance with the goals of ownership, or to counsel the ownership entity that its goals are unrealistic or inappropriate in the marketplace, it would be difficult for property management to incorporate these ESG concepts without ownership buy-in.

2.7 Conclusion

The built environment, as well as individual real property assets, affect all spheres of sustainability. The results of this impact are powerful and highly interrelated, both at the global and individual levels. As a result of this inherent interdependency, sustainable property management is a critical component of modern environmental progress, the health and well-being of society, and corporate profitability. The importance of the decisions of property managers in sustainable building operations cannot be overstated.

ESG reporting fosters inclusion of environmental, social, and economic spheres and provides a broader perspective. The increased demand from stakeholders for ESG disclosure makes the business case for sustainable property management from multiple stakeholder perspectives. It also allows companies to take ownership and accountability of their actions on society and the Earth versus keeping a grasp on a narrower view of business. As we are all interdependent on each other, the mentality does not have to be “them” versus “us,” as this interdependence is universal as a human condition.

Figure References

Figure 2.1: Temperature increases in the southwestern United States. Kindred Grey. (2023). Data from A closer look: Temperature and drought in the Southwest. EPA. (2021). (https://www.epa.gov/climate-indicators/southwest#ref2) CC BY 4.0

Figure 2.2: Maslow’s hierarchy of needs. Kindred Grey. (2023). CC BY 4.0

Figure 2.3: Shareholder versus stakeholder capitalism. Kindred Grey. (2023). Includes Money Bag by leo-graph.com, from The Noun Project. Noun Project (Noun Project license) Includes Csr by Hilmy Abiyyu Asad, from The Noun Project. Noun Project (Noun Project license). CC BY 4.0

Figure 2.4: A sampling of key ESG issues. Kindred Grey. (2023). Adapted from Environmental, social and governance issues. Principles for Responsible Investment. https://www.unpri.org/sustainability-issues/environmental-social-and-governance-issues. Includes Government, by Adrien Coquet, from The Noun Project. Noun Project (Noun Project license). Includes group, by Gregor Cresnar, from The Noun Project. Noun Project (Noun Project license). Includes Tree, by Guilherme Furtado, from The Noun Project. Noun Project (Noun Project license). CC BY 4.0

Figure 2.5: GRESB ESG components and weightings for building operators. Kindred Grey. (2023). Data from GRESB Real estate assessment reference guide, 2021. (https://documents.gresb.com/generated_files/real_estate/2021/real_estate/reference_guide/complete.html). CC BY 4.0

Figure 2.6: GRESB ESG Components and associated aspects for building operators. Kindred Grey. (2023). Data from GRESB Real estate assessment reference guide, 2021. (https://documents.gresb.com/generated_files/real_estate/2021/real_estate/reference_guide/complete.html). CC BY 4.0

Figure 2.7: Components of 2020 ESG report from Mill Creek Residential Trust. Kindred Grey. (2023). Adapted from Mill Creek ESG 2020 report. https://millcreekplaces.com/2020-esg-report/. CC BY 4.0.

Image Descriptions

Figure 2.1: Temperature map showing southwest U.S. states; values range from 1-2.2 degrees Fahrenheit. Largest temperature increases in southern CA, central Arizona, southern New Mexico, southern Nevada, eastern Utah, and western Colorado. Return to figure 2.1.

Figure 2.3: Milton Friedman’s shareholder capitalism: company shareholder is prioritized; social responsibility is to increase company profits. Howard Bowen’s stakeholder capitalism: all stakeholders are prioritized; social responsibility is to increase well-being of people and the planet. Return to figure 2.3.

Figure 2.4: Environmental: sustainable land use, plastics, water, fracking, methane, biodiversity. Social: human rights and labor standards, employee relations, conflict zones. Governance: tax avoidance, executive pay, corruption, director nominations, cyber security. Return to figure 2.4.

Figure 2.6: Left: Management (E is 0%, S is 35%, G is 65%). Total points: 30. Leadership: 7 points, policies: 4.5 points, reporting: 3.5 points, risk management: 5 points, stakeholder engagement: 10 points. Right: Performance (E is 89%, S is 11%, G is 0%). Total points: 70. Risk assessment: 9 points, targets: 2 points, tenants & community: 11 points. Energy: 14 points. GHG: 7 points. Water: 7 points, waste: 4 points, Data monitoring & review: 5.5 points, Building certifications: 10.5 points. Return to figure 2.6.

Figure 2.7: From top to bottom. Cover page. Letter of Introduction by CEO. 1) Mill Creek ESG: 1.1 Company overview, 1.2 Guiding principles, 1.3 ESG integration. 2) Mill Creek Communities: 2.1 Resident experience, 2.2 Environmental performance, 2.3 Certifications. 3) Mill Creek Residential: 3.1 Associates, 3.2 Innovation, 3.3 Risk and crisis management, 3.4 Neighbors. Return to figure 2.7.