Is Green certification sufficient?

The limits of certification

The certification networks that grew up in the 1990s, such as Building Research Establishment Environmental Assessment Methodology (BREEAM) and Leadership in Energy and Environmental Design (LEED), are based on the tenets of the Green building movement and have provided the market with foundations to talk about “Green.” Without certification providers, it is hard to imagine that asset owners and the construction industry would have embraced the concept of green buildings. Namely, these certification companies effectively spread the idea that there is economic and societal value in constructing buildings to protect the environment, scarce resources, and the societies that the buildings serve as places to live, work and play. Various studies have reflected that tenants and real estate buyers reward this information as they find significant sales and rental premiums for certified buildings (see Figures 1 and 2).

However, certifications – with their binary view of an asset being ‘certified’ or ‘not certified’- have taken us as far as they can. The market now needs a new, more dynamic measurement model. These models, which use standardized and science-based data, compliment institutional investors’ use of certificates and should be used when engaging with real estate companies.

Certification may not always provide an objective reality

In the book of Matt Ellis, Co-founder & CEO at Measurabl, he provides an overview of the process, methodologies, and price to be certified by one of the following six associations: BOMA 360, BOMA Best, BREEAM, ENERGY STAR, Green globes, and, LEED. It immediately becomes apparent that each organization has created different standards for what it means to be a ‘Green’ building. It follows that if different organizations claim to measure the same principle in different ways, then it follows that their criteria of measurement are subjective rather than objective.

Not only are the standards different from each other, but because of the flexibility of the formulas used to certify the buildings, the properties ‘that meet the same standard’ can also be markedly different. Finally, these certifications are a snapshot of a building’s health of a building at one point in time. Certifications cannot predict the future state of an asset. To some extent, this could partly explain why the green premium in terms of price and rent differ so much across certifications and time horizons (see Figures 1 and 2).

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Are certifications built-to-sell or built-to-solve?

Built-to-sell certifications, designed for marketing buildings to tenants and buyers based on point-in-time assessments and subjective opinions, are not sufficient to solve the problem of climate change. The notion that you need to pay a fee to certify that a building/fund is green is to accept the narrative perpetuated by certification providers. Shouldn’t the data speak for itself? Isn’t it a question of measuring and monitoring the appropriate data? Think of measures as Co2 emissions by m2 or energy consumption per m2.

Rather than concentrating on certifying some buildings as shades of Green, the real estate industry needs to be measuring the carbon emissions of all buildings and implement target reductions based on science. Assets are not sustainable or unsustainable. They exist on a spectrum as data points that can be measured consistently. However, with their binary view of an asset being certified and not certified, certifications do not reflect this.

Objective ESG data as a compliment to certifications

As a society, we are doing extreme damage to the environment. Green certifications have helped draw attention to how the built environment can induce or mitigate this harm. Nevertheless, we are at a point where the harm needs to be measured and monitored on an ongoing basis. What is required of us to mitigate this damage is not a static certification, updated every few years. That is why, the next step should be that firms disclose objective, independent ESG data to the market. By doing so they communicate to the market that they are monitoring the building’s compliance over the long haul and ensuring it remains sustainable between certifications.

The real estate sector can learn from the bond rating market. Here credit agencies use systematic, quantitative analysis based on hard data. A standardized approach so that all bonds can be compared against the same criteria. It is time to move to an apples-to-apples approach for measurement.