The Leader Magazine

SEP 2016

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SEPTEMBER 2016 13 A s CoreNet Global convenes its 2016 North American Summit s CoreNet Global convenes its 2016 North American Summit under the banner of "The Bigger Picture: Geopolitics, Economics under the banner of "The Bigger Picture: Geopolitics, Economics & the Environment" in the City of Brotherly Love, top executives A & the Environment" in the City of Brotherly Love, top executives in corporate real estate (CRE) are recognizing that the growing, global, in corporate real estate (CRE) are recognizing that the growing, global, movement toward "corporate sustainability" has created a remarkable movement toward "corporate sustainability" has created a remarkable movement toward "corporate sustainability" has created a remarkable opportunity for CRE to offer C-suite visible strategic leadership. opportunity for CRE to offer C-suite visible strategic leadership. opportunity for CRE to offer C-suite visible strategic leadership. opportunity for CRE to offer C-suite visible strategic leadership. As the lead presenters of CoreNet Global's excellent Sustainability As the lead presenters of CoreNet Global's excellent Sustainability Strategies: Impact on Corporate Real Estate Portfolios MCR seminar observed, "Sustainability creates an unprecedented opportunity for CRE." observed, "Sustainability creates an unprecedented opportunity for CRE." observed, "Sustainability creates an unprecedented opportunity for CRE." observed, "Sustainability creates an unprecedented opportunity for CRE." observed, "Sustainability creates an unprecedented opportunity for CRE." observed, "Sustainability creates an unprecedented opportunity for CRE." 1 Sustainability Roundtable, Inc. (SR Inc) management research with dozens Sustainability Roundtable, Inc. (SR Inc) management research with dozens Sustainability Roundtable, Inc. (SR Inc) management research with dozens of leading CRE departments makes it clear, however, that before CRE can of leading CRE departments makes it clear, however, that before CRE can of leading CRE departments makes it clear, however, that before CRE can seize this unprecedented opportunity, three things must happen: seize this unprecedented opportunity, three things must happen: 1. CRE leaders need to understand what corporate sustainability is and 1. CRE leaders need to understand what corporate sustainability is and 1. CRE leaders need to understand what corporate sustainability is and 1. CRE leaders need to understand what corporate sustainability is and what it is not; 2. CRE leaders need to recognize why the so-called "sustainability 2. CRE leaders need to recognize why the so-called "sustainability 2. CRE leaders need to recognize why the so-called "sustainability 2. CRE leaders need to recognize why the so-called "sustainability 2. CRE leaders need to recognize why the so-called "sustainability megatrend" has evolved in 2016 toward an issue of compliance megatrend" has evolved in 2016 toward an issue of compliance world-wide; and 3. CRE leaders need to step up to lead what can be a no-new-cost, 3. CRE leaders need to step up to lead what can be a no-new-cost, change-management process driving substantial incremental savings while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic while making CRE's traditional continuous-optimization efforts strategic through greater visibility and relevance to top customers, talent, through greater visibility and relevance to top customers, talent, through greater visibility and relevance to top customers, talent, investors and regulators increasingly concerned about sustainability. investors and regulators increasingly concerned about sustainability. investors and regulators increasingly concerned about sustainability. first, let's defi ne corporate sustainability Research shows that corporate managers in general and middle manag- Research shows that corporate managers in general and middle manag- Research shows that corporate managers in general and middle manag- ers in particular are far behind the C-suite and investors in understanding the value of corporate sustainability. the value of corporate sustainability. the value of corporate sustainability. 2 According to a joint 2016 MIT Sloan Business School and Boston Consulting Group study, 80 percent of institutional investors care about a company's sustainability efforts (while institutional investors care about a company's sustainability efforts (while institutional investors care about a company's sustainability efforts (while institutional investors care about a company's sustainability efforts (while 31 percent of middle managers think investors care). This lack of under- standing extends well into the CRE profession until, SR Inc has found, CRE standing extends well into the CRE profession until, SR Inc has found, CRE standing extends well into the CRE profession until, SR Inc has found, CRE standing extends well into the CRE profession until, SR Inc has found, CRE professionals come to understand what corporate sustainability is; at that professionals come to understand what corporate sustainability is; at that professionals come to understand what corporate sustainability is; at that point, it's increasingly embraced across sectors and geographies. It is also understood that CRE is vitally important in helping companies "walk the understood that CRE is vitally important in helping companies "walk the understood that CRE is vitally important in helping companies "walk the walk" in the move to greater corporate sustainability. walk" in the move to greater corporate sustainability. walk" in the move to greater corporate sustainability. In 2013, SR Inc worked with dozens of Charter Members to defi ne corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation corporate sustainability as "a more strategic approach to business innovation and optimization in a world of rising resources constraints." and optimization in a world of rising resources constraints." 3 This defi nition is aligned with the longer and more detailed defi nition that the Dow Jones is aligned with the longer and more detailed defi nition that the Dow Jones Sustainability Indices fi rst published in 1999, which defi ned corporate Sustainability Indices fi rst published in 1999, which defi ned corporate Sustainability Indices fi rst published in 1999, which defi ned corporate Sustainability Indices fi rst published in 1999, which defi ned corporate sustainability as: "A business approach that creates long-term shareholder value sustainability as: "A business approach that creates long-term shareholder value sustainability as: "A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, social and environmental developments." The fi rst three words of the Dow Jones Sustainability Indices defi nition, The fi rst three words of the Dow Jones Sustainability Indices defi nition, The fi rst three words of the Dow Jones Sustainability Indices defi nition, "A business approach..." make it clear that corporate sustainability is quite "A business approach..." make it clear that corporate sustainability is quite "A business approach..." make it clear that corporate sustainability is quite distinct from the United Nations' commitment to advancing "sustainable development," which is focused on making generations of global development development," which is focused on making generations of global development development," which is focused on making generations of global development development," which is focused on making generations of global development development," which is focused on making generations of global development possible. It is also distinct from "environmental sustainability" or "corporate possible. It is also distinct from "environmental sustainability" or "corporate possible. It is also distinct from "environmental sustainability" or "corporate possible. It is also distinct from "environmental sustainability" or "corporate social responsibility." social responsibility." social responsibility." aligning with the sustainability megatrend In 2010, Dan Lubin of the Sustainability Network and Dan Esty of the In 2010, Dan Lubin of the Sustainability Network and Dan Esty of the In 2010, Dan Lubin of the Sustainability Network and Dan Esty of the In 2010, Dan Lubin of the Sustainability Network and Dan Esty of the In 2010, Dan Lubin of the Sustainability Network and Dan Esty of the Yale School of Management wrote that sustainability was a "megatrend" Yale School of Management wrote that sustainability was a "megatrend" Yale School of Management wrote that sustainability was a "megatrend" similar to mass production, the Total Quality Management (TQM) movement, similar to mass production, the Total Quality Management (TQM) movement, similar to mass production, the Total Quality Management (TQM) movement, similar to mass production, the Total Quality Management (TQM) movement, and the IT revolution. They suggested that it constitutes a fundamental, and the IT revolution. They suggested that it constitutes a fundamental, cross-markets change of context that companies need to align with or risk cross-markets change of context that companies need to align with or risk perishing. If they fail, they may suffer greatly as GM did when TQM remade perishing. If they fail, they may suffer greatly as GM did when TQM remade manufacturing or, perish as Kodak did in the still-unfolding digital revolution. manufacturing or, perish as Kodak did in the still-unfolding digital revolution. Beyond the United States, the science of climate change is not contro- Beyond the United States, the science of climate change is not contro- versial and the understanding of the risks it poses to political stability and versial and the understanding of the risks it poses to political stability and versial and the understanding of the risks it poses to political stability and versial and the understanding of the risks it poses to political stability and global supply chains is growing. Thus, infl uenced by strategists from the most selective business schools and consultancies, as well as their own most selective business schools and consultancies, as well as their own modeling, it is not surprising that global C-suites are aligning with the sustainability megatrend. Accenture partnered with the U.N. Global Compact sustainability megatrend. Accenture partnered with the U.N. Global Compact sustainability megatrend. Accenture partnered with the U.N. Global Compact to survey more than 1,000 global CEOs across 27 industries three times to survey more than 1,000 global CEOs across 27 industries three times in six years and found 93 percent of them think sustainability issues will in six years and found 93 percent of them think sustainability issues will in six years and found 93 percent of them think sustainability issues will in six years and found 93 percent of them think sustainability issues will be "key to their future business success." In 2013, research found that 63 be "key to their future business success." In 2013, research found that 63 percent of CEOs felt sustainability-related issues would "transform their percent of CEOs felt sustainability-related issues would "transform their percent of CEOs felt sustainability-related issues would "transform their industry" within fi ve years. industry" within fi ve years. Global capital markets have also gotten the message. Given a "fuller Global capital markets have also gotten the message. Given a "fuller Global capital markets have also gotten the message. Given a "fuller cost accounting" that provides investors with a broader view than fi nancial accounting alone, the consideration of a company's management of environmental, social and governance (ESG) issues in investment decisions has been dramatic. 4 The amount of capital now managed in funds that explicitly consider ESG issues when investing has grown to an astonishing explicitly consider ESG issues when investing has grown to an astonishing $21 trillion. $21 trillion. $21 trillion. $21 trillion. $21 trillion. 5 The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global The non-profi t that seeks to rationalize this burgeoning global market is the Sustainability Accounting Standards Board (SASB), which intends to do for the accounting of ESG issues what FASB has done for fi - nancial accounting. 6 It may well succeed; evidence shows that companies that It may well succeed; evidence shows that companies that are high-performers on sustainability issues identifi ed by SASB as fi nancially are high-performers on sustainability issues identifi ed by SASB as fi nancially are high-performers on sustainability issues identifi ed by SASB as fi nancially are high-performers on sustainability issues identifi ed by SASB as fi nancially "material" do, in fact, outperform peer companies in value to shareholders, even when normalized for company size, age and other infl uencing factors. even when normalized for company size, age and other infl uencing factors. regulatory interests also up SASB and its more widely used, older, European-based counter-part – the Global Reporting Initiative (GRI) – is getting meaningful assistance – the Global Reporting Initiative (GRI) – is getting meaningful assistance – the Global Reporting Initiative (GRI) – is getting meaningful assistance from regulators and stock exchanges across the world. Beginning January from regulators and stock exchanges across the world. Beginning January of 2017, the European Union will require companies with a signifi cant of 2017, the European Union will require companies with a signifi cant presence in the E.U. to report ESG-related issues and provide detailed energy-effi ciency data in accord with individual member country standards. energy-effi ciency data in accord with individual member country standards. energy-effi ciency data in accord with individual member country standards. Meanwhile, the Sustainable Stock Exchange initiative organized by the U.N. has brought dozens of stock exchanges together since 2009 to enable them to share best practices in encouraging or requiring listed companies to to share best practices in encouraging or requiring listed companies to disclose ESG issues. In the U.S., the Securities and Exchange Commission is being pressed by ESG investors to more forcefully enforce its regulatory is being pressed by ESG investors to more forcefully enforce its regulatory is being pressed by ESG investors to more forcefully enforce its regulatory is being pressed by ESG investors to more forcefully enforce its regulatory mandate requiring the disclosure of a company's climate-related risks. mandate requiring the disclosure of a company's climate-related risks. 7 Meanwhile, around the world at the municipal level – where CRE is Meanwhile, around the world at the municipal level – where CRE is primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. primarily regulated – cities are responding to the challenge of climate change. Mandates for high-performance codes, management practices and disclosures Mandates for high-performance codes, management practices and disclosures Mandates for high-performance codes, management practices and disclosures Mandates for high-performance codes, management practices and disclosures are being paired with substantial allowances and incentives to accelerate are being paired with substantial allowances and incentives to accelerate the move to a more sustainable built environment. Already, for example, the move to a more sustainable built environment. Already, for example, 14 billion square feet (1.3 million sq. m.) of real estate has been certifi ed 14 billion square feet (1.3 million sq. m.) of real estate has been certifi ed 14 billion square feet (1.3 million sq. m.) of real estate has been certifi ed 14 billion square feet (1.3 million sq. m.) of real estate has been certifi ed 14 billion square feet (1.3 million sq. m.) of real estate has been certifi ed under the U.S. Green Building Council's LEED Building Rating System. In Paris last December, the U.N.'s 21st Conference of Parties brought widespread agreement by all the governments of the world on goals, met- widespread agreement by all the governments of the world on goals, met- rics and reporting to avoid the most catastrophic effects of climate change; rics and reporting to avoid the most catastrophic effects of climate change; rics and reporting to avoid the most catastrophic effects of climate change; this suggests why 2016 is a remarkable moment for CRE. It is a moment this suggests why 2016 is a remarkable moment for CRE. It is a moment shaped by infl ecting revolutions in the digitalization of information,

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