Sustainability in the Built Environment: A Leadership Imperative for Real Estate

When it comes to climate change, the real estate sector finds itself in a perplexing situation—caught in a quagmire of risk, responsibility, and opportunity. On one hand, real estate developers and investors are increasingly vulnerable to the impacts of climate change. This was vividly illustrated by the historically devastating wildfires in Los Angeles destroying an estimated $30 billion in real estate value this January,¹ and also includes threats like rising sea levels threatening to strand valuable assets and soaring temperatures driving up the costs of cooling the built environment. On the other hand, the industry itself is a significant contributor to climate change, generating approximately 40% of total global greenhouse gas emissions across building operations and construction processes.²

The financial stakes are enormous: S&P Global projects that, by 2050, exposure to climate risks could escalate to a staggering $560 billion, representing 28% of the total real estate value within the S&P Global REIT Index.³ Yet, despite these looming threats, the current state of sustainability in the sector remains largely reactive. Two recent studies found that 78% of investors and 83% of occupiers identify climate risk as a financial risk,⁴ but only 23% of executives are contingency planning in the next 12 to 18 months.⁵

To date, sustainability efforts have predominantly centered around data gathering and reporting for compliance purposes. However, this approach leaves real estate players highly vulnerable to physical and brand risk, and threatens to leave several value sources untapped.

Instead, we encourage real estate executives to leverage sustainability as a strategic lens to uncover opportunities for value creation and reduce the industry’s negative impacts.

Unlocking value: Sustainability's triple bottom line

Our conversations with more than 15 real estate investors, developers, and service providers, revealed a consistent theme: making the built environment more sustainable is contingent upon demonstrating clear financial benefits. This requires developing a comprehensive business case that aligns sustainability efforts with financial performance, ensuring that environmental goals contribute to overall competitive advantage. As the impacts of climate change become more pronounced, this business case is – sadly and hopefully – becoming easier to prove, but challenges remain.

For real estate leaders, sustainability presents a multifaceted opportunity for creating value across three primary dimensions: costs, income, and valuation.

For developers and investors, embracing sustainability can lead to substantial cost savings. These savings are achieved through reduced operating expenses such as energy and water consumption, access to government incentives and rebates, and the adoption of sustainable materials that enhance durability and minimize long-term maintenance costs. Green buildings are often thought to be much more expensive than traditional ones, but their construction costs are usually offset by lower operating expenses that can often yield up to 20% in annual savings.⁶ Moreover, green buildings can yield higher employee productivity, due to improved daylighting, thermal comfort and indoor air quality. The benefits of higher ventilation rates alone are estimated at $6,500-$7,500 per person per year in employee productivity.⁷ Finally, using materials and technology to future-proof properties against the worst effects of climate change can also help prevent revenue loss from business interruptions or asset devaluation as a result of severe weather events.

Sustainable properties can also command higher incomes. This is due to their ability to attract premium rents, draw in higher-quality tenants, and bolster brand equity. The prestige and desirability associated with sustainable properties also enable them to stand out in competitive markets, thereby enhancing revenue streams. Sustainable buildings often achieve higher rents and occupancy rates compared to non-green ones. According to a KnightFrank study, the asset value of green buildings can rise by 7-18% due to high demand and limited supply.⁸ However, we do observe that in times of economic challenges, the willingness or ability to pay premiums becomes uncertain.

From a valuation perspective, sustainable buildings are increasingly recognized by investors as more desirable and resilient. They offer a buffer against environmental fluctuations and extreme weather events, are better positioned to meet future regulatory demands, and are less susceptible to swings in energy prices and potential regulatory penalties. These attributes not only enhance their market appeal, but also contribute to higher asset valuations. Health-certified spaces sell for 4-7% more per square foot than nearby non-certified spaces and the data shows that green buildings have a value premium ranging from 13-36% in transaction prices.⁹

Despite these clear advantages, the real challenge lies in quantifying the value derived from sustainability. The industry lacks standardized metrics and the requisite depth and breadth of data necessary to accurately assess and forecast the potential for cost reduction, income generation, and valuation increases. Moreover, the returns from sustainability are often measured in much longer-term time horizons, particularly as it relates to valuations. Furthermore, the diverse and often conflicting regulatory environments create a patchwork of incentive structures that complicate the business case for and implementation of uniform sustainability strategies. As a result, advocates for sustainable investments can face hurdles in convincing stakeholders of their long-term benefits.

Bridging the divide: Integrating sustainability into strategy

In response to the mounting pressures of climate change, many real estate executives have taken initial steps towards sustainability by assembling teams focused on Environmental, Social, and Governance (ESG) compliance. These teams are often tasked with collecting, analyzing, and reporting data to meet regulatory requirements. However, this approach tends to be operational and administrative, lacking the strategic integration necessary to drive meaningful business transformation.

The primary shortcoming of this response lies in its disconnect from the long-term strategic objectives and core business drivers. While data gathering and compliance are crucial, they do not inherently translate into strategic action or competitive advantage. Without a strategic framework, these efforts remain siloed, limiting their potential impact on the overall business.

Moreover, a significant gap exists in the representation and influence of experienced sustainability leaders within executive ranks. Often, these leaders are not afforded a seat at the decision-making table, both internally and externally, which hinders their ability to drive impactful change. This exclusion not only limits the strategic potential of sustainability initiatives but also stifles innovation and the integration of sustainable practices across the enterprise.

To truly harness the value of sustainability, it’s crucial for leadership teams to empower ESG and sustainability leaders. This involves integrating their insights into strategic planning and decision-making processes, thereby aligning sustainability efforts with broader business goals. By doing so, organizations can uncover and leverage new sources of value, positioning themselves for long-term success in an increasingly sustainability-conscious market.

A roadmap for sustainable success in real estate

To effectively capitalize on the opportunities presented by sustainability, real estate firms must adopt a more strategic and integrated approach. Here are several actionable steps that leadership teams can take:

1. Empower sustainability leaders: Elevate heads of ESG and sustainability teams by providing them with greater influence in strategic decision-making processes. Ensure these leaders have a direct line to top executives, allowing their insights to shape the organization's long-term strategy.

2. Integrate ESG into core business strategy: Move beyond compliance-focused approaches and integrate ESG factors into strategic planning, risk management, and investment decisions. This integration will enable organizations to identify and exploit opportunities for cost savings, income generation, and increased valuations.

3. Leverage data for strategic insights: Invest in advanced data analytics to develop robust KPIs and measurement tools that can quantify the value of sustainability initiatives. Use this data to make informed decisions and demonstrate the business case for sustainability to stakeholders.

4. Engage with stakeholders: Actively engage with investors, regulators, and other stakeholders to align sustainability efforts with their expectations and requirements. Transparency and collaboration can foster trust and support for sustainability initiatives.

5. Develop a culture of sustainability: Foster a corporate culture that prioritizes sustainability across all levels of the organization, and a mindset shift among individual leaders to prioritize sustainable value creation. Encourage innovation, collaboration, and continuous improvement in sustainable practices, ensuring that every team member contributes to the company’s sustainability goals. For some companies, this means tying a proportion of compensation to individual or business unit KPIs.

6. Invest in leadership development: Identify and develop sustainable leaders within your existing leadership team. Provide training and development opportunities that emphasize the importance of sustainability, equipping leaders with the skills needed to drive enterprise-wide change.

By implementing these actions, real estate investors and developers can not only address the challenges posed by climate change but also unlock new avenues for value creation and competitive advantage.

Authors

Jessica Casey is a member of Russell Reynolds Associates’ Real Estate Practice. She is based in New York.
Mackenzie Horton is a member of Russell Reynolds Associates’ Assessment and Development Knowledge team. He is based in Toronto.
Emily Meneer leads Russell Reynolds Associates’ Sustainability Knowledge team. She is based in Portland.
Alexander Prokot leads Russell Reynolds Associates’ European Real Estate practice. He is based in Frankfurt.
Anjelica Zalin is a member of Russell Reynolds Associates’ Real Estate Practice. She is based in Los Angeles.

Acknowledgements

The authors would like to thank all interviewed executives for their valuable feedback.

External References

_{¹ Marketplace, “Insured losses from LA’s fires could be upwards of $30 billion, industry trade rep says” < https://www.marketplace.org/2025/01/15/insured-losses-from-las-fires-could-be-upwards-of-30-billion-industry-trade-rep-says/> , Accessed January 15 2025
² GRESB, What is embodied carbon in the real estate sector and why does it matter?, < https://www.gresb.com/nl-en/what-is-embodied-carbon-in-the-real-estate-sector-and-why-does-it-matter/.> Accessed December 2024
³ S&P Global, Integrating Climate Adaptation into Physical Risk Models, <https://www.spglobal.com/esg/insights/blog/integrating-climate-adaptation-into-physical-risk-models> Accessed December 2024
⁴ JLL, The commercial case for making buildings more sustainable, November 2023
⁵ PwC, PwC Pulse Survey: Focused on reinvention, <https://www.pwc.com/us/en/library/pulse-survey/business-reinvention.html> Accessed December 2024
⁶ Smart CRE, Financial Benefits of Green Buildings – Are They Expensive? 
< https://smart-cre.com/financial-benefits-of-green-buildings-are-they-expensive/> Accessed January 16, 2025
⁷ Boyd Watterson Asset Management¸Green Buildings – Good for the Environment and the Bottom Line 
<https://boydwatterson.com/economic-and-market-commentary-2023-10-09/> Accessed January 16, 2025
⁸ Boyd Watterson Asset Management¸Green Buildings – Good for the Environment and the Bottom Line 
<https://boydwatterson.com/economic-and-market-commentary-2023-10-09/> Accessed January 16, 2025
⁹ MIT Real Estate Innovation Lab, The Financial Impacts of Healthy Buildings, <https://realestateinnovationlab.mit.edu/wp-content/uploads/2020/12/201214_Healthy-Buildings_Paper_V2.pdf> Accessed January 14, 2025}