Capturing The Value Of Sustainability - UK Green Building .
Capturing the value ofsustainability:Identifying the links betweensustainability and business valueJANUARY 2018Report sponsored by:
ForewordIt is important for the built environment sector to remember who ourcustomers and stakeholders are. Our purpose is ultimately to deliverplaces and buildings that allow communities to thrive while not havinga detrimental impact on the natural environment. More and more,responsible companies are realising how aligning business activitieswith sustainable practices can bring value. However, it is difficult toproperly quantify how this subjective added value contributes toobjective financial value. I believe we need to be far more sophisticatedabout the ‘value targets’ we’re trying to achieve, and make surethat these are factored in at the start of all business activities to aiddecision-making.This report is designed for those organisations that have begun tointegrate sustainable business practices into their company ethos,products and services and would benefit from measuring the value thatthis integration brings. Attempting to do this can seem overwhelming,so this document aims to be an intuitive, simple-to-use tool that setsout an approach to help businesses to understand what drives valueand how sustainable activities can help contribute to these valuedrivers. It is not a “how-to” guide for calculating additional financialvalue, but an introduction for the built environment industry to beginexploring how investments made in society and the environmentdelivers value to an individual business.Argent is intent on being a responsible developer and we are constantlystriving to understand how best to capture the positive impact ofeverything that we do and embed this ethos into all of our businessactivities in order to demonstrate the value-add that we and ourpartners bring.UKGBC will continue to advocate and assist industry in encouragingand capturing the value of sustainability and for it to become amainstream issue in business leadership. We will encourage ourmembers, and other businesses in the industry, to use the metrics in thisreport to undertake their own measurements and share their findings.Collaboration across businesses within the built environment valuechain, including customers, clients, suppliers and partners, will progressall aspects of measurement and prove our claim as a major valuecreating industry with the figures to back it up.David PartridgeChair of the Board of Trustees at UKGBCand Partner at Argent LLP
ContentsExecutive summary 21.Introduction52.Sustainable business trends73.Value driver identification104.Value drivers and sustainable business activities135.Fundamentals of measurement166.Cost saving187.Talent attraction and retention228.Brand and reputation269.Customer attraction and retention2910. Progressing the business case3211. Appendix3312. References3513. Contributors37
Executive summaryThe purpose of this report, and the guidancewithin it, is to empower businesses andindividuals to make the business case forimproving environmental and social impactactivities and to enable them to measure anddemonstrate the value their organisationsderive from such practices.11 value drivers were identified for builtenvironment businesses. A value driver isdefined as:“Any variable or factor (i.e. a resource, activityor condition) that can be influenced, measured,managed and controlled and, in turn, affectsthe value of the business by one or more ofthe following means: reduces risk, increasesprofitability, leads to future growth inprofitability.”STAINABLSUBUSINESSValue ofassetsCostsavingCustomerattraction &satisfactionBUSINESSVALUEBrand &reputationLicence tooperateInnovationAccess tocapitalCOST SAVINGThe construction and property industry has a significant costbase and operates on slim margins, with the industry’s tenlargest contractors having an average pre-tax profit margin of-0.5% in 2017.Related sustainability activities include resource efficiency,waste management and energy efficiency.TALENT ATTRACTION AND RETENTIONLabour shortages are intensifying within the UK constructionand property sectors and the costs of attracting and retainingstaff are also highly significant.Related sustainability activities include defining a business’social purpose, creating an open and inclusive work culture,flexible work schedules, encouraging health and wellbeingprogrammes and providing showers and cycle storage.BRAND AND REPUTATIONBrands are now expected to demonstrate a social purposeand the reputation of a brand is now in the top three mostimportant risks to business and has the second greatestpotential impact on growth.Related sustainability activities include identifying and actingupon environmental and social purpose, and embedding itinto internal and external messaging.Talentattraction e business activities may positivelyimpact one or many of the value drivers andin turn enhance business value. The fourhighlighted value drivers were identified byUKGBC members to be current high prioritydrivers of value and are the focus of the report.Priority value driversResilienceCUSTOMER ATTRACTION AND RETENTIONProduct performance and affordability is no longer enoughto attract all customers, including investors and occupiers.They are increasingly seeking products and services whichpositively impact the society and the environment.Related sustainable business activities include providingenergy efficiency products and services, and moving towardsa more long-term, collaborative landlord/tenant relationshipwhich is centred around co-creating the positive outcomesand experiences that building users desire.2UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
Performance indicators and methodologies were identified foreach of the four value drivers. The key indicators are shown onthe next page with a longer list within the full report.This report has identified some means of measuring thelink between sustainable business activities and financialsuccess but the business community would benefit from morecompanies undertaking such measurements and sharing theirfindings.UKGBC asks all its members, and other built environmentbusinesses, to continue their work on improving theirenvironmental and social impact, to identify how this drivesvalue for their organisations, and to share their learningswith us so that together we can make a better builtenvironment.Improvingperformance in growth,profitability and sustainabilityhas far greater results thanonly improving performanceon two of the three.Over 50% of SMEsrecognise the cost benefitsof implementing sustainablebusiness practices andapproximately 30% have seenimproved profitability as aresult.Accenture’s CompetitiveAgility Index, 2017Lloyds Bank CommercialBanking, 201718% higherprofitability for Standard &Poor’s 500 industry leaders onclimate change managementcompared to low scoringpeers and 67% higher thannon-responders.CDP, 2014.89% of companiesindicate that sustainability issuescould have a financial impacton their business but 70% don’tbelieve their risk managementpractices are adequatelyaddressing those risks.The World Business Council forSustainable Development(WBCSD), 20173UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
Key value driver metricsPerformance IndicatorUnitMethodologyStakeholders% costCost reductions (annual or rolling) in energy anddifferential water relative to a baseline year. Note that energySavings through reduction inenergy and water use Energy managers Facilities management Finance teamprice fluctuations will skew calculations and shouldbe factored inReturn on investment (ROI) ofenergy efficiency investments%Actual energy cost savings divided by the sumof opex costs and capex costs specific to energyinvestments, for a given period (to reflect the factthat capital expenditures do not yield their greatestsavings immediately), or aggregated estimated ROIon energy capex projects Energy team Facilities management Finance teamProportion of job applicationsreferring to or influencedby the sustainability of theorganisation in the recruitmentprocess%Ask the candidate during the application whattheir key attractions to the organisation were.Alternatively, track unprompted key terms e.g.‘sustainable business’, ‘responsible business’. Notethat this should be based on unprompted, openquestions HR team Business/departmentmanagersProportion of quality candidatesinfluenced by the sustainabilityof the organisation%Filter the applications above by those thatprogressed to interview HR team Business/departmentmanagersEmployee satisfaction survey HR team Business/departmentmanagersScoreEmployee satisfaction with keysustainability issuesStaff turnover due topoor performance on keysustainability issues%Use total number of exit interviews which quote keysustainability issues in turnover calculations HR team Business/departmentmanagersBrand value attributed tosustainability activities%Brand value calculations are complicated so workwith a brand consultant to establish the valuesustainability delivers to your brand Marketing teamStakeholder perception oforganisational sustainability (bykey sustainability issue)ScoreStakeholder questionnaires and focus groups Client relationship teamHR teamMarketing teamBusiness development teamImpact of sustainability ontender submissionsScoreCalculate the weighting attributed to sustainabilityin all tender submissions and measure the averagescore achieved over time in your responses Business development/client relationship teamsProportion of repeatbusiness attributed to variousorganisational sustainabilityissues%Customer survey Business development/client relationship teams Finance teamNumber of clients’ sustainabilitytargets that have been met dueto delivery of service or product%Before each project discuss what your customer’ssustainability aspirations are. Post projectcompletion, review the proportion of theseaspirations that have been met Sustainability team Procurement team Project managersNB: Not all performance indicators and metrics will be relevant or appropriate for a business. They should be selected based on the sustainable business activitiesand relevance of the value driver to the business.Download the full report atukgbc.org/value-of-sustainabilityUK Green Building CouncilThe Building Centre426 Store StreetLondonWC1E7BT and business valueUK Green Building Council Capturing the value of sustainability: Identifying the linksbetweensustainabilityT 020 7580 0623#ValueOfSustainability
1. IntroductionPURPOSE OF THIS REPORTBuilt environment businesses, as well as those in other industries, are only just startingto demonstrate the link between their sustainability activities and creation of value atthe individual business level. It is important to establish this relationship in order todemonstrate to employees, shareholders and customers why it makes commercial senseto be striving to improve environmental and social impact.Therefore, the purpose of this report is toempower businesses and individuals to makethe business case for environmental andsocial impact activities and to enable themto measure and demonstrate the value theirorganisations derive from such practices. Thereport focuses on the creation of value withina business, rather than the measurement ofnatural capital or social value[1], or the specificlink between sustainable built assets andgreater financial returns.The metrics and case studies within thisreport were gathered via industry researchand due to the nascent stage of this topicthey are not exhaustive or definitive.However, we believe they do provideguidance to the increasing number ofbusinesses who are starting the journeyof identifying and measuring how theirsustainable business activities create addedvalue.Following the launch of this report, UKGBCwould welcome its members and other builtenvironment businesses to embark on furthermeasuring in order to capture the value ofsustainability and build a stronger case forsustainable business. We are interested ingathering from our members case studies onimplemented metrics and subsequent valuecalculations.5UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
WHO THIS REPORT IS FORThis report is aimed principally at businesses in the UK whose work involves owning,designing, constructing, managing, maintaining, or creating products for, buildings orinfrastructure. However, much of the content is applicable to all types of business.The information in this report can help: Board and C-suite members to link sustainable business activities to value creation Finance teams to evaluate the costs and benefits of investments in sustainability Corporate affairs teams to provide relevant information to analysts, investors and otherrelevant stakeholders Business development and customer relationship teams to identify the level of importanceplaced by clients on sustainability and integrate sustainability into product and servicefeatures Marketing and communications teams to integrate sustainability into the brand narrativeand maximise the value that sustainability delivers to the brand and the business’ reputation HR teams to identify the level of importance placed by new and existing staff onsustainability Sustainability teams to demonstrate their role in value creation.REPORT STRUCTURESustainable business trends discusses the meaning of sustainability and other related termsand why this report uses the phrase ‘sustainable business activities’. The increasing importanceof disclosing performance and the growing amount of evidence that links sustainable businessactivities with financial outperformance are both investigated. Examples are cited from onlinesources which are both in and out of sector.Value driver identification classifies the eleven most significant value drivers for builtenvironment businesses and how they relate to sustainable business.Fundamentals of measurement provides guidance for ensuring robust and comparable data isrecorded.Chapters on cost saving, talent attraction and retention, brand and reputation, and customerattraction and satisfaction investigate these value drivers in greater depth. This includes theirlinks to sustainable business, and the metrics and methodologies for measuring the impact ofsustainable business activities.As with all UKGBC projects, this report is the result of collaboration with our members and themethodology and list of contributors can be found in the appendix, along with a glossary ofterms.6UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
2. Sustainable business trends INTEGRATION OF SOCIAL AND ENVIRONMENTAL IMPACTAt the business level, the word sustainability is often substituted with the word‘responsible’ and the phrases ‘corporate responsibility’, CSR (corporate socialresponsibility), ESG (environmental, social and governance), or ‘social and environmentalimpact’. The exact term used will differ between businesses and depend on the audience,but all denote a focus on activities which seek to improve the organisation’s impact onpeople and the planet. Within this report we use the term ‘Sustainable business activities’.The range of activities encompassed bySustainable business activities is increasinglybroad due to changes in the naturalenvironment, demographics, societalexpectations, regulations, and the variancesin underlying business activities. Manybusinesses now undertake a materialityassessment in order to identify whichenvironmental and social issues are mostrelevant for them, thus enabling prioritisationand maximisation of return on investment.This has led to a move away from purelyphilanthropic and standalone activities toundertaking a broad range of environmentaland social focussed activities that haverelevance to the business. These often involvecontributions in time and skills, workingwith a range of stakeholders and ultimatelychanging how the business operates andcreates value.Much has been written on how businessesare moving towards doing more good ratherthan less bad. The phrases ‘net positive’ and‘restorative enterprise’ are now appearingwithin sustainable business circles, with bothreferring to businesses that put back morethan they take and restore social and naturalcapital whilst making a profit. Such businessesmay be termed as using a ‘business withimpact’ approach or being a ‘purpose driven’organisation. In this context, ‘purpose’ maybe defined as ‘an aspirational reason forbeing which inspires and provides a call toaction for an organisation, its partners andstakeholders, and provides benefit to localand global society’.7UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
PERFORMANCE DISCLOSUREAcknowledging a business’ sustainable credentials through a published policy is now aminimum expectation and an absence of sustainability information may be seen as a costlyrisk[3]. Frameworks for progressing non-financial capital measurement, valuation and reportingare coming to the fore with the aims of improving decision-making, using reporting to drivechange from within, assisting with integrated performance management and delivering valueto stakeholders. These frameworks can help businesses make transparency, reporting anddisclosure more meaningful.As of 2017, the Non-Financial Reporting Directive requires large companies within Europeto report on issues including: environmental protection, treatment of employees, socialresponsibility, diversity, respect for human rights, anti-corruption and anti-bribery matters[4].Companies are recommended to assess the impact of consolidated reporting.[5]The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD)released their recommendations report in 2017, which provides a framework for climaterelated financial disclosures[6]. The recommendations are currently voluntary but the TCFD hasidentified the materials and building sector (including metals and mining, chemicals, capitalgoods, construction materials and real estate management and development) as havingsignificant exposure to climate risks and the highest likelihood of climate-related financialimpact.“I think disclosure is a key issue that will help mobilise capital at a moreaccelerated pace into the transition. Transition risk is complicated [ ] andyou’ve got people trying to analyse that without good data and gooddisclosure from companies.”Brian Cahill, Managing Director, Moody’s Investment Services[7].8UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value
THE LINK TO FINANCIAL VALUEThere is growing evidence that investors, customers and employees are demanding thatbusinesses have a positive impact on the environment and society[8], and that this leads toimproved financial performance[9][10]. This is taking various forms including enhanced revenueand profit growth, greater returns on equity and assets, and lower cost of capital.The Association of Chartered Certified Accountants (ACCA) concluded in a 2017 paper that,whilst there are the initial costs of integrating sustainability into the core strategy and reporting,this can be offset by cost savings and growth. This can be achieved through access to newmarkets and increased business opportunities; demand from a sustainable supply chain;advantages in overcoming barriers to entry to large supply chains; strategic benefits of buildingnetworks; capturing resources and talent; developing a more innovative workforce; andgenerating
drivers of value and are the focus of the report. 3 UK Green Building Council Capturing the value of sustainability: Identifying the links between sustainability and business value Performance indicators and methodologies were identified for each of the four value drivers. The key indicators are shown on
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