What will change everything in 2011 and beyond?

A few 2010 events either changed or reinforced perceptions enough to influence sustainable finance in 2011 and beyond:

1. Positive Green Building Momentum & Performance

Confirming year-end data reinforces the value of building environmental certification.

• LEED-certified buildings have reached a footprint of 1 billion square feet worldwide, with another six billion square feet of registered projects in the pipeline.

• In the The Economics of Green Building, researchers demonstrate that green building economic performance was not affected by recent market volatility, that the economic premiums in the green properties studies remain substantial and energy efficiency does contribute to higher rents and values.

2. Quantified Credit Risk for Environmental Irresponsibility

• If your lender shrugs when you tell them that building environmental certification benefits them, too, send them a copy of Corporate Environmental Management & Credit Risk. Rob Bauer and Daniel Hann’s prize-winning study that demonstrated how US companies engaged in environmentally risky activities paid a premium for their bond debt of up to 64 bps per annum.

3. Innovative Structure Straddles Real Estate & Energy

• We covered Hunt Power’s use of the REIT structure to offer up to $2.1 billion in energy infrastructure finance via joint ventures, purchase and leasing. There are several energy and technology sectors that urgently need better ways to access capital than the market can provide. Look out for more novel, hybrid investment structures that bring commercial solutions to financing sustainability across buildings and other domains.

4. Regulatory Ramp Up Continues

• Carbon cap and trade has arrived in California, joining building energy disclosure requirements and Cal Green. Under new regulations adopted 20 December, greenhouse gas emissions of large industrial plants will be capped from 2012 forward. Given California’s legal requirement to reduce emissions by 15% from today’s levels by 2020, we will continue to see heavy action both within California, as well as California’s experience influencing how these issues are handled in other states and even within the Federal Government.

5. PACE: New Tools Equal New Perceptions

• We dedicated substantial coverage last year to tax-lien financing for energy efficiency. Professionals from diverse sectors joined forces to cheer on property-assessed clean energy’s brave fight…and boo the regulators as they killed most residential programs. New tools equal new perceptions. PACE’s major success has been how it helped build awareness and shape positive perceptions. Now practitioners realize that such structures are possible and urgently needed. That’s kicked off a lot more interest in getting green finance right from now on.  Policy makers are working on various versions of PACE 2.0 or other PACE-like enabling legislation. It’s hard to tell what progress they’ll make, but PACE’s potential helped focus commercial real estate and government on the market need for such structures in a way not seen before.

So, what kind of market do you think you’ll sell into?

With so much momentum already underway, what are the prospects for your building portfolio?  We think successful investors in the coming years will be good at continuously re-imagining and reinventing their businesses, often at highly local levels.

Which of these events carry the most weight for green real estate?

What’s missing from the green finance conversation that you think needs attention?

Photo credit: Muse by Oimax. If you are a fan of urban photography, check out Oimax’s 6,000+ photostream of stunning Tokyo architecture, scenes and objects.

Vet your metrics, avoid wrong investment decisions with these Expert Questions

Metrics are important to green building finance because they can help you prove the green value-add you’re getting from your sustainability or energy efficiency initiatives.  First of all, they’ll drive the project choices that your company makes, which will determine the future state of the green finance or investment program that you’re running. Over time, they’ll teach your company how and where to improve its green investing activities because they’ll point you to the areas to improve in order to reach your business objectives.

There’s a lot riding on your choice of metrics

However, achieving that success depends on choosing the right metrics in the first place. There’s lots of evidence that getting metrics wrong can result in huge problems… once you realize that there’s even a problem in the first place and that it stems from a faulty metric.

Enterprise Group CEO John Mariotti wrote about how the medical establishment continues to accept the “normal” human body temperature of 98.6 F, even it was proven to be 98.25 F many years ago.

There’s also the expensive (and ongoing) example of the losses suffered by governments and investors that relied on the AAA credit ratings on securitized mortgage pools, which touched off a global financial crisis, when the ratings were exposed as inaccurate.

Expert Questions for vetting metrics

We help clients to vet their metrics, so that they make the right decisions about their target environmental, social and economic impacts. I condensed them into shortlist of Expert Questions for Vetting Metrics**, that I taught my grad finance class yesterday. You can use it to locate and assess potential weaknesses in measurements, preventing wrong decisions and expensive problems.

1. Who created the metric or it’s criteria?
2. How do they define value?
3. What do they want to know?
4. What will they do with the data?
5. Does the measurement and any impacts comply with the Four C’s?
6. Are chosen discount rates and sensitivity scenarios well-justified?
7. How does it drive marginal improvement in environmental quality and well-being?
8. What’s the measurement baseline?
9. How is the metric’s range of motion defined?
10. Does the metrics reporting period match the firm’s normal financial reporting period?

There’s only enough time for now to discuss a simple principle that is behind #’s 1-4. It is: forms of social / environmental measurement serve the perspective and objectives of the measurement’s creator.

Most practitioners know that it’s important to use metrics that are comparable across many firms, to get a transparent view and the right context about a company’s or portfolio’s performance.  In green investing, there are various private data collection firms compiling this information, but they may focus their data reporting on a particular sub-sector of clients. The measurements used can be less effective for you if your firm does not fit the profile of this client sub-sector.

I’ll write more on the other vetting questions from time to time, but feel free to use this list to check or recheck your own metrics or the criteria that’s behind them. When you know you’re accurately measuring green investment performance, then you’ll enjoy the benefits of better decision making and impact.

**What are Expert Questions?