Reducing adverse impacts

from the built environment

Paul McNamara, PRUPIM
Director and Head of Research, reflects on his involvement in the UNEP FI Property Working Group – which he chaired from 2006 to 2010 – and the growing influence of environmental issues for commercial property investment.


UNEP FI is a global partnership between the United Nations Environment Programme and the financial sector. Prudential plc has been a member since 2001.

Why is commercial property important to the environmental debate?

“The built environment is a conduit for 40 per cent of carbon emissions, of which about half is through commercial property. The bulk of that is from occupation.”

Why focus on existing buildings rather than development of new ones?

“People who don’t understand much about property tend to focus on development. However, in a mature market like the UK, development only adds between one and two per cent per annum.

The view of the UNEP FI was that if you really wanted the property industry to make its contribution to carbon mitigation it had to be primarily focused on existing stock. So, the working group was formed to bring best practice together for reducing emissions from built stock. As we began to push the initially Anglo-French group forward, we were quite successful in bringing in new members, with Australia and Japan joining first, and, more recently, members joining from North America. The challenge moving forward is to include members from fast-growing emerging markets. Today, there is one Indian member but, as yet, none from Latin America, Africa or China.”

What were the initial aims and activities of the working group?

“In PRUPIM we had been thinking about these issues for a fair time before getting involved in the initiative, and our work was really quite pioneering. From the beginning we were able to bring our experience to the working group, sharing thinking on the issues as we saw them. One of the issues from an investment perspective was to establish whether being socially responsible conflicted – or not – with fiduciary responsibilities. So, we set about looking for empirical evidence to prove that managing portfolios responsibly enhances performance.”

What do you see as the case for ‘green’ buildings outperforming, medium term?

“Our simple logic goes something like this: if ‘green’ buildings are more acceptable to investors and tenants than ‘brown’ buildings, they will be cheaper to run, command higher rents and remain acceptable for longer, depreciating less quickly. Brown buildings will also become more risky because maintaining a flow of rent from them will be harder, and cash flows will be interrupted more often. Finally, if investors prefer to be seen holding green rather than brown assets in their portfolios, then green assets will be easier to transact.”

How far is it possible to demonstrate that with evidence?

“I think that what is problematic from a research perspective is that in any building there will be a whole range of performance drivers, including lease length, tenant quality, and so on. To distil the influence of sustainability factors from other drivers requires enormous amounts of data. However, we are starting to see some of that data come out of the US, and while the UK has not been able to gather data to that level yet, there are plenty of people on its trail.”

What do the early results show?

“One study in the US16of around 9,000 commercial properties suggests that green buildings exhibit a three per cent rental premium. Their higher than average occupancy translates this into a six per cent better income return, and, because they were capitalised at a lower rate, they had a 16 per cent price premium. So, while those numbers are not guaranteed, if they are broadly indicative, they have to be considered when making investment decisions.

Here at PRUPIM we are looking at sustainability as an emerging standard for property – one which it seems tenants and investors increasingly care about. Both are looking for the economic benefits – lower energy costs and so on – as well as reputation advantages. As an example of the latter, one of the UK’s big accountancy firms recently moved into a building in London rated as ‘outstanding’ (the highest rating) using the BREEAM17 methodology. They did this because they wanted to position themselves as an employer of choice to young people for whom this is an important issue.”

How has the focus of the working group changed over time?

“The focus of the group has moved on with the development of toolkits for asset owners and fund managers interested in sustainability. We can help them with the things they need to know and do to embed sustainability into the culture of their organisations as part of the investment process.

In 2009 we published a paper18 arguing against commentary that the economic crisis had derailed sustainability, reinforcing our position that sustainability is a long-term concern for investors and corporations, and that the issue of cost savings is even more relevant in straitened times.”

What do you see as the next development for the property sector and environmental issues?

“What’s clear is that in tough times, governments are less able to push their own carbon reduction initiatives and, as a result, will look to others to do it for them – commercial property is increasingly in their sights. Property is a major user of resources and producer of emissions, but it is also very much part of the solution. There is a lot of low-hanging fruit with regards to carbon reduction in the built environment. There are things that can be done quickly to give a fast payback. Governments are puzzled as to why such opportunities are not being taken up.

If I have one message for the property industry it is the need to work closely with governments to find appropriate policy mechanisms for carbon reduction, rather than have them imposing solutions on the industry.”

“ In PRUPIM we had been thinking about these issues and our work was really quite pioneering. We were able to bring our experience to the working group.”

Further Reading
For more information on PRUPIM visit

15 PRUPIM is a top twenty global real estate investment manager and part of the M&G group.

16 Eichholz, P., Kok, N., and Qugley, J. (2009) Doing Well by Doing Good? An Analysis of the Financial Performance of Green Office Buildings in the USA, Royal Institution of Chartered Surveyors, Research Report, March 2009

17 Building Research Establishment Environmental Assessment Method


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