January 7, 2024 by Mike Phillips and Mark Faithfull

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon

It’s a golden age for the green building certification and ratings world.

The number of companies buying green certifications from organisations like BREEAM and LEED or sustainability ratings from GRESB is booming. As sustainability moves front and centre for real estate, certifications are creating billions of dollars in value as investors and lenders increasingly target the greenest buildings and companies. 

There’s just one problem: These certifications aren’t helping real estate cut carbon. 

“I’ve got a short and simple message: The system is wrong, and we need to change it quickly,” Edge Technologies CEO Coen van Oostrom said. “It is taking a lot of effort away from the things that are really important.”

Green building certifications could be a vital tool in helping an industry accounting for up to 40% of global carbon emissions to cut back. Done right, certifications could help investors, developers and lenders traverse a complex and highly technical path, ensuring they put their money where it can have the most impact in cutting carbon. 

But in its current form, the system is not helping the industry hit decarbonisation targets. It may even be hindering the fight against the climate crisis, investors and sustainability experts told Bisnow

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon
BREEAM was the first green building certification.

Experts told Bisnow that as things standthe system is overly complex, making it difficult for investors to work out which buildings are truly green and where they should put their money. What's more, some of the most widely used certification and rating systems reward buildings and companies that are green in theory instead of practice, incentivising box-ticking and form-filling rather than cutting carbon.

Like ratings agencies during the 2008 subprime crisis, green building certifications can mask rather than highlight true risks, opening the door for building owners and developers to make claims that aren’t supported. And that is a huge potential danger for the industry as financial regulators take a far more forensic look at environmental, social and corporate governance claims to avoid potential greenwashing

It is an even bigger risk for the planet.

“I think we should throw [green building certifications] out of the window,” van Oostrom said. 

The Paradox Of Choice

The sustainability certification and rating industry for real estate has never been so big or financially important. 

Properties with some sort of green certification rating rose by 500% between 2013 and 2021 in the European Union alone, according to research from BNP Paribas Real Estate. As of 2020, more than 96,000 assets across 64 countries were submitted to GRESB, accounting for a real estate value of $4.8T from over 1,200 property companies. An estimated half of the buildings built in the $248B construction sector were covered by LEED certifications as of 2016. 

Those certifications and ratings are adding value to buildings.

The most sustainable buildings, as measured by sustainability certifications, sell for between 20% and 25% more than less sustainable peers, according to analyses from JLL and Green Street. And research from Knight Frank found that these buildings lease up faster and at rents of more than 10% higher than less sustainable rivals. 

The world’s first green building certification was BREEAM, or the Building Research Establishment Environmental Assessment Methodology, launched in 1990 by the Building Research Establishment in the UK. The BRE traces its roots to 1920, when it was set up to test building materials for new housing after the First World War. As it evolved, it became a private “profit-for-purpose” organisation, moving into sustainability ratings in the 1990s. 

LEED came next, in 1995, pioneered by the U.S. Green Building Council in partnership with the Natural Resources Defense Council. The idea for the certification took form at a meeting of the American Institute of Architects in 1993, but its genesis can be traced to the 1970s oil price shock and growing awareness that buildings needed to be more energy-efficient for the U.S. to become more energy-independent and keep costs down, according to the organisation’s online history. 

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon
ULI's Lisette van Doorn

GRESB, the Global Real Estate Sustainability Benchmark, was born in 2009, providing a star rating system for portfolios and companies, with one star being poor and five stars being excellent. 

That might sound straightforward, but the number of global certifications and ratings benchmarks has ballooned beyond those three over the last two decades. GRESB now recognises more than 90 green certifications for owners that submit their portfolios for rating.

To some degree, this is understandable, maybe even necessary: Countries have different needs and regulatory frameworks, necessitating different certifications.

Yet the proliferation of different standards risks obfuscating the facts as real estate becomes more global, namely which buildings and companies are most sustainable. Certifications are similar but slightly different globally, making it hard for investors to compare and contrast assets and decide where to put their money. 

“We need to make sure that we have the same dictionary. If each of us has our own definition, how can we talk to each other? We won't have the same language,” Ivanhoé Cambridge Head of Sustainable Investment Stéphane Villemain said. “And so we won't see the acceleration we need in terms of really fostering decarbonisation of existing real estate.

“Certifications overall are a key element for us and for the industry to be able to have an independent view on the quality of the properties that we own or that we manage.”  

If it is hard for large, sophisticated investors to negotiate the labyrinthine world of sustainability certifications, that goes doubly so for smaller owners. Smaller owners may not grab the headlines, but they own a huge proportion of existing real estate. 

“There’s a member of my team who is a sustainability expert. She has been working in the field for 15 years, and she struggled with it,” ULI Europe CEO Lisette van Doorn said, speaking about an exercise the ULI undertook to map key sustainability certification and regulations. “If she doesn't understand, how does anyone?”

Certifications and labels are important, but if done badly, they can have the wrong effect, van Doorn said.

“The comparison is very interesting with subprime because it paralyses people and stops them using their common sense and looking one level deeper to ask, ‘What am I actually looking at now?’” she said. “Once a label is on something, people are like, ‘Oh, probably it's OK,’ without looking any further.”

Defining Net-Zero

One of the biggest problems with the current system, consistently cited in the industry, is that there is no single, universally agreed-upon definition of what constitutes a net-zero building, especially as more and more governments, regulators and businesses set net-zero targets.

Efforts are underway to change this. In the UK, veteran developer David Partridge, Chair of Related Argent, is overseeing a cross-industry partnership which aims to create a Net Zero Carbon Buildings Standard. The initiative is backed by all of the UK’s major professional organisations (RICS, RIBA, IStructE, and CIBSE) who have been joined by the UKGBC, LETI, the BRE, the Better Buildings Partnership and the Carbon Trust. 

“People are crying out for this,” Partridge told Bisnow. “A lot of existing certification schemes as they were originally conceived wanted to capture a lot of different things to do with green and healthy buildings, but we are focusing on decarbonisation as an absolute priority. 

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon
The large number of green building certifications is causing headaches for owners.

“We want to be the standard, to get everyone measuring the same things in the same way, to make sure that the whole built environment sector including lenders and investors, is on the same page. We don’t want people to have to do the same thing four or five times for different certifications, as that is a waste of time, effort and money.”

Partridge addressed the fact that the current plethora of multiple certifications, and different definitions of something like a net-zero building, opens up the potential for false claims of “greenwashing” to be made.

“There’s a lot out there, people claiming that their building is net-zero, which is complete nonesense,” he said. “You might have one person doing a great job, and then someone else down the road claiming the same thing and not producing nearly as sustainable a building, and that makes it so hard for people to differentiate and know what is really net zero.”

Financial regulators have been increasingly willing to investigate allegations that ESG claims made by financial organisations are overblown, with the fund management arm of Deutsche Bank offering the highest-profile case so far. DWS paid $25M to settle charges over misstatements regarding its ESG investing and failure to prevent money laundering.

“There's a risk for the industry because there is a greater focus from financial regulators on greenwashing,” ULI’s van Doorn said. “If you look at what happened to Deutsche Bank, there is a risk for the industry that it actually gets held to account for not decarbonising.”

Another significant problem highlighted by multiple real estate investors, developers and advisers is the gap between the level of sustainability promised by a certification and the energy consumption of a building in practice. 

BREEAM has two types of certification: one that rates energy efficiency in design, or how sustainable a building is when it is completed but before it is actually used, in a hypothetical perfect world, and another that measures a building’s sustainability in use. The latter measures how sustainable it is in the real world.

LEED similarly has different ratings for design and construction or operations and maintenance.

As for BREEAM, an in-use certification needs to be renewed every three years, updating data on how much energy a building actually uses, giving a running analysis of its sustainability. But the in-design certification does not need to be updated, which critics say can provide a misleading picture. 

“I saw a recent example of a building being sold in the City of London where the marketing materials from the brokers said it was BREEAM Excellent, but that turned out to be a BREEAM in-design certification, and the building was designed in 2001,” Evora Global co-founder and Chief Operating Officer Paul Sutcliffe said. “Standards have changed a lot since then.”

The National Australian Built Environment Rating System, or NABERS, is a sustainability certification system many in the field cite as better at measuring how much carbon buildings are emitting in practice, and the standard is gaining traction in the UK, in particular. But it is another certification for owners to get their heads around. 

Sutcliffe and Evora last year criticised GRESB, saying the ratings provided by the organisation are not "an accurate measure of sustainability.”

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon
Sustainable developer Edge says that how much energy a building uses in practice is more important than any certification.

In the GRESB scoring system, too many points are allocated simply for collecting data rather than actually decreasing the carbon emissions of a portfolio, Sutcliffe said.

“People are spending money to make sure they have a good GRESB score rather than spending that time, money and effort on improving sustainability,” Sutcliffe said. “It is the tail wagging the dog.”

“Everyone gets obsessed with the stars,” ULI’s van Doorn said. 

Certifications and rating systems have pushed the sector forward in sustainability, Sutcliffe said, but the system needs to evolve, and the industry needs to become better educated about what certifications actually mean, experts told Bisnow.

“I think we have to put a little bit of a criticism at the door of the likes of BREEAM. They've been very slow to respond to the net-zero carbon challenge and also to respond effectively to the role that their certifications can play in regulations like Sustainable Finance Disclosures Regulation,” Nuveen Real Estate Head of Strategic Insights Abigail Dean said.

“It would have been helpful for certification bodies to lead in developing zero-carbon standards.” 

Dean said a building can achieve a relatively high rating, indicating it is energy-efficient, when it isn't, especially when it scores high on elements like wellness.

“I think there is an argument that all of these different certifications do different things, and clearly the proliferation isn't great when you see a building and it's got eight different certifications,” she said. “You just wonder whether spending the time and effort and money on getting all of those is really the best use of time, which could have been spent making the building much more sustainable.”

Organisations like the BRE and GRESB are using criticism to improve their systems.

“Buildings are great until people move in,” BRE Head of Strategic Partnerships James Fisher said, explaining that BREEAM certification is evolving. “Version 7 [of the certification] is in consultation, with a hope to introduce it in 2024. There is a move towards stronger links with life cycle stages and bringing the initial design and in-use certification closer together.”

GRESB is also evolving the way it provides its ratings in response to criticism. Chief Innovation Officer Chris Pyke said it planned to do so in its 2024 foundation road map. 

For Pyke, another problem with the current system is that it rewards and sends capital toward buildings that are already high-quality, typically newer buildings, and they aren't the problem when it comes to real estate and carbon. Certifications need to evolve to help capital flow to the buildings that still need to be decarbonised — the big opportunity to make a change, Pyke said. 

“We should have more entities in the lower left [of a graph of the most carbon-efficient buildings],” he said. “And we should be celebrating them as they move to the upper right and helping investors know that that's what they want to invest in. It's the brands and the theories of change of certification bodies that limit them.”

Urban Partners Head of Sustainability Elisabeth Hermann Frederiksen said she hopes to see certification boards change and become more transparent.

Scandinavian investors have led the charge when it comes to innovating on sustainability in the built environment, coming from countries with a deep environmental focus.

The Green Building Certification System Is Worth Billions — But It Isn’t Helping To Cut Carbon
The certifications given to buildings need to reflect how sustainable they are in practice, not at the design stage.

“We need to move to a place where you don't only get points for trying but actually get points for meeting a certain standard,” Frederiksen said. “Where we came from 10 years ago was more to get everyone to speak a common language. Now there is room for speciality certifications that are really deep on health or really deep just on carbon, but they need to be aligned with EU legislation. Taxonomy would be an obvious one for those in Europe so that certifications continue to adopt those standards [and] we don't have to double certify.”

A Surmountable Problem

Simplifying the current system is the main message, according to stakeholders who spoke to Bisnow.

“I would have one standard that measures carbon emissions that aligns the language in how we define a low-carbon building, using actual performance only,” van Doorn said. “And everybody involved, the regulators both from city governments and national governments, use that, as well as the banking or the financial authorities for investment and reporting.”

That is what Partridge is trying to do as lead of the Net Zero Carbon Buildings Standard, though he said he is not blind to the irony that he is creating yet another rating the industry could unite behind but might just as easily see as another benchmark among many. 

Urban Partners Head of Sustainable Finance Rasmus Olsen said he would like to see a clearer hierarchy of certifications and regulations that act as building blocks, allowing asset owners to make claims about their buildings based on firm foundations. And he wants to see priorities aligned around developments that create the least environmental impact.

“I would say to investors who only buy BREEAM Excellent buildings or DGNB Platinum, that's just a little bit lazy, because they don't want to dig into the numbers,” he said.

Edge’s van Oostrom said the system needs to be boiled down and refocused on what actually matters for the planet. 

“There are only two numbers that matter,” he said. “That’s the kilowatts of energy used by a building in its operation and the kilograms of carbon produced per square metre during construction.”

Keeping these two numbers below a certain level — 70 kilowatts per square metre of energy consumed in operations per year and 500 kilograms of carbon per square metre during construction — is the right path in helping the real estate sector meet decarbonisation targets and combat global heating.

“We spend so much time discussing it, but we spend millions on these certifications, and that is money we can’t spend on making our buildings greener,” he said. “There are a lot of problems coming towards us in the world, but we think carbon is first and foremost. And these two numbers really move the needle.”