Why Now Is the Time to Leverage ESG Incentive Programs

More than ever, energy efficiency is seen as a social good, according to David Hodgins of Sustento Group.
David Hodgins

With so many Americans out of work or working from home, residential energy use has increased 15 percent to 20 percent, making the “utility cost burden” a pressing issue as we endure the summer heat. For low-income households who are already disproportionately impacted by the ongoing health and economic crises, this is even a bigger problem.

Meanwhile, fossil fuels (coal and natural gas) have become economically noncompetitive against renewable energy sources like solar and wind, emboldening state and local governments to pursue 100 percent clean energy policies and pass legislation requiring owners of multifamily residential and other types of real estate to benchmark, disclose and reduce energy use in the near term.

These trends will continue regardless of who wins the presidential election this November. If President Donald Trump remains in office, states and cities will redouble their efforts. If Joe Biden wins, the clean energy sector expects a windfall of federal stimulus spending.

Now is the time for landlords―especially those with exposure to affordable or market-rate multifamily residential property―to ramp up portfolio-wide environmental, social and governance work. This is important not only to manage regulatory and transition risk, but to stay competitive and position portfolios to actively participate in and benefit from the clean energy transition.

Building performance/efficiency upgrades reduce energy bills, improve renters’ ability to pay and ultimately provide better risk-adjusted returns. When planned in advance, and in coordination with other upgrades, it’s possible to generate utility savings of 40 percent to 60 percent-plus with incentives covering 30 percent to 75 percent-plus of the upfront cost.

The increased efficiency of new HVAC equipment can also offset the additional power loads required to provide enhanced air filtration, alleviating some of the ongoing costs to mitigate the spread of diseases like COVID-19 and protect residents from exposure to other pollutants.

Start too late, though, and it becomes difficult to incorporate efficiency measures or take advantage of incentives. To maximize financial and environmental returns on ESG investments, planning should be integrated into the pre-acquisition due diligence process, with clear goals and metrics, and support from asset management.

Here are three points to consider as you ramp up your ESG program:

1. Survey the Landscape: Incentive programs vary by geography, so make sure your acquisitions and asset management teams are aware of the incentives available to support their specific projects. In frothy markets like California, incentive programs can be stacked and combined, but programs have different requirements so it’s important to understand what those are well in advance.

2. Work Backwards, Plan Forwards: Incentives can have a dramatic impact on the economics of building performance upgrades. But projects move on their own timelines, and too often, opportunities are missed because the project team doesn’t allow time for applications and related analysis. Collaborate with incentive program managers early, to align project and incentive timelines as closely as possible.

3. Pilot to Portfolio: To achieve zero net carbon emissions by 2050, we need to electrify transportation, industry and buildings as quickly as possible. The good news is that multifamily properties are well-suited for electrification, with technologies on the market today. Choose a “typical” asset or group of assets and set a goal to achieve the deepest greenhouse gas reductions possible. Conduct a pilot to familiarize the team with the technologies, gain experience with incentive processes, document lessons learned and measure results. Use the pilot results to inform your portfolio-wide strategy, identify scale economies, and chart a path to zero net carbon.

The clean energy transition is underway. The technology is here. Now is the time to roll up our sleeves and get to work.

David Hodgins is the founder & CEO of Los Angeles-based Sustento Group.