How do you include sustainability in your financial models?

1 Define your sustainability goals

Before you start building your financial model, you need to define your sustainability goals and how they align with your project vision, market demand, and stakeholder expectations. For example, you may want to achieve a certain certification level, such as LEED or BREEAM, or reduce your energy consumption, carbon footprint, or water usage. You may also want to consider the social and governance aspects of sustainability, such as community engagement, diversity, and ethics. Your sustainability goals should be SMART: specific, measurable, achievable, relevant, and time-bound.

2 Identify your sustainability costs and benefits

Once you have your sustainability goals, you need to identify the costs and benefits associated with them. Costs may include upfront capital expenditures, such as installing solar panels or green roofs, or ongoing operational expenses, such as maintenance or monitoring. Benefits may include lower utility bills, higher rental rates, lower vacancy rates, tax incentives, or premium pricing. You should also factor in the opportunity costs and risks of not pursuing sustainability, such as regulatory compliance, reputation damage, or lower resale value.

3 Incorporate sustainability into your cash flow projections

The next step is to incorporate your sustainability costs and benefits into your cash flow projections. You can use various methods and tools to estimate the financial impact of sustainability on your project, such as net present value (NPV), internal rate of return (IRR), payback period, or sensitivity analysis. You should also use appropriate discount rates and assumptions that reflect the uncertainty and volatility of sustainability factors. For example, you may need to account for changes in energy prices, carbon taxes, or consumer preferences.

4 Evaluate your sustainability performance and returns

Finally, you need to evaluate your sustainability performance and returns against your goals and benchmarks. You can use key performance indicators (KPIs) and metrics to measure and monitor your progress and achievements. For example, you can use the Global Real Estate Sustainability Benchmark (GRESB) or the Sustainability Accounting Standards Board (SASB) frameworks to assess and report your ESG performance. You can also compare your returns with your peers and competitors, as well as with the market average and expectations.

By including sustainability in your financial models, you can make better decisions and create more value for your real estate development projects. Sustainability can help you optimize your costs, revenues, risks, and opportunities, as well as enhance your reputation and credibility. You can also contribute to the global efforts to combat climate change and social inequality, and create a positive impact on the environment and society.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?