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April 12, 2010 | Comments 6

LEED Certification = Greenwashing?

By Andrew King, Ph.D.

Andrew King, Ph.D.

A few weeks ago, my students and I discussed a local drug company's new LEED platinum building. The building was the first to be given the highest level of certification for environmental performance by the US Green Business Council. By building it, the drug company received voluminous and tremendously positive press coverage. And yet, the more my class and I looked into it, the more we doubted the buiding's merits.

According to the information we could obtain, several of the credits needed to boost the LEED certification from Gold to platinum came from additional steps to conserve water and use green power. Although water and energy conservation seem praiseworthy, the real question that should be asked by anyone interested in sustainability is: "do these investments improve total human happiness?" And according to our calculation, in the case of this building the answer was an emphatic "NO!" The building's carbon reductions were obtained at a cost more than double that required to purchase carbon offsets. Similarly, the water savings turned out to cost a little less than $4 per thousand gallons - a number comparable to the most inefficient means of producing fresh water. By our calculation, the drug company could have achieved the same energy and water objectives at a lower cost and had some money left over to give back to its investors - many of whom have been upset by the firm's recent poor financial performance.

If the managers of this company really wanted to spend the same amount of money in improving social welfare, how should they have spent it? By using their comparative advantage in drug discovery to find drugs for neglected diseases, we concluded. For example, they could have invested more money in programs to find cures for diseases like Malaria or tuberculosis which are of growing concern worldwide. In fact, the company has a program to do just this, but its annual budget is a fraction of the money required to push their building over the LEED platinum threshold.

My class and I concluded that just as we should criticize firms for inefficiently failing to seize profitable ways to reduce their effect on the environment, so should we castigate them for spending money wastefully to reduce their environmental impact. A firm deserves praise, we concluded when it tries to maximize human happiness, and not when it acts not to reduce energy consumption at any cost.

Unfortunately, not all stakeholders respond as economists think they should, and as I mentioned earlier, the building was widely praised. When I asked a local elected official about this at a recent dinner party, her response was "But being the first platinum building made a big difference to city officials. The company got a lot of good will." I said, "But wouldn't they have gotten as much good will for using the money to work on drug-resistant TB or malaria?" Her response was "No, they [local elected officials] don't care at all about that." This surprised me because drug resistant TB is already a health problem, and malaria may become one - particularly in low lying areas like my home town.

As economists and management scholars, we often assume that firms are acting in response to well-reasoned stakeholder demands. The resulting give and take between firms and stakeholders, we hope, brings about a situation where both parties are better off. But the story of this particular LEED building suggests that such interactions can also lead to wasteful outcomes. Under what conditions do good outcomes emerge from interactions between stakeholders and firms, and when and how do things go wrong? ARCS scholars like Tom Lyon (Michigan), John Maxwell (Indiana), Mike Lenox (Darden) and I are working on exactly this issue. We are beginning to understand when stakeholder pressure leads to good outcomes and when it leads to green washing and waste. More on that in my next post.

6 Comments | Leave a comment

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Interesting arguments. A few additional considerations:

1. Part of the premise of your argument is that sustainability ought to be exclusively human-focused, as evidenced by ("do these investments improve total human happiness?"). I think sustainability ought to also consider other species, both of which might be more enhanced by improving air and water quality.

2. Even if constrained to human happiness (which might be heavily weighted to the short-term) it's hard to know off hand what benefits the marginal dollar would actually elicit for water and air quality vs. reducing disease.

3. A wise man once reminded me of the importance spillover effects. Such effects might well be present with investments in green building practices. If a green building signals something desirable about management, it could attract higher caliber workers and venture partners. And green buildings might actually deliver on their promise to enhance productivity via better indoor air quality. If these effects take hold, either or both could actually enhance the productivity of drug discovery efforts.

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Interesting points. Deconstructing construction?

Some observations/comments:

1. LEED is not meant to be sustainability in general. It is an environmental set of standards. Social and economic issues are not part of these standards. I have heard that many LEED certified buildings are some x% greater in cost (something like 15%, but don't hold me to it). Also, whether slave labor or underpaid workers are supplying material or erecting the building is not relevant for the LEED requirements. Thus, the triple bottom line of sustainability is not an issue.

2. LEED is not anywhere near perfect, but it is better than nothing. There are attempts to improve the environmental performance of buildings, if nothing else, raising awareness of this activity. Builders are not laughing when they are asked about LEED and are seriously considering the environmental issues of the built environment. I think this is one of the 'spillover' effects Mike mentions. The benefits are not always very direct and tangible, as much as stockholders and investors would like.

3. There is another problem with LEED something that costs millions to do, gets as much credit as something that costs hundreds. There is no real 'business' or 'environmental' case associated with it. That is the costs are not really part (maybe they shouldn't be?) of the LEED requirements, as mentioned. But there is also a poor balance of environmental criteria. Is putting up renewable energy systems the same as putting bike racks outside the door? LEED thinks so. The credits given are the same no matter the environmental or business (or social) impact.

4. What is greenwashing? It is a term that does not have a clear definition. Every organization causes some environmental degradation. I know of no organization that is inter-generationally sustainable for perpetuity. Thus, any organization that makes a claim, gets a certificate, etc. is greenwashing. But, at least they are making the effort. But, if everyone is greenwashing, it means very little. These things like LEED and other certifications are drops in a very big lake, but at least they are contributing in some way.

5. In the case of your project, some things may be considered poor decisions (e.g. a cheaper alternative) but we really don't know what is causing the decision to have been made in a particular way. It could be because of the systemic aspects of construction (one aspect requiring a little more expense while another element more than makes up on savings). It could be because of poor management decisions or needing to get a quick solution. It could be because, as you assert, they didn't talk to everyone, or the most critical stakeholders involved. Maybe the most critical stakeholder is the supplier who knows someone well on the management team? All these things take time and planning. Not all organizations are runperfectly and not all organizations (or people) are born knowing all. If this is a mistake economically, not sure that it is, then they learn from it. But is it a mistake environmentally? It's a wash in that situation.

6. Carbon offsets? Do you trust those? Not sure if things are that easily calculated.

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Mike
1. Part of the premise of your argument is that sustainability ought to be exclusively human-focused, as evidenced by ("do these investments improve total human happiness?")...
a. Yes, this is my logic. Honestly, I can see no other. Even if we tried to follow some sort of Kantian Categorical Imperative, any other test would fail. Would we really wish to pass a general world-wide law (his first test for the CI) so that no species went extinct or that no changes were made to the planet? Does not having the law make logical sense (another test)? No. So, no principal beyond a utilitarian logic makes sense to me. We may want to preserve species because they increase human utility, but that is consistent with what I said.
2. Even if constrained to human happiness (which might be heavily weighted to the short-term) it's hard to know off hand what benefits the marginal dollar would actually elicit for water and air quality vs. reducing disease.

a. One can never know exactly, but let us reverse the logic. Is there any reason to believe that the company had a comparative advantage in having a green building designed for it? Did it possess some unique knowledge or capabilities? No. Would a social planner have allocated resources to this company to have them make these investments? No. Now, consider its ability to develop drugs? I think the answer to both questions is YES.
3. A wise man once reminded me of the importance spillover effects. Such effects might well be present with investments in green building practices. If a green building signals something desirable about management, it could attract higher caliber workers and venture partners. And green buildings might actually deliver on their promise to enhance productivity via better indoor air quality. If these effects take hold, either or both could actually enhance the productivity of drug discovery efforts.
a. But then why certify? If workers like the building they will want to work there regardless of whether it is LEED Platinum or LEED plutonium. As to the “signaling” argument. That is the subject of my next blog.
I understand that we all want to hope that companies will save us from ourselves. And, I understand that cynicism and pessimism are dangerous perspectives. However, we must be careful not to fall for greenwashing and thereby reward counterproductive actions.

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Interesting topic. Adding to Mike's considerations, here a few
provocative thoughts.

1) I could be completely wrong but a brand new green building for many companies is a sign of power and a way to enhance the company's
reputation especially in the local community. It is a truly marketing product. Is it a deceptive use of marketing? I am not sure. Pushing your argument to the extreme, we could say that the drug company should not waste money in expensive buildings or even in marketing, on the contrary they should solely focus on fighting illnesses and maximizing human happiness.

2) Had it been a Tobacco company would you make the same argument?

3) Another question would be whether LEED certification and eventually other types of green certifications are truly effective.

4) Looking back at your example, the proximity dimension could be interesting to explore in trying to understand whether stakeholder pressure leads to good or bad outcomes. What is good locally (the new fancy green building for the local
community) may not be necessarily good globally.

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Andrew, are you including a temporal element to the logic of "maximizing human happiness" in your research? What makes people happy today may not tomorrow, and the results may be too late fix. Know what I mean--just curious.

That said, as one involved in the fee-based world of green and sustainable education and certification (and hopefully change-inducing) programs. The question of investment of dollars by our members to these efforts--especially investment of dollars for the assistance and oversight from a USGBC or other organization--is a constant internal question. As a mission-based organization, how do we affect the greatest amount of change? I guess I end up falling back on my friend Voltaire: "the perfect is the enemy of the good (paraphrased)."

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Corporate sustainability, would you say that a Corporation such as UNFI and Steve Spinner that thinks if he just puts a couple of solar panels on a building, but refuses to respect his on workers right`s can claims to be a GREEN CO. or should I say a company that say it`s driven by sustainability.

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