1. Introduction
The pursuit of rapid economic growth has made people focus merely on economic profits, and neglect what may have thereby been sacrificed, for decades or even centuries. This has led to several severe consequences, such as environmental pollution, climate change, biodiversity loss, etc. The continually worsening situation has raised people’s awareness of how their activities can affect their surroundings and urged us to find innovative practices that could mutually benefit economic growth and environmental sustainability. This social phenomenon has led to the popularity of corporate social responsibility (CSR) in recent years. The concept of CSR is based on the assumption that social, environmental and economic perspectives should all be considered in the business operation process by stakeholders when coming up with investment decisions [
1,
2]. Thus, it can simply be defined as strategies that firms use to conduct their business in an ethical and society-friendly way.
The sustainability revolution is also occurring in the real estate sector. This paper specifically focuses on “green building” as the application of CSR in the environmental dimension. In fact, the CSR practices in real estate may play the most critical role in sustainable transformation, because building and construction comprise the world’s largest consumer of energy and producer of carbon dioxide (CO
2) emissions (accounting for 36% of global final energy use and 39% of energy-related CO
2 emissions) [
3]. Hence, progress towards green buildings and construction is essential to sustainable transformation and has grown significantly and rapidly over the past 10 years, with the aim of supporting public health and well-being, as well as the economy and the environment [
4]. As a result, it is believed that there will be a new wave of investment in the real estate sector in which sustainable building will be set as a top priority.
The increased environmental awareness in the real estate industry has created a demand for the growth of voluntary certification systems such as Leadership in Energy and Environmental Design (LEED), Energy Stars, etc. These rating agencies have been initiated by government organizations, aiming to assess the degree of environmental friendliness and energy efficiency of construction, so as to quantify the standard of building sustainability. This study focuses on LEED green certification because it is considered the most widely used green building rating system in the world. LEED was developed by the US Green Building Council (USGBC), and its certification has been evaluated as an internationally recognized symbol of sustainability achievements.
Besides the several major contributions green building makes to the environment, there is a growing concern about whether or not these certified buildings affect financial performance positively. Most of the previous studies have focused on how greenness affects the properties’ values. Green buildings have been found to generate higher premium rental rates and higher occupancy rates [
5,
6], longer economic lives [
7], and higher profits for investors and developers [
8]. Moreover, previous studies have found that real estate firms and Real Estate Investment Trusts (REITs) with green certification have higher stock returns [
9] and lower operating expenditure [
10]. Despite extensive research on this topic, the previous studies have mainly focused on the profits of the green building owners, e.g., on the accounting and market-based financial performance. So far, there is an absence of research examining capital market participants’ perceptions of green building, e.g., the cost of equity capital.
The cost of equity capital is defined as the return a company requires, in order to determine that an investment meets its capital return requirements, representing the compensation the market demands in exchange for owning the asset and bearing the risk of ownership. As a result, this indicator performs an important role in affecting corporate investment and financing decisions and is one of the substantial determinants of film value. Shleifer and Vishny [
11] suggested that a lower cost of equity capital means that the savings can be retained or used in other investments. Accordingly, firms prefer a lower cost of equity. This research aims to provide an overview of how financial performance reacts to green building practices through the channel of the cost of equity capital.
Another question that we intend to answer in this research is whether there is a relation between corporate governance and the green building intensity of REITs. At present, there is still little understanding of the circumstances under which firms are more likely to invest resources in sustainable goals [
12]. Since outside shareholders have difficulty evaluating the profitability of green infrastructure projects, managerial discretion is more likely to be responsible for such investment decisions. Managerial discretion is an important element of the corporate governance mechanism, and it has been suggested that better corporate governance results in higher firm valuation and performance [
13,
14,
15], stock returns [
16], and stock market liquidity [
17]. Therefore, it is likely that the corporate governance mechanism could affect the green building practice intensity of REITs.
The ownership structure is one of the most important elements of the governance mechanism, as it can have an enormous impact on the incentives of managers, thereby affecting the efficiency of the firm [
18]. It is assumed that firms’ strategies are conducted based on the motivations and benefits of the parties involved in formulating and making decisions in the firms. Meanwhile, the ownership structure is defined by the distribution of equity with regard to votes and capital, but also by the identity of the equity owners. Therefore, it would be interesting and significant to examine whether the ownership structure is the driving force behind the green building practice intensity of REITs. This research will focus on two proxies for ownership structure, namely, institutional holdings, and ownership concentration.
In short, through analyzing the United States Real Estate Investment Trusts (US REITs) in the period between 2000 and 2016, we conduct empirical studies to determine, firstly, whether or not green building practices can help improve the financial performance of REITs in terms of cost of equity, and secondly the relationship between corporate governance and green building implementation intensity. Our results do not merely fill the research gap in identifying the attributes that characterize green building in REITs, and their financial performance from the perspectives of capital market participants, providing beneficial implications for REIT investors, but also, and more importantly, should encourage green building practices due to the finding of mutual benefits in terms of economic profits.
The remainder of this research is organized as follows.
Section 2 provides a review of the theory and literature in relation to green building implementation, cost of equity, and corporate governance.
Section 3 discusses the methodology, including the selection of the sample, calculation of the variables, and formation of the regression equations.
Section 4 presents the research results, and
Section 5 concludes.
5. Conclusions
The growing awareness of environmental issues has led to the booming interest in green buildings. Thus, trying to understand whether or not, and if so how, green building practices could benefit both the economy and environment is important. Although numerous research works have been carried out, they have mainly focused on the profits of sustainable building owners, e.g., through accounting and market-based financial performance. It is still unclear whether green building practices can benefit capital market participants.
The empirical results of this study provide insights into the effect of green building certification on REITs’ financial condition, as well as the role corporate governance, specifically ownership structure, may play in promoting greenness. The first model of this study aims to unveil the effect of green building certification on the cost of equity capital. We find significantly negative relationships between the greenness of the REITs and the cost of equity capital, indicating that the participation of REITs in the LEED green building certification scheme significantly reduces REITs’ cost of equity capital. Apparently, this motivates REIT managers to join the LEED green building certification scheme. Although prior studies have suggested that green building involves higher costs during the development period [
63], the savings obtained from the lower cost of equity capital for REITs would bring benefits from the development of green buildings. Another conclusion from the empirical results is that REITs will experience a lower cost of equity capital as they become “greener”. This should encourage managers not just to participate in LEED green building certification, but also to seek higher rankings in the green building rating system.
The second model emphasizes the effect of ownership structure, as an element of corporate governance, on green infrastructure implementation. We find evidence that corporate governance practices, measured by both institutional ownership and ownership concentration, have positive impacts on the amount of resources firms devote to green building. That is, with an increase in institutional holdings and a higher level of ownership concentration, REITs tend to own more green infrastructure. In other words, corporate governance practices implemented to align the interests of shareholders and managers positively affect green building adoption. This suggests that good corporate governance encourages green building as a way to build good public relations and thereby enhance firm performance. In this sense, an effective control mechanism might provide the foundation for green building implementation.