MIT for Managers: Can You Afford to Build Green?

This new blog from MIT Sloan Management Review explores ideas from different corners of the MIT community that are relevant to business executives. In this space, we will introduce you to research, people, and events you might not otherwise encounter — things we hope you find useful and perhaps provocative.

How much more does it cost to make a building “green”? Most people assume it’s a lot. Over the past five years, John Sterman, MIT Sloan School of Management’s Jay W. Forrester Professor of Management and the director of the MIT System Dynamics Group, has conducted dozens of surveys using MIT’s LEED-certified Sloan School building as his case in point. Most respondents think the price tag on building sustainably is as much as 20 to 50% more than conventional construction. But based on Sterman’s analysis, the real cost premium can be a small fraction of that.

“It would be great if managers developed sustainable buildings, products, and processes because it’s the right thing to do,” Sterman told his students in a lecture in April, 2016. “But you’re also going to have to make the business case.” And one way to do that, he said, is to expand the boundary of your analysis.

To demonstrate, he used the recent experience of MIT Sloan. When the school first began exploring the idea of constructing a new “headquarters” in 1998 to bring its far-flung faculty offices, classrooms, and common spaces into one location, making the facility sustainable was not part of the mandate. At the time, oil was less than $20 per barrel, and few organizations were interested or experienced in building green. But Sterman, who was tapped to co-chair the building project along with Professor Paul Asquith and Cindy Hill, director of capital projects, was determined to make the building as energy efficient as possible. To support this objective, the committee hired a green design consultant and used an “Integrated Design Process” to design the building as an integrated system, in contrast to processes where, for example, decisions about siting, building exterior, HVAC, interior design, etc. are made largely separately.

It paid off. Like many organizations, “MIT is a data-driven place,” Sterman says. “You have to make the argument with data before people will act.” When the planning team presented the project to the school’s dean, they emphasized the building’s opportunities for win-win investments: actions that lower energy and greenhouse gas emissions while generating high financial return. Extra insulation, high-performance windows, a tight envelope to reduce air leakage, and other investments would help make E62 the most energy-efficient building on campus. This meant the HVAC system could be about half the size of what it would be in a conventional building and the electrical substation could be smaller, offsetting some of the costs of the insulation, windows, and other efficiency features. The planners were able to demonstrate that, despite slightly higher capital costs, the reduction in energy costs would yield positive net present value.

Based on the strength of this argument, the dean endorsed the sustainability focus. Construction, which began in 2007, was completed in 2010 on time and on budget. As an investment, the new building is paying off handsomely. Electricity use is 42% less than other comparable MIT office/classroom buildings, and energy for heating and cooling are about 70% less, yielding annual energy savings of more than $500,000. But how much higher were the construction costs? For the building itself, the net additional capital costs of the sustainability features amount to about $2.3 million, just 1.6% of the project cost, far less than what most people expect.

But expanding the boundary of the analysis revealed even larger savings. MIT, as owner-operator, supplies most of the electricity, steam, and chilled water for its buildings. A conventional building would have required the university to invest about $1.9 million more to expand its heating and cooling capacity to cover the new demand. Taking these avoided capital costs into account, the net incremental capital cost of building green at MIT Sloan wasn’t $2.3 million but more like $340,000 — about 0.25% of the building’s cost. The net present value of the sustainability features ends up being nearly $10 million, and the payback time far less than a year — a substantial win-win.

It took committee members years of persistence and countless meetings, through a tough fundraising environment and two MIT administrations, to fulfill the vision for a sustainable home for the Sloan School. MIT is now engaged in a major program of campus renovation and renewal, which is building on many of the lessons learned in the MIT Sloan project. Sterman has documented the “capability trap” that impedes making sustainability improvements in many organizations — and how to overcome them — in a new paper in the journal Academy of Management Discoveries.