Sunday, September 11, 2016

Socially-Responsible Real Estate Development (part I)

I am trying to build a MOOC (an open course on line) that will help anyone engaged in real estate development, or any aspect of city redevelopment, think hard about their social responsibilities.  To date, most discussion of social responsibility focuses on what is called Corporate Social Responsibility (CSR).  That is, what do  corporations need to do to meet their social responsibilities?  CSR is basically a form of “corporate self-regulation” or “active compliance” with the “spirit of the law,” “ethical standards” and “national or international norms”.  By now, after several decades of discussion (and some serious scholarship), CSR advocates are prepared to make the case that corporate actors will have an easier time attracting the workers they want, enhancing their reputations and differentiating their brand, reducing regulatory scrutiny and improving relationships with their suppliers if they take environmental sustainability seriously, get involved in the communities where they operate (often through charitable giving) and avoid false advertising (and engage is what is known as ethical marketing).  So, if corporations do “the right thing,” engage in corporate philanthropy and behave ethically they can count themselves as socially-responsible.

I have a different view.  Imagine a large real estate investor who is thinking of building a mega-project outside his own country; say, in a developing country. With the help of local partners, he finds a site for a large, gated, mixed-use development that will take a decade or more to complete and cost billions of dollars.  If he succeeds, he will make a lot of money.  He hires consultants (some local, some from his home country) and prepares a marketing brochure that includes images of the amazing project he has in mind. He initiates preliminary conversations (behind closed doors) with key political figures in the region to win their support.  And, based on these conversations, he takes on local equity partners.  He is assured by these partners that they will have smooth sailing when it comes to getting the regulatory approvals they need. He begins to make highly visible donations to local business organizations and seeks as much media attention as he can get.  In the formal submissions he makes to whatever agency has final review power, he highlights his commitment to “green” building and promises to set aside a share of construction jobs for local workers.   Most CSR-types would say that he is acting in a socially-responsible way.

As he begins to market his project, it is clear to everyone (from the images on the giant posters on the site and the materials handed out in the showroom) that the project is aiming to attract a class of international investors and residents who look nothing like the vast majority of people in the region or in the communities near the site.  His media consultants succeed in planting newspaper stories highlighting the tax revenues his project will generate for the local and state government.  These stories also refer to the substantial grants that the national government has offered the developer and the local community to underwrite the infrastructure required within the gated community.  The developer argues that his mega-project will be almost self-sufficient in terms of its energy production, waste disposal, and provision of social services. In the process of filling wetlands and assembling the land for the proposed project, however, environmental interest groups begin to complain that the project will be diverting too much water away from existing settlements.  And, they are concerned that the gated community will not be full integrated into (or managed by) the local and metropolitan agencies and service systems that already exist. Some international environmental organizations express worries as well.   They are concerned that internationally protected environmental areas will be sacrificed. Some local political groups ask why there has not been a more careful study of the potential environmental and social impacts the proposed project might have.  The developer points to (1) the extensive studies he has done that led to the “green” design he is pursuing; (2) the “approvals” he has already gotten from local and state officials; (3) the charitable contributions he has made and will make to local organizations because he intends to be a good neighbor; and (4) his record (in his own country) as someone who takes his corporate social responsibilities seriously. He claims to have met all prevailing regulatory requirements.

It is easy to see why corporate philanthropic contributions do not necessarily equal socially-responsible development.  Merely generating some “social good” beyond the interests of the developer is not enough. Reaching informal agreements (or winning political support from a few key officials in the region or the country) is not the same as ensuring that the concerns of local stakeholders (i.e. the people most likely to be adversely affected by a mega-project now and in the future) are met.  Obeying the law, to the extent that regulatory requirements are spelled out and enforced, is not enough.  Claiming that you “always” take account of your “triple bottom line” (i.e. seeking to have a net neutral environmental impact, a positive social impact and, of course, achieve financial profitability), and that you adhere to ISO 26000 norms (the best practices prescribed by the International Standards Organization) do not guarantee socially-responsible real estate development.

You could imagine how a massive real estate project could displace long-time poor residents of an area, claim a disproportionate share of scarce natural resources, radically alter culturally significant patterns of everyday life and leave a number of groups worse off, even as the developer demonstrates that his project will have a positive impact, he will behave ethically, and he will make philanthropic contributions to the area.  The balancing of competing stakeholder interests, now and over time, is the issue. Values and conflicting interests need to be reconciled in a transparent way, and not all can be easily factored into a comprehensive benefit-cost analysis.  The problem for all the parties is how to meet their conflicting interests in an effective and efficient fashion. I don’t think we can rely on standard government agency reviews to achieve such balance.

Well then, how can such balance be achieved?

My new MOOC (Socially-Responsible Real Estate Development: Using Environmental and Social Impact Assessment to Reconcile Conflicting Interests) -- that will be offered in 2017 by the Sam Tak Lee Laboratory for Real Estate Entrepreneurship at MIT  -- will teach how conflicting interests can be balanced. My focus is on the process of social and environmental impact assessment. This is the only way to guarantee the direct engagement of all relevant stakeholders; and, the ONLY way to achieve socially-responsible real estate development on a case-by-case basis.  The good intentions of the developer are not enough.  The physical design of the project is not in-and-of-itself a measure of socially-responsible real estate development.  It is only by engaging representatives of ad hoc stakeholder groups, with the assistance of a professional (neutral) facilitator, in a joint problem-solving process, that socially-responsible real estate development can be achieved.  The problem-solving I am talking about needs to focus on how the developer, in conjunction with local stakeholders, regulators, independent technical advisors, and non-governmental advocacy groups can ensure that conflicting interests are resolved fairly,  in ways that take account of the culture and values of the existing area.  The tools for doing this are well developed:  environmental impact assessment (EIA), social impact assessment (SIA), and collaborative adaptive management (CAM).  I also argue that these tools should be used regardless of the extent to which they are legally required.  My measure of whether socially-responsible real estate development has been achieved is the extent to which good-faith efforts have been made to meet the conflicting interests of the relevant stakeholders, taking account of technically-sophisticated forecasts and assessments produced by analysts working for all the stakeholders.

In the MOOC  I  review exactly what ought to be done at each step in such a collaborative review process. And, I think I can make this case (although slightly differently) even in countries that have less of a democratic tradition of public engagement. I review and illustrate the practical aspects of getting this work done in a reasonable amount of time at the lowest possible cost.   And, I emphasize the important role that only a neutral facilitator can play once a large number of stakeholders agree to participate in face-to-face problem-solving.  Of course, the interactions I am describing do not substitute for or pre-empt government decision-making.  They precede it.

In my next blog post, I will review in more detail the ways in which EIA, SIA and CAM have been used (and abused) over the past several decades in the United States, Europe and elsewhere.  In this first post, my goal was to reframe the definition of social-responsibility – moving away from the focus on corporate philanthropy. I want to make the case that creating “shared value” from the standpoint of all the parties involved is a more appropriate way to define social responsibility.  Most of all, I want to challenge the assumption that traditional entrepreneurial models (i.e. doing well by doing good) can achieve socially-responsible real estate development.  More is required, particularly a commitment to direct stakeholder engagement.