Real estate is the number-one emitter of greenhouse gases, accounting for 37% of global emissions, according to UN figures. If the world is to achieve globally agreed net zero targets, it is imperative the built environment adapts immediately – a commitment that demands investment of $5trn (£4trn) a year.
This equates to about half the size of today’s managed real estate market, which suggests those responsible for reducing the sector’s footprint face significant competition to secure finance from a finite pool of investors.
Understanding real estate’s contribution to climate change is paramount for property organisations and investors. Financial regulators recognise that transparent, high-quality data is best delivered through the Taskforce on Climate-related Disclosures (TCFD).
The UK, New Zealand and Japan are the first countries to make TCFD reporting mandatory, and other jurisdictions are likely to follow suit.
Property companies subject to TCFD must report their scope 1 and 2 emissions, generated through a building’s use, and scope 3 emissions that arise through construction.
Progress boils down to two key efforts: cutting emissions from new construction; and retrofitting.
In western countries, the relative share of emissions linked to construction is barely 15% of the sector’s footprint: the rest stems from scopes 1 and 2. In other words, while cutting construction-related emissions is vital, the renovation and retrofitting of existing real estate ought to be the top priority.
There are three steps that stakeholders should take:
1. What gets measured gets managed
The first step is to measure environmental performance for each tenant, building or fund, and arrange them in order of merit. How else can you decide which building to refurbish?
Ascertain energy consumption, whether consolidated consumption data is reliable, the heating system or metering plan in use, which meter feeds which building zone and so on.
Not all relevant data belongs to the building owner – the co-operation of tenants, property managers and service providers may be required, and some may not want to share data if they see it as a strategic asset. However, investing in the collection and centralisation of building data is essential. Having complete, relevant information is vital to developing reliable key performance indicators, setting priorities and focusing efforts on the weakest performances or highest risks.
2. Gather insights for good decisions
There are multiple ways to cut scope 1 and 2 emissions, including better equipment maintenance and optimising the management of lighting, heating and air conditioning. Measures may include advanced technology or simple behaviour modification. Whatever the action, remember that you are evaluating not just financial returns but the impact on emissions. Action plans should be evaluated in terms of both overall costs and effects.
Having defined priorities, chosen investments and identified measures, you will need outside support to fine-tune figures, draw up specifications, get quotes or issue a call for tenders to evaluate work costs and find the right supplier.
3. Move forward, now
To achieve net zero, the industry must collectively train a generation of engineers, project managers, contractors, technicians, auditors and consultants. The sector is woefully ill-equipped in terms of qualified resources.
For asset managers, the challenge lies in taking environmental, social and governance (ESG) and climate change into account across all endeavours. This includes evaluating assets for acquisition, establishing investment plans, monitoring asset performance, contracting with property managers, attracting and welcoming new tenants and choosing qualified net zero project managers and general contractors.
One challenge in devising successful portfolio policies is aligning stakeholder interests. Whether in-house or external, property managers are the cornerstone of any net zero strategy, particularly in terms of building insights and tenant relations. Bringing net zero into contracts and incentivisation plans is vital.
Once net zero investment plans are in place, asset managers must prioritise and monitor implementation. The success of these strategies will then be gauged in terms of real impact.
Various building standards have emerged to encourage action, which are more than just a set of rules or a way to please stakeholders. Standards have a real impact on the value of assets and portfolios.
Markets expect assets will be held to increasingly strict ESG requirements, and straying from the path will lead to devaluation. The risks of ‘brown discounting’ and ‘stranded assets’ have begun to eclipse the impact of green premiums. Consequently, it is critical real estate meets expectations.
In summary, our sector faces an ESG revolution, with uncharted territory ahead. While not easy, the road to net zero will create opportunities, cut costs and improve energy independence. The industry must take up the challenge and follow the steps to success.
Vincent Bryant is chief executive and co-founder of Deepki