Real Estate: Creating a framework for a zero carbon future
The real estate industry is at a crossroads with climate change and the global drive towards a zero carbon future. We’re acutely aware of the issues that face us and now we need to move forward with a consensus on action. There is substantial pressure on owners, occupiers and funders of real estate to perform in a way that makes the lowest impact on our planet.
That’s already affecting the sources of equity, with investor pressure driving investment managers to set and reach targets on energy performance of buildings, but it will also start to affect sources of debt.
The rise of green finance
Financial institutions, such as the Bank of England and the European Central Bank, are increasing the requirements of financial organisations to properly price climate risk, whether it is debt or bonds. Sustainable investing and the rise of green finance will be common threads across all our markets.
There is pressure from lenders to real estate to better understand the financial risk around carbon and the climate risks of buildings, and factor that into decisions about who they lend to.
It’s not just going to be about penalising borrowers and assets that have poor performance: it’s also about rewarding good performance. There will be cheaper debt and better terms for properties with less climate risk, and for those that are considered more sustainable.
For the industry, the starting point is to work hard to transform buildings to be net zero, with the total amount of energy they use being roughly equal to the amount of renewable energy created on site or nearby.
Smart decisions from good data
The most important aspect for this is having robust data, and making sure that data is available to everyone. Owners and managers need to be able to respond to the fiduciary responsibilities through consistent and comparable statistics.
They need to be able to make smart decisions, set accurate targets and monitor the operational performance of buildings. The right information will help us put in place a series of actions that we are confident will have delivered the impact we need in 10 or 20 years’ time.
We have seen great success with some of the existing measurements, such as the Global Real Estate Sustainability Benchmark (GRESB), which is the principal way of benchmarking fund-level environment, social and governance (ESG) and BREEAM, a global standard for asset level performance.
However, if you look at the percentage of the overall market that is covered by some form of assurance-type validation or disclosures, it is pretty small. There’s a huge part of the market to play for.
One of the other main issues will be new buildings versus old. A lot of emphasis for change goes into new buildings, but the reality is that the built environment of 2050 already exists. The majority of buildings that will be around in 30 years’ time have already been constructed.
Retrofitting older buildings
Focusing on new buildings is positive but, to make an impact, the mitigation has to be in refurbishing and retrofitting older buildings. It is more challenging for investors, owners and occupiers, but that’s where data comes in again.
You need to understand how a building is actually performing to make informed decisions. An old building doesn’t necessarily perform badly. Or, if you want to make a building that has a 70-year lifespan rather than 40, then there are significant upsides from a carbon perspective. But designing for that longevity will have cost implications.
Landlords’ relationships with their tenants are also evolving as the move towards flexible space means they’re in more of a partnership. The roles and responsibilities of both sides are blurring, but occupiers place greater expectations on landlords, and that will extend to being proactive about carbon and mitigating climate risks.
Governex is an ESG advisory business that helps businesses with corporate governance as well as answering the question of how they make positive contribution to the environment and social issues.
We help organisations implement the right shift in focus from a purely financial commitment to include environmental, social and governance commitments. All in the context of meeting business purpose, strategy, integrity and diversity.
Produced by Alan Somerville & Savills
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