Climate resilience and the search for ‘zero carbon’: Trends and expectations for sustainable real assets in 2019

The challenge of improving the sustainability of real estate portfolios is not new. However, the increasing pressure from investors, certification bodies and other industry drivers is creating a wave of change toward portfolios that can demonstrate increasingly resilient and efficient asset performance. Furthermore, a growing desire for occupants to have real time access to building performance indicators is changing how landlords manage and operate buildings. There is certainly an expectation from stakeholders that the real estate industry will adapt quickly to protect their investments from a changing political and regulatory environment.

2018 was a year of significant climate change discussion. Following on from the Paris Agreement in 2016, the Intergovernmental Panel on Climate Change (IPCC) released a special report on the impact of 1.5°C global warming above pre-industrial levels. This report sparked a global discussion on how we can best prevent the catastrophic impacts of a warming planet and led to intense negotiations on how to recognize the report in the latest COP24 in Katowice, Poland. The report highlighted the need to aim for net zero carbon by 2050. This has in turn led to an increase in the number of corporates and organizations striving to develop science based targets. Certification bodies and industry working groups also furthered their efforts to incorporate consideration of the recommendations of the Task Force for Climate-related Financial Disclosure (TCFD) in to their guidance.

At Verco, we have already begun to lead our real estate clients along the journey towards a zero carbon future. This in turn is increasing investor confidence and setting the scene for increased asset value, tenant retention, higher rental returns, reduced operational costs and industry leadership. By identifying the core drivers and associated responses that are shaping the real estate markets for 2019 and beyond, we see the following trends emerging:

1. Improved building monitoring and performance
2. Increased interest in the definition of ‘Zero carbon’ and pathways to achieve it
3. More emphasis on climate resilience

Improved Building Monitoring and Performance

The value of an energy efficient building goes beyond energy cost savings. An optimized building delivers measurable improvements to rental profit, asset value and ultimately, securing or maintaining investment. We can expect to see the increase in automatic data collection systems continue into 2019, as both landlord and tenants request more information on buildings’ performance.  Furthermore, there is continued discussion in industry working groups, including GRESB, to understand what constitutes high quality data. This is leading to improved metrics on how to report building performance and compare assets against each other.

By utilizing automated data and effective optimization and visualization tools, building managers can identify the root causes of poor plant performance.  Subsequent plant and controls optimization can result in a reduction in tenant complaints. The coming year will see landlords engaging with their tenants further to improve building operation, cutting energy and maintenance costs, and ultimately improving reporting and transparency for investors.

The NABERS rating scheme in Australia has led to significant reductions in the energy intensity of its total commercial building stock. Critical to this was addressing how landlords managed the operational performance of a building. The NABERS rating is now priced into the value of a building, and a higher rating (more energy efficient building) yields higher rent. Now others are catching on. In the UK, the recently launched pioneer phase of the Design for Performance (DfP) initiative seeks to improve the UK’s commercial building performance through a select group of industry leaders. This could well be the catalyst of a systematic change in how commercial building stock is reported and ultimately ranked.

The link between high performance and high value is becoming increasingly clear. As the evidence basis for this grows, leaders in the industry will be seeking to take full commercial advantage and avoid the risk of stranded assets.

Increased interest in the definition of ‘Zero carbon’ and pathways to achieve it

Optimizing the performance of real assets globally is pivotal in achieving the ambitious carbon reduction goals outlined by the IPCC’s report on the 1.5°C global warming scenario. Setting unambitious targets to reduce energy consumption and associated carbon emissions is no longer enough. Investors, tenants, and industry bodies will be seeking evidence of dedicated efforts to achieve zero carbon emissions by 2050. It will also be important for the industry to agree on a clear definition for net zero.

It is therefore inevitable that this year will see an increase in real estate investors seeking effective and forward thinking targets. The Science Based Targets Initiative (SBTi) has provided the Sectoral Decarbonization Approach (SDA) as a methodology for developing carbon targets that match the goals of the Paris Agreement of a 2°C increase. We expect to see a growing number of real estate companies looking to set targets, or at least align their targets, with the SBT approach. But with the devastating impact of just a 1.5°C increase already making the weaknesses in this method clear, many real estate companies will want to develop more ambitious targets if real assets are to remain attractive and sustainable investments. As scrutiny of asset performance by sustainability teams and asset and fund managers increases in 2019, leaders will be looking to deliver on this heightened ambition with net zero carbon targets.

However, achieving zero carbon will require changes to energy supply infrastructure and cannot be practically achieved by building standards and improvements alone. We expect more interest in green tariffs, renewable PPAs, offsetting and renewable heat options.

More emphasis on climate resilience

Real estate often forms an integral part of a city or community. As such, real estate managers and investors hold a significant responsibility to ensure that these assets remain stable, sustainable and operational in the face of the disruptive consequences of climate change. There is little debate that climate change is both an environmental risk and a financial risk, and the recommendations of the Task Force on Climate-related Financial Disclosure’s (TCFD) are becoming increasingly integrated with investor decision making.

Certification bodies, such as GRESB, are now introducing criteria specifically targeted at reviewing how real estate is considering the risks and opportunities of climate change. How will asset managers meet the demand for increased transparency on climate resilience? Will funds risk stranded assets if they fail to develop appropriate assessments? Expect to see the industry look to answer these questions as we move through 2019.

Summary points

We are seeing investors request increasing levels of climate-related reporting and evidence for investment in building performance improvement. This coming year will set the groundwork for some exciting developments in how the industry assesses and reports on resilience of real estate assets and their role in the global net zero carbon agenda.

Written by Craig Morey, Consultant, Verco