Transaction Management and the Transition to ‘Net-Zero’

Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position. Please refer to official GRESB documents for assessment related guidance.

Ahead of COP26, due to take place in Glasgow this November, the Intergovernmental Panel on Climate Change has released its most recent report on climate change. The report reaffirms it is unequivocal that human influence has warmed the atmosphere, ocean and land, and that limiting human-induced global warming requires limiting cumulative carbon emissions, and reaching at least net zero carbon.

Unfortunately, what ‘achieving net-zero’ means can vary depending on whom you ask, while how you get there can be equally uncertain. The motivation may be a genuine concern for the environment, the need to meet market expectations, or delivering on the demand of stakeholders or investors. What is in no doubt is the increasing importance of this requirement within the real estate asset and fund management space.

The approach to achieving net-zero can vary significantly between funds and portfolios; in fact, different investment strategies require different decarbonization strategies. Core funds tend to be characterized by high-profile tenants with long-term leases, making it difficult to undertake major retrofit works when needed. However, the profile of these funds is such that many are likely to have their decarbonisation commitments and so are more than willing to work collaboratively to find a solution. On the other hand, value-add funds may have more opportunities to undertake major works but may be limited by shorter hold periods, making it difficult to track progress or set meaningful targets.

The approach to achieving net-zero can vary significantly between funds and portfolios; in fact, different investment strategies require different decarbonization strategies. Core funds tend to be characterized by high-profile tenants with long-term leases, making it difficult to undertake major retrofit works when needed. However, the profile of these funds is such that many are likely to have their own decarbonisation commitments and so are more than willing to work collaboratively to find a solution. On the other hand, value-add funds may have more opportunities to undertake major works but may be limited by shorter hold periods, making it difficult to track progress or set meaningful targets.

For development projects, a collaborative approach is the core to any decarbonisation effort. Decisions made at an early stage can lock in carbon for the life of the development, if not a large portion of it. For example, the choice to install a heat pump versus a gas boiler fundamentally affects the design of the distribution equipment in an asset. Furthermore, plant equipment may typically have a useful life of 15-20 years, with building fabric elements sometimes longer. In this context, a net-zero target of 2040 or 2050 no longer seems far away.  The opportunity to make significant changes to an asset is usually limited to within the normal refurbishment cycle. While changes can of course be made outside of this cycle, this would be a costlier approach and would mean cutting short the useful life of a component.

Embodied carbon within building elements is also a major source of carbon emissions. Again, working collaboratively and ensuring ESG is integrated throughout is vital for minimizing emissions. A development-specific life cycle or whole life carbon assessment should be completed at the earliest opportunity in the design to examine the most material and intensive sources of emissions. Quantifying carbon through this recognized methodology enables the early adoption of necessary design measures to create a resilient asset that retains value as we progress to a low-carbon economy. In the same way, how life cycle costing can provide clarity on an asset’s return on investment and net cash flows, the data yielded from Whole Life Carbon Assessments can provide this same strategic insight to financially plan the asset’s carbon commitments.

A similar level of care is also needed when assets are acquired. Transition risk assessments, where the energy and carbon performance of assets are benchmarked against market expectations have become the norm in the industry. Where assets are shown to perform poorly, additional investment may be required to keep pace with market expectations, and it is important that capex is included in valuations. As more and more funds transition to net-zero, there may be fewer players in the marketplace willing to accept the poorest performing assets. For certain asset types such as logistics warehouses in the UK, the transition risk is typically low as the cost and level of disruption are relatively small. For other asset types such as multi-let residential, transition risk may become more of a fundamental concern.

GRESB is nudging asset owners to consider these risks in more detail by including new Risk Management metrics in the 2021 survey. Although not (yet) scored, these questions indicate a positive alignment with the recommendations from the Task Force for Climate-related Financial Disclosure (TCFD). TCFD-aligned disclosures will become mandatory across the UK economy by 2025, with the expectation that all listed issuers and large asset owners would disclose in line with the TCFD recommendations by 2022. It is expected that other G7 and G20 nations will announce similar requirements in the near future.

Disclosure against the TCFD recommendations is an emerging motivator for asset managers, owners and developers to identify climate-related risks of their portfolios and put in place strategies to manage and mitigate them. Such strategies include asset-level net zero carbon and decarbonisation strategies, which can inform a firm’s wider ESG strategy and contribute towards their alignment with the TCFD recommendations.

At all levels, performance tracking is essential. Setting clear targets is a fundamental requirement for everything from effective TCFD-aligned disclosure to verifying the performance of an asset-level decarbonisation strategy. Setting appropriate metrics, targets, and monitoring procedures for a building is crucial to track performance and provide an indication, at any point, as to whether a strategy has been implemented and is working correctly. Here again, online platforms like SIERA may be used to monitor and track performance and implement specific actions at the asset level. Higher quality building-level data also improves the integrity of data aggregated across a portfolio, leading to overall improved reporting accuracy.

Transitioning a portfolio to net-zero ultimately requires consideration at each stage of an asset’s life cycle, whether at acquisition or development, management of an asset, and affecting its potential disposal. To many, achieving net zero by 2050 may seem like an age away, but in fact we may only have one or two opportunities to get things right and set assets on the right path. This cannot be undertaken without industry wide upskilling as well as a collaborative approach to decarbonisation.


This article was written by Sabbir Sidat, Leighton Smith and Phil Fieldhouse at EVORA

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