We are now in a critical period requiring rapid and urgent action to retrofit our buildings in a bid to address climate change. The Paris Agreement set a global imperative ¹ to restrict global warming to 2⁰C or below. To achieve this ambition, global greenhouse gas emissions need to reduce rapidly today with developed economies ultimately becoming Net Zero by 2050. We cannot afford to bide our time and cut emissions later.
Several policy drivers are now facilitating a step change in emissions reduction not within the next 30 years, but within the next 10 years. For example, under the European Green Deal, the EU Commission has recently furthered its ambition to reduce emissions by 50% by 2030 from 2005 levels. Also, the Energy Efficiency Directive (EED) aims to improve energy efficiency by at least 32.5% by 2030 with the Energy Performance of Buildings Directive (EPBD) setting out regulations to increase the rate and depth of building retrofit programs. Countries are also formulating long-term national strategies to achieve ‘Net Zero carbon’ targets by 2050 including mobilizing significant investment in innovation and sustainable economic activity such as renewable energy and decarbonization of the energy system.
Those leading the way in commercial real estate have signed the BBP’s Climate Change Commitment and will be disclosing plans to achieve Net Zero carbon by 2050 by the end of this year. ² It is today’s actions that will determine whether intermediate and long-term targets are achieved, but it is crucial that immediate action is coupled with longer term planning in order to minimize costs.
Risks & Opportunities
In the transition to a low-carbon economy, investment manager’s fiduciary responsibility will increasingly include assessment of how climate-related ‘transition’ risks, such as the legislative risks described above, will impact asset values. Such considerations will need to be included in future investment strategies and decision making.
Buildings where energy and carbon performance is not improving in line with emission reduction targets may be exposed to “stranding” risks. These risks could include a reduced investor, market and tenant demand, and exposure to increasing energy costs and carbon pricing. As a result, these assets may require significant capital investment to meet stringent energy and carbon performance regulations.
The recommendations from the Taskforce for Climate Related Financial Disclosure (TCFD), that are currently progressing towards mandatory disclosure, will require investment managers to identify, assess and effectively manage these potentially material financial risks. But it’s not all about risks. TCFD will also require investment managers to identify opportunities as improving energy and carbon performance increasingly serves to enhance and preserve asset value and secure long-term income streams by minimizing associated costs.
To improve forward-looking decision making and aid financial planning, specific tools are becoming available such as the Carbon Risk Real Estate Monitor (CRREM) developed in partnership with institutional investors and industry bodies including GRESB. The CRREM tool provides country and property use emission intensity benchmarks that are aligned with global warming scenarios of 2⁰C or below. It projects current building emissions intensity, allowing for factors such as grid decarbonization, and assessment of low-carbon transition “stranding” risks where factors such as future carbon pricing can be analyzed under a number of scenarios.
Data, data, data
Transition risks will increasingly be associated with whole building energy consumption and emissions intensity. To begin to assess risks, set targets to reduce building emissions and plan for Net Zero, the full picture of the current whole building energy consumption is needed.
Existing assets will most likely include tenant-controlled areas, which pose challenges for data acquisition especially for those with difficult-to-reach tenants on FRI leases and long-term leases in core strategic assets. ³ In addition to leveraging green lease clauses, building good tenant relationships will be key to unlocking tenant data. The installation of AMRs and partnerships with data collection agencies, will both be crucial to circumvent the inherently inefficient process of collecting data manually from property managers.
The Future is Decided Now
With only two retrofit cycles left to 2050 ⁴, long-term initiatives must be carefully planned to ensure intermediate emission and energy reduction targets are met while aiming towards a Net Zero emissions future.
Conducting this forward-looking assessment to meet these targets, and assessing the transition risks and opportunities at an asset level, may require changes in the process by which investment managers currently plan renovations and M&E upgrades across the asset hold period. However, by identifying the worst performing assets and implementing programs of Net Zero audits across portfolios, investment managers can begin to identify and plan the required measures to meet this ambition. It is also important to ensure sufficient depth of retrofit as opportunities arise within the retrofit cycle. Initiatives such as long-term Building Retrofit Passports, as proposed under the EPBD, will also help advance this agenda and assist in the planning process.
The usual practice of like-for-like replacements may no longer be sufficient but by making significant investments in energy efficiency and taking maximum advantage of retrofit opportunities in the short and medium-term, these costs can be minimized.
2050 may seem like a long time away, but investment managers need to act now to implement sustainability programs with the associated risks assessments and financial planning to ensure portfolios and investment strategies remain resilient as we transition to a low-carbon economy.
¹ The international community convened in 2016 to sign the Paris Agreement, committing to limit global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.