The Net Zero Pathway for the Real Estate Sector
The task at hand
The real estate and construction sector is currently responsible for almost 40% of final energy use and process-related carbon dioxide (CO2) emissions, and thus has a critically important role to play in meeting international goals under the Paris Agreement (1).
The challenge of reducing buildings’, both new and existing, carbon emissions is being met with new momentum. The World Green Building Council has set major goals to ensure every building achieves Net Zero emissions by 2050. Signatories of the Better Buildings Partnership’s Climate Change Commitment outlined their organisations’ Net Zero carbon pathway at the end of 2020.
Net Zero is defined as ‘a state where we add no incremental greenhouse gases to the atmosphere’. This requires carbon emissions emitted by the development, ownership and servicing of a building to be reduced to a maximum, with remaining emissions offset through carbon sequestration (4).
It is worth distinguishing emissions generated by construction, also known as embodied carbon, from those produced by the operation, servicing and maintenance of standing assets, termed operational carbon (5).
Incentives
Beyond meeting government targets, there are two main incentives for stakeholders in the property sector to create Net Zero buildings. First, Net Zero constitutes a valuable risk management strategy. Increasingly intense, frequent and long-lasting extreme weather events pose a variety of risks to buildings, from direct physical damage to insurance premium repricing and even abandonment of riskiest locations. With over a third of Real Estate Investment Trusts (REITs) properties exposed to such climate hazards, building resilience is a top priority (9).
Second, pursuing a Net Zero strategy in the property sector offers opportunity for all stakeholders. For shareholders, taking environmental factors into account improves long-term financial performance. Office buildings that have the highest levels of sustainability certification command rental premiums of at least 10%, lower vacancy rates and up to 14% lower operating costs (10). For clients, green-certified buildings lead to higher property values, better tenant attraction and retention and improved returns on investment. For talent, offering a working environment which matches a wider sustainable ethos has proven effective in drawing in and retaining a skilled workforce (12). A study by Harvard University found certified green buildings improved cognitive performance by 26% (13).
Achieving Net Zero
Practically, reducing emissions in the real estate sector involves following the three R’s: renewables, retrofitting and responsible ownership. First, renewables are a valuable sustainability measure as they can be used in the short term and often require lower capital expenditure (CAPEX) than other emission reduction measures.
Second, given 80% of the building stock that will exist in 2050 is already built, retrofitting is key to achieving Net Zero (14). Greater energy efficiencies, and cost savings, are tied closely with the implementation of new technologies, such as Automatic Meter Reading (AMR) devices. Other retrofitting measures include triple glazing, plumbing replacement, passive solar heating, combined heating and power (CHP), cycle parking, and electric vehicle (EV) charging.
The final ‘R’ to implement is responsible management. Responsible real estate investors should seek to improve their buildings’ environmental performance and encourage tenants to bear such considerations in mind as well. Tenant engagement activities include the collection of energy and sustainability data, tenant behaviour and refurb guidance.
Challenges
The three Rs are key to reaching Net Zero in real estate. However, this goal does present its challenges. Some investors might be dissuaded by the cost required to reach Net Zero. However, they must bear in mind the long-term financial benefits they will reap. Finance is also available for greening buildings, as demonstrated by a framework created by the World Economic Forum and UBS to close the ‘climate finance gap’ (15).
A further important challenge comes from competition in the real estate sector. Benchmarks like the Global Real Estate Sustainability Benchmark (GRESB) and Real Estate Environmental Benchmark (REEB) at portfolio level, or Leadership in Energy and Environmental Design (LEED) and the Building Research Establishment Environmental Assessment Method (BREEAM In-Use) at building level, rank real estate investors’ environmental performance. Scoring poorly or failing to complete these benchmarks can reflect badly on property investments and reduce their attractiveness to potential buyers, tenants, and other stakeholders. Reputational damage will often translate into lower investments and returns. Responsible investors should consider sustainability benchmarks as a part of due diligence for potential customers and investors.
Last, but not least, if buildings fail to take sufficient measures towards improving their environmental performance, and ultimately becoming Net Zero, they risk non-compliance with fast evolving government legislation. The Minimum Energy Efficiency Standards (MEES) are an example of regulations introduced by the UK government in 2018 which will render unlawful all non-domestic buildings with Energy Performance Certificates (EPC) below an ‘E’ rating by 2023 with more stringent requirement applied progressively throughout the course of the decade. Actors involved in construction as well as real estate investing would benefit from staying ahead of regulatory evolutions and futureproofing their portfolios.
Conclusion
Net zero in the real estate sector presents a unique opportunity to significantly reduce GHG emissions, as well as improve portfolio resilience, long term viability, and competitive edge. The onus on the real estate sector to reach Net Zero is great considering it contributes 40% of annual CO2 emissions. Wide-reaching sector changes will be needed to reach the 2050 Net Zero emissions target. The business and ethical rationale for property owners to reach net zero is strong; it provides greater resilience to regulatory changes, allows owners to command higher rents, and makes developments more financially attractive. Using the ‘three R’s’ approach of renewables, retrofitting, and responsible ownership provides a grounded framework from which to work. There are some challenges to reaching net zero but evidence shows that it is worth ‘greening’ portfolios now rather than risk being left behind in the future. Orbis Advisory and ITPEnergised combined have over 30 years’ experience in supporting real estate client’s emissions reduction and Net Zero strategies.
For a timeline of how to get started on your organisation’s journey to Net Zero, read our article ‘Defining and Achieving Net Zero’ here: https://www.orbisadvisory.com/news-list/defining-and-achieving-the-pathway-to-net-zero .
If you are looking to set a science-based net zero strategy for your business, Orbis Advisory can support you. With over 30 years of experience in sustainable consulting, we have taken businesses through the whole process of calculating their carbon emissions, reducing their emissions, and setting science-based targets. Please see the “services” section on our website to explore the full range of services, or send an email through to info@orbisadvisory.com for any inquiries.
References
(1) https://www.iea.org/reports/global-status-report-for-buildings-and-construction-2019
(2) Ibid.
(3) Ibid.
(4) https://www.betterbuildingspartnership.co.uk/sites/default/files/media/attachment/BBP_Net-zero%20Carbon%20Framework%20Final_0.pdf
(5) Ibid.
(6) https://www.sciencedirect.com/science/article/abs/pii/S0378778813004143
(7) https://public.wmo.int/en/media/press-release/state-of-climate-services-2020-report-move-from-early-warnings-early-action
(8) https://edition.cnn.com/2020/10/03/weather/gamma-rapid-intensification-on-record-season/index.html ; https://www.newscientist.com/article/2249489-recent-decades-of-european-floods-are-among-the-worst-in-500-years/
(9) https://www.reit.com/news/reit-magazine/july-august-2019/reits-assess-potential-fiscal-impacts-climate-change
(10) Sustainability and value in central London’, JLL, 2019
(11) Ibid.
(12) https://www.knightfrank.co.uk/research/london-report/2020-02-05-green-is-the-new-black-how-sustainable-buildings-can-support-returnshttps://www.knightfrank.co.uk/research/london-report/2020-02-05-green-is-the-new-black-how-sustainable-buildings-can-support-returns
(13) https://workinmind.org/2018/08/08/correlation-between-building-performance-cognitive-function-and-productivity-explored/
(14) http://www.wrap.org.uk/sites/files/wrap/FINAL%20PRO095-009%20Embodied%20Carbon%20Annex.pdf
(15) http://427mt.com/wp-content/uploads/2018/10/ClimateRiskRealEstateBottomLine_427GeoPhy_Oct2018-4.pdf
(16) https://www.propertyweek.com/legal-and-professional/we-must-act-now-to-reach-net-zero-by-2050/5109407.article
