Net zero aspirations in the real estate sector
Will 2022 see a turnaround for net-zero efforts in the real estate sector? If only the answer to this question were a resounding "yes." But the reality turns out to be more complicated. Despite the challenges, however, there is reason for confidence that 2022 could bring the hoped-for turnaround in global efforts to achieve net-zero emissions. An assessment by Ruari Revell, ESG Manager, Real Assets at abrdn.
U-turn for net-zero efforts in the real estate sector? At last year's COP26 climate conference, many participants called for a new form of radical collaboration in the real estate sector to address the climate crisis. This is undoubtedly important. However, for these measures to have an impact, several other important issues must also be addressed.
Simplify the message
First of all, the fact that everything is unnecessarily abbreviated must be addressed. The multitude of definitions and voluntary standards in this area continues to be confusing. They are all undoubtedly well-intentioned, but often attempt to address similar challenges from different angles without taking into account their mutual interaction. The result is an almost impenetrable tangle that sometimes makes it difficult for even highly competent ESG specialists to determine what is "good" and what is not.
Fortunately, this issue is now well understood. Some common principles are emerging that lend credibility to net zero targets and provide greater clarity to investors, asset managers, and tenants on how to achieve them. These include the importance of rapid decarbonization across the value chain, near-term targets, and clarification regarding the role of voluntary CO2-Balances.
Real estate investors have to take a number of things into account when it comes to this topic. The clearer and more standardized the key figures, the better. For example, the question arises as to how energy-efficient the building is. Are fossil fuels used? Are there renewable energy sources on site? What activities does the tenant engage in and how might this affect future emissions? And this only addresses the energy and CO2-aspect is illuminated. Other important considerations are biodiversity, health and well-being, a circular economy, social value and transport.
Shaping the future
In the real estate sector, there are currently many exciting design and innovation concepts related to net-zero efforts. Heat pump, energy storage and building materials technologies are all being developed and improved to support the energy transition. For this to happen at the scale and speed required, investment, innovation, and policies are needed to steer businesses in the right direction. Currently, the policy measures taken to decarbonize the sector fall far short of what would be required from a scientific perspective. Take energy performance certificates (EPCs), for example. These can provide useful information about a building's energy consumption. However, they are less helpful in managing global real estate portfolios. Key EU regulations on sustainable finance, which aim to eliminate greenwashing and improve transparency, place a strong emphasis on energy performance certificates and the related concept of the zero-energy building. The problem here is that the different implementation of these concepts at Member State level makes cross-country comparison almost impossible. Currently, the same building could be classified as efficient or inefficient (according to the Regulation on sustainability-related disclosure requirements in the financial services sector) or sustainable or unsustainable (according to the EU taxonomy), depending on the country in which it is located.
Improvement of the policy measures
There are encouraging signs that the policy approach is gradually becoming more coherent and reflecting the science-based findings. For example, there are update proposals to the Energy Performance of Buildings Directive (EPBD). These are intended to provide a clear signal for phasing out the use of fossil fuels in buildings, an emissions trading scheme for the use of fuels in buildings, support for large-scale retrofits, and mandated CO2-provide assessments. The proposals also seek to standardize the various methods used for energy performance certificates in all member states.
The carbon intensity of buildings is already of great importance and will become even more important in the future. Indeed, we recently rejected investment opportunities for these reasons. However, accurately assessing the costs of taking real estate down the path of net-zero efforts is proving difficult, especially since the route options are unclear and everyone seems to be using a slightly different map. The basis for valuation is becoming much clearer with the convergence and increasing use of voluntary standards, the filling of an academic/policy gap, and the recently updated guidance on ESG factors from the Royal Institute of Chartered Surveyors.
Net Zero Efforts: Concluding considerations
So will 2022 mark a turning point in net-zero efforts? There are encouraging signs, and the merging of voluntary standards and more clarity on policy direction will level the playing field and incentivize more rapid action. If just a little of the radical collaboration mentioned at the outset is achieved, perhaps 2022 can provide the much-needed tipping point for decarbonization of real estate. In any case, we are optimistic.
Author:
Ruairi Revell is ESG Manager, Real Estate at abrdn. He helps the real estate business protect and enhance investment performance by integrating ESG into all elements of the investment process. abrdn (formerly Aberdeen Standard Investments) is one of the world's leading active asset managers. With more than 800 investment specialists in over 30 globally networked locations, the company manages over CHF 575 billion in assets (as of 2021).
