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Climate Change Action in Commercial Real Estate

The UN Climate Change Conference (COP26) is in full swing in the UK, bringing 120 country leaders together to accelerate action which helps reach climate change goals. The fact that they are all attending in-person is somewhat ironic in itself given that the worldwide economy survived the last two years at home but before getting into personal responsibility and wrongdoing, let’s examine how commercial real estate features in COP26 goals and what it means.

Commercial Real Estate’s Role in Climate Change

Commercial real estate construction is without doubt essential for the rebuilding of the economy, jobs, housing and prosperity. The industry is responsible however, for almost 40% of all carbon emissions globally according to the World Green Building Council and tackling that must remain a big focus for any country hoping to achieve net zero.

Much of these emissions can be attributed to ongoing energy usage in finished buildings, namely heating space and usage of IT and other equipment.

UN Climate Change Goals

The first goal coming out of COP26 is mitigation. This commitment, made five years ago in the Paris climate agreement, was to restrict global warming to 1.5 degrees by 2100, a target that is out of reach unless carbon emissions are halved within the next decade and net-zero is realized by mid-century. Every aspect of the commercial real estate (CRE) cycle requires analysis and action to mitigate impact on the environment and this is going to involve transition to completely clean power, ensuring buildings are not just energy-efficient but zero-rated and restoring nature and greenery that would be taken away in the construction process.

Closely related to mitigation is the ‘adaptation’ goal, which speaks to the need to adapt now to address the losses that are already being felt through climate change; often disproportionately by those least able to protect themselves. Building resilient infrastructure with an emphasis on re-introducing biodiversity to our towns and cities is a way to improve natural defences against extreme weather events and preserve natural habitats, human lives and livelihoods.

Economies are ramping-up again post-pandemic and although it would be tempting to concentrate on that recovery at the detriment of everything else, we can’t afford to delay action against environmental change in favor of political gain. To this end, every private investment decision needs to be aligned with the other climate change goals. The financial industry supporting CRE investment will be asked to consider whether each and every investment and lending decision works in harmony with the goal of net-zero. As an industry, CRE needs to be nothing less than honest about the risks climate change poses to business and engage in open conversation with investors and business owners in the hope that total transparency will result in more private funds being allocated where they are most needed for impact.

A Goal Without An Action Plan is a Daydream

All the measures being outlined at the conference over the next couple of weeks are simply goals and by definition a goal is simply the object of an ambition or effort or a desired result; there might be commitment and a deadline for achieving those goals but nonetheless, nothing concrete as to what actions will lead to their realization. Leaders may argue that consensus was reached five years ago in Paris to limit global warming to well below 2 degrees, but that consensus was merely a commitment to share ambitions around how they will reduce emissions and as yet we’re still to see any accountability for countries under the Paris agreement. Without accountability, we’re unlikely to see any real progress driven out of government.

CRE will Drive its Own Change

Sustainable property has far-reaching benefits both financially and environmentally and there’s growing demand from investors, tenants and owners for future-proofed property, along with an appetite from developers to deliver it. With very little policing on UN members to meet their climate agreements, there’s a huge void and growing frustration between what can be achieved and what will be achieved if CRE and other industries sit back and wait for mandates, policies and new regulations to be made by the government.

Far from sitting back and watching politicians procrastinate on implementing climate change mandates, many CRE companies are taking the lead as they realize that the uncertain risk profile of developments is untenable. Increasing costs of finance, maintenance and increased or even denied insurance policies are fueling change from the bottom-up. Globally, companies are being scrutinized on the imprint they’re having on the world and commercial real estate is no different - if it’s just about making a profit and the business can’t demonstrate a contribution to bettering the world then there’s cause for concern.

Challenges Delivering on CRE Goals

On the face of it, addressing energy usage alone could go a long way in mitigating CRE emissions but there are a few crucial challenges to be overcome for the industry to accomplish carbon-neutral status. The key things that could inhibit progress are;

  • Achieving consensus on what constitutes zero-rated buildings - As it stands there is no industry standardization on what constitutes a low or zero-rated building. There are many different energy-efficient certifications that a building can meet but moving towards a set of recommendations and standardized policies for both new builds and retrofits would help to ease confusion around what can be done to make an impact, what should be done as standard and what the cost savings might be;

  • Advancing collaboration between public and private entities - With the best will in the world, addressing climate change in CRE involves complex, intertwined and far-reaching issues and the industry can’t achieve what’s needed alone. Public-Private Partnerships (PPP) in Canada have been around since the 1990s, however usage has been haphazard and crippled with debate around funding and transparency. Again, there is no consensus on what a PPP is and although the current government appears in favor of mutually beneficial partnerships, there needs to be dedicated resources at a federal level to drive initiatives for new infrastructure particularly around affordable housing and green transport;

  • Perceived cost of retrofit of existing buildings - In developed countries this is becoming less of a challenge after many studies have detailed that retrofitting of buildings with energy-efficient equipment can be done with nominal upfront cost and these upgrades take minimal time to start paying for themselves, as little as a year in most cases. With risk mitigation in mind and significant energy cost savings on offer, retrofits should still be an attractive proposition. For commercial buildings, simply upgrading HVAC systems can achieve cost savings in the region of 25-50% and this could be much more if building envelopes were upgraded from predominantly glass facades.

Developers Take Initiative

Realistically, achieving change in CRE will likely be a far from ideal, two-pronged approach; governments will increasingly mandate standards for existing buildings and developers will be the driving force behind net-zero in new commercial real estate as concerns over the future risk profile of developments makes investors more vigilant. Research from the ‘Center for the Study of Energy Markets’ which studied the financial returns on over ten thousand ‘green’ buildings compared to non-energy certified, found that those with green ratings commanded 3-6% higher rental rates and 16% higher sale prices than those without. This divide will only go one way so commercial real estate can really only take the initiative now and “Do Well by Doing Good”.

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