2019 has been a roller coaster for sustainable real estate. The industry is maturing quickly, becoming even more sophisticated and nuanced as the public and private pressure to address climate change has become stronger, the stakes even higher and the link between responsible real estate investment and long-term financial health even more undeniable.
The definition of real estate sustainability is constantly expanding. Each year we see new topics rise to the top of the discussion: Health and Well-being, Social Impact, Renewable Energy, ESG, Resilience. In 2019 all eyes were on Climate Change.
I believe we will look back at 2019 as a watershed year in which climate change took center stage globally, not just within real estate. Major public and private institutions identified the massive impact climate change will have on the status quo across every facet of the economy. Time Magazine named Greta Thunberg the 2019 Person of the Year. The Oxford Dictionary declared “Climate Emergency” the 2019 word of the year. And the climate change discussion expanded into corners of society and the economy that have historically ignored it, either consciously or subconsciously. From micro to macro, climate change topics infiltrated mainstream business, politics and media at an unprecedented scale. 2019 was the year of Plastic Straw Bans, Extinction Rebellion, Yellow Vest Protests, COP25, Building Carbon Mandates, Natural Gas Moratoria, the Exxon Climate Case, and of course Greta Thunberg.
New reports, more dire warnings
Reading the scientific climate reports published in 2019 can be very depressing. According to the Global Carbon Budget 2019, global carbon emissions increased from 2018, but only by around 1%. The 2019 Annual Emissions Gap Report says that even if countries achieve their Paris commitments we still won’t avoid a global temperature increase of 3.2C or more and the resulting catastrophic climate impacts. The New York Times chronicled the history of climate science and how it has been ignored by decision makers around the world for the past 50 years, with disastrous results.
Climate Risk takes center stage in the corporate ESG conversation
Climate Risk replaces Resilience and in incorporates Transition Risk to swallow ESG
As one in-a-hundred-year weather events become one in-a-month climate events and property losses continue to rise, businesses of all kinds have been forced to evaluate their exposure to these events. In 2019 the world’s largest institutional investors, banks and government institutions published studies identifying the immense financial risks posed by climate change on communities, businesses and individuals and called for more aggressive action to reduce carbon emissions around the world. Numerous tools, rating programs and rating agencies have jumped into this new area of data-driven climate risk assessments for real estate, changing the paradigm from historical analysis to forward looking scenario analysis to help real estate owners prepare for the inevitable short and medium impacts of climate change as we fight to prevent the most catastrophic long-term impacts.
But storms, flooding and heat waves are only one piece of the climate risk puzzle. The Taskforce for Climate Related Financial Disclosures (TCFD), created by the Financial Stability Board in 2015, has identified “Transitional Risk” – the impact of changes in policies, public opinion and consumer demands associated with transitioning to a low carbon economy – as having an equal or potentially greater impact to businesses and especially to real estate.
2019 saw an explosion of interest in climate-related disclosure at all scales, from the EU’s guidance for Climate-Related Non-Financial Reporting to recent climate risk reporting legislation proposed in US Congress. Over 800 financial institutions representing over $100 trillion in assets now support the TCFD and large real estate investors are just beginning to apply TCFD reporting to their funds.
Climate Risk Reporting head start for real estate firms with robust ESG programs
For commercial real estate Transitional Risks take the form of local energy and carbon mandates and the growing demand for energy efficient, sustainable and healthy buildings from investors, partners and tenants. “Transitional Risk” may sound new but addressing these challenges has been the focus of sustainability and ESG managers in real estate for almost a decade now and leading firms that have been responding to programs like GRESB will be well prepared for this scrutiny.
Portfolios that have been tracking and reducing energy use and maximizing renewable energy will be well prepared for emerging transitional risks like energy and carbon mandates as they roll out across the country and the globe. Portfolios that have pursued certifications such as LEED, Fitwel and WELL are well positioned to address the changes in consumer demand and to attract and retain demanding tenants and avoid becoming stranded assets in the new low carbon economy. These initiatives are not new. What’s new is placing their financial impacts on equal footing with the physical impacts of storms, fires and floods.
I predict adoption of TCFD across the real estate industry to grow significantly in 2020 and not just as a tool to evaluate the negative impacts of climate change, but as way for leading firms to differentiate themselves by highlighting the long-term financial and environmental benefits of developing and implementing proactive plans to address physical and transitional risks across a portfolio.
“Zero” is the new “80”
Net zero carbon commitments subsume renewable energy and “80×50” targets
From government mandates to voluntary reduction targets, carbon has replaced energy as the yardstick to measure environmental progress, and in 2019 relative reduction targets have given way to absolute targets, evolving from “40×30” or “80×50” to “Net Zero Carbon by 2050”. This shift was sparked by the 2018 IPCC 1.5C Special Report just as the spread of “80×50” targets was spawned by the findings of the 2014 IPCC AR5 Report.
In 2018 many leading organizations focused on setting 100% renewable energy targets. In 2019 cities, states, private organizations and countries have upped the ante and made even bolder commitments to net zero carbon by 2050. California was the first state to announce such a goal, followed by New York. A number of cities including Washington, DC, New York and Boston have developed ambitious Climate Action Plans that also include 2050 net zero goals. Just last week the EU announced that it would cut greenhouse gas emissions to net zero by 2050.
In the private sector the Net Zero Alliance created by UNEP FI and UNPRI has already secured commitments from institutional investors covering over $4 trillion AUM to reach net zero carbon across their portfolios by 2050. In the real estate sector, the UK Better Buildings Partnership announced their Climate Change Commitment with 23 members representing over $400B of global real estate assets committing to net zero by 2050.
At the building level there is still a healthy debate over how to define Net Zero with many organizations around the world proposing varying methodologies. Hopefully this will get settled in 2020. USGBC has even created a new certification for net zero buildings, the LEED Zero Carbon certification.
Show Don’t Tell
Cities shift from benchmarking disclosure to performance mandates to accelerate carbon emissions reductions
Since 2009 many cities across the US have developed programs aimed at reducing the energy use of existing buildings. And for over ten years, the foundation of these programs has been annual Energy Star benchmarking and disclosure, hoping that peer pressure would drive competition and energy reductions. Cities with disclosure ordinances have seen some citywide energy reductions from these policies, but not enough to achieve most cities’ ambitious climate goals.
In 2019 two cities, Washington DC, and New York took a more direct approach – setting energy (or carbon) performance requirements for large existing buildings. DC’s Building Energy Performance Standard (BEPS) uses Energy Star to measure compliance and NYC’s Climate Mobilization Act Local Law 97 uses carbon emissions per square foot, “GHGI” (Greenhouse Gas Intensity – you saw it here first!). Under these laws, buildings will be required to meet certain performance levels, undertake prescriptive upgrades or face fines. New York City has already set a fine of $268 for every metric ton of CO2e a building exceeds the limit.
New York City building owners can already estimate the performance of their buildings against the carbon limits as well as any potential fines. Buyers and sellers of buildings are already starting to incorporate carbon fines into their transactions. And tenants are starting to ask potential landlords if the building will face a fine and if the tenant will be responsible for a portion of it. The fines also impact capital upgrade planning. If you incorporate avoided fines into the payback analysis for energy upgrades, many previously unattractive projects become financially viable.
These laws are the first in the country to set a bar for energy or carbon emissions with financial consequences for non-compliance. If the historical spread of benchmarking ordinances is any indication, we will see building performance laws like these appearing in most large cities in the very near future.
What to Look for in 2020
Data Integrity – Scrutinize your data before everyone else does
Given the ever-increasing weight placed on setting and achieving specific energy and carbon targets for voluntary and mandatory reporting, data coverage, granularity and integrity will become even more crucial. Understanding where and when energy is being consumed within a building and across a portfolio will be necessary to identify, implement and track improvements.
Every kWh Counts – Take advantage of every chance to improve efficiency
As the bar is raised for energy and carbon efficiency, building owners must develop long-term strategies that address every step in a building’s lifecycle from tenant fit-outs to lobby renovations to equipment replacement.
Start Now – Develop A Long-Term Climate Risk Strategy
What 2019 has taught us is that financial success, in real estate and any other business, will be tied to successful climate risk management. To successfully address the physical and transitional risks of climate change real estate organizations will need to develop long-term strategies for mitigation and adaptation to prepare for the near-term physical impacts of climate change while improving energy, carbon and healthy building performance to avoid becoming stranded assets in a world of mandatory carbon performance and demanding investors and tenants.
Confused, Overwhelmed, or just Intrigued?
The team at CodeGreen is helping over 500 million square feet of property across the country develop and implement successful long-term sustainability and energy management programs to reduce climate-risk and protect long-term investments. Call us if you’d like to find out how we can help you.
Thank you to the many groups around the world that drive action on the environment every day and whom I have referenced throughout this article: ULI, IMT, RMI, DOE, USGBC, WGBC, GRESB, IPCC, EPA, BBP UK, UNEP FI, UNPRI, NYC MOS, DC DOEE
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