Will 2022 be the turning point for net zero in real estate? If only the answer to that question was a straightforward yes. In reality, it’s complicated. However, in spite of the challenges, there are reasons to be optimistic that 2022 could be the watershed as we strive towards the global ambition of net zero emissions.
Many at last year’s COP26 conference called for a new form of radical collaboration in the real estate sector to address the climate crisis. This is certainly vital, but to be effective there are several other important issues that need to be resolved.
Firstly, there is tackling what is best described as ‘death by acronym’. The proliferation of definitions and voluntary standards in this space remains bewildering. They’re all well-intentioned but are often attempting to address similar challenges from different angles without having considered their effect on each other. What results is an almost impenetrable mishmash that can leave even highly knowledgeable ESG specialists wondering what ‘good’ really looks like.
Thankfully, this is now well recognised. We are seeing some common principles emerge that give integrity to net zero goals and provide more clarity to investors, asset managers and occupiers on how to get there. These include the importance of rapid decarbonisation across the full value-chain, near-term targets and clarification on the role of voluntary offsets.
There is a lot to consider on this topic for real estate investors and the clearer and more standardised the metrics, the better. For example, how energy efficient is the building? Does it use fossil fuels? Are there on-site renewables? What are the activities of the occupier and how might that affect future emissions? And that’s just on energy and carbon; biodiversity, health and wellbeing, a circular economy, social value and transport are other key consideration.
There is so much exciting design and innovation around all of this in the real estate sector at the moment. For example, heat pump technology, energy storage and building material technologies are all evolving and improving to support the transition.
For this to happen at the scale and speed required, we need investment, innovation and the policies that will push businesses in the right direction. Currently, the policies designed to decarbonise the sector still lag far behind what science tells us is necessary. Take energy performance certificates (EPCs) as an example., These can provide helpful information about the property’s energy usage. When managing portfolios of properties located across the world, however, they are less helpful. Key EU sustainable finance regulations designed to banish greenwashing and improve transparency rely heavily on EPCs and the linked concept of Nearly Zero Energy Buildings. The issue here is that the different implementation of these concepts at member state level renders cross-border comparison nearly impossible. At present, the same building could be classified as either efficient or inefficient (under the Sustainable Finance Disclosure Regulation), or as sustainable or unsustainable (under the EU Taxonomy), based purely on the country it happens to be located in.
There are encouraging signs that the policy mix is evolving to become more coherent and to better support science-based outcomes. Proposed updates to the Energy Performance of Buildings Directive for example, are designed to provide a clearly-signposted end to fossil-fuels in buildings, an emissions-trading scheme for fuel use in buildings, support for deep-retrofit and mandatory embodied carbon assessments. The proposals will also unify the methodologies used for energy performance certificates across all member states.
The carbon intensity of buildings matters now and will matter even more in the future. Indeed, we have recently turned down investment opportunities on these grounds. But pricing the journey to net zero for real estate is certainly challenging when the destination and route options are unclear and when everyone seems to be using a slightly different map. The basis for valuation will become much clearer with the consolidation and widespread use of voluntary standards, a closing of the science/policy gap and the recently updated guidance on ESG factors from the Royal Institute of Chartered Surveyors.
So, will 2022 be a turning point? There are encouraging signs and the consolidation of voluntary standards and clarity on policy direction will level the playing field and incentivise faster action. With a dose of that radical collaboration I mentioned at the start, maybe 2022 will be the much-needed turning point for the decarbonisation of real estate. I’m certainly optimistic.