Climate change is driving change in real estate

As we move through 2022, the consensus is that there is a need to pick up the pace and demonstrate progress against the targets and milestones that have been set in order for the sector to play its role in keeping the global temperature rise to no more than 1.5°C.

Of course, the sector is far from alone in that respect, but with the built environment contributing to 40% of global carbon emissions, inclusive of construction and building operations, generates somewhat higher levels of pressure and a stronger sense of responsibility.

One key step change is that the industry will consider carbon emissions in relation to the whole lifecycle of a building, including materials used, the supply chain and construction, rather than just the operational carbon.  At COP26, the World Green Building Council (WGBC) announced 44 new signatories to their updated Net Zero Carbon Buildings Commitment which includes this requirement.  The Commitment now has a total of 156 signatories, accounting for approximately 6.5 million (tCO2e) of portfolio emissions annually and more than $300 billion annual turnover. A clear sign of progress.

The consensus is that radical collaboration is now needed, with those working in real estate finance, design and development, brokerage, property and facilities management, all working together on this shared vision.  Sharing best practice and celebrating key milestones will play an important role.  Within the real estate team at FTI Consulting, we are helping our clients, from ESG-focused startups through to large real estate players delivering ambitious net zero strategies, use the media and other communications channels to share their stories.

No less ambitious is the UK Green Building Council’s COP26 announcement of their Net Zero Whole Life Carbon Roadmap which sets out a framework to decarbonise the entire built environment by 2050.  This gives us hope that it can be done, with clear asks from Central Government, Local Authorities and other stakeholders.  However, it also lays bare the scale of the challenge ahead, with significant changes required in order to hit targets.

One standout recommendation is National Retrofit Strategy for the residential sector, addressing one of the built environment’s key emitters, with a mandate for creating a clear national homes upgrade programme by 2040.

COP26 has revealed several startling statistics around the road ahead.  Whilst the built environment is responsible for up to 40% of carbon emissions, the sector will only receive 20% of global government financial commitments.  It will inevitably fall to the private sector to shoulder the remaining burden.

2021 saw many of the industry’s biggest names outlining their net zero plans and targets.  The earliest target coming from Nordic fund manager NREP, a €17.5bn global fund with plans to achieve a carbon neutral portfolio by 2028, without offsetting.  Others setting targets include Aviva, Nuveen, Blackstone, SEGRO, Abrdn and L&G.

The WGBC also revealed that only 1% of new buildings in the world currently applies the whole building lifecycle standard, leaving a huge gap to bridge on embodied carbon.  Data and accountability will be critical in measuring progress as without better data and stronger evidence-based metrics, greenwashing will still be a real threat.

As in many areas, innovation is widely tipped to play an important role in finding the solutions needed, from alternative building materials and technological developments through to urban planning.  For example, Canadian-based CarbonCure has come up with a method for injecting recycled CO₂ into fresh concrete.

Smart building technology will monitor and report carbon emissions during both the construction operation phases, whilst delivering a plethora of methods to future proof buildings.  We can expect these buildings to perform better, be more compliant to environmental standards and ultimately deliver better value for owners and investors.

According to proptech VC Pi Labs, 20% of their portfolio companies are involved in developing the types of sustainability solutions that are becoming essential to asset owner’s toolkits.  This includes companies such as Switchee, Demand Logic, Built-ID, 720 Degrees and QFlow, who have all launched products that help meet ESG metrics and goals by monitoring things like energy consumption, carbon emissions, air quality and environment risk.

As the year progresses, it will be interesting to watch the industry’s response to proposed updates to  the Minimum Energy Efficiency Standard legislation currently being passed through Parliament.  According to data published by Cushman & Wakefield, only 4% of commercial buildings in London would achieve the required minimum EPC B rating, which shows the monumental scale of the challenge.

In an ideal world, COP26 will become recognised as a major turning point in the sector’s fight against climate change.  It brought together asset and property managers, tenants and owners, designers and builders and generated significant momentum.  However, climate change will need to remain the priority, if the industry is to meet the challenges ahead.