An uphill battle with decarbonization targets

Owners are working to make their buildings more efficient, but a shortage of regulation and renewable energy is challenging.

Japan’s biggest real estate players are working to help the country meet its ambitious decarbonization targets, but they and the nation are facing unique challenges and a surprising lack of government pressure.

The government has pledged to reduce Japan’s greenhouse gas emissions by 46 percent from 2013 levels by 2030, and is committed to achieving net-zero carbon emissions by 2050. This will be a stiff task for what is the fifth largest country in terms of carbon emissions, according to the International Energy Agency, and one which is reliant on fossil fuels for energy – more than two-thirds of its electricity was produced from coal, oil and gas in 2022.

Carbon emissions have been falling in Japan, with per capita emissions dropping to 8.5 tons in 2022, from a peak of 10.3 tons in 2013. However, there is still a way to go if Japan is to meet its interim goals, never mind the more ambitious 2050 target.

As in other nations, real estate accounts for a substantial proportion of energy use in Japan – a third of the total according to the Climate Action Tracker – so the industry is in a strong position to make a difference.

Tracking progress

The headline results from sustainability benchmark GRESB seem positive. Ruben Langbroek, head of Asia-Pacific at GRESB, says: “From a GRESB point of view, Japan is by far our best covered market in Asia. We have seen steady growth in the numbers of companies participating and their performance. For example, we have nearly all the listed J-REITs covered and have seen a massive increase in private funds taking part.

“Japan is performing better than the global average in most aspects. Between 2020 and 2023, Japanese vehicles in GRESB reduced the carbon footprint of their buildings substantially. However, Japan is behind the global average when it comes to net-zero commitments and targets. This means more ambition and corresponding actions are needed to achieve net zero in the built environment.”

There is momentum in the real estate industry, which is at the moment focused on green building certifications, says Ryuichi Horie, principal at consultants CSR Design Green Investment Advisory. The most common are domestic programs such as CASBEE and the DBJ Green Building Certification. “International standards such as LEED are less popular but there are companies now following the CRREM pathway and using Science-Based Targets,” he says.

Unusually for a developed market, much of the momentum in Japan is self-generated. The industry is making a “collaborative push” toward sustainability, says Doug Smith, managing director, Asia, at energy efficiency solutions firm GreenGen.

“We have observed a significant alignment between sustainable practices and asset values in Japan’s real estate market. For instance, five years ago the primary focus of our clients was to implement solutions with a quick ROI that reduced energy costs,” he says.

“Now, the focus has shifted to decarbonization strategies that enhance both financial and climate outcomes. Doing this requires a much more forward-thinking approach that considers the full asset lifecycle, building systems, energy efficiency measures, regulations, tenant requirements, financing and, of course, the business case.”

However, where the Japanese market is furthest behind is its lack of mandatory energy rating based on actual energy performance, such as the European EPC, Australian NABERS or the US Energy Star.

Horie says: “The discussion about this has started but there is no integrated government department addressing climate change. The topic is covered by both the Ministry of Land, Infrastructure, Transport and Tourism and the Ministry of Economy, Trade and Industry. It could still be several years before something is introduced.”

One of the problems caused by a lack of mandatory regulation is that climate action is only taken by those real estate players who are motivated by pressure from external and internal stakeholders. Private real estate managers with institutional investors to serve are motivated in this way, as are Japanese developers with multinational and larger domestic tenants.

Horie says: “Most of the pressure on real estate comes from investors, both Japanese and international. On the tenant side, there is some pressure from large multinationals but not from local companies.”

While private real estate firms, J-REITs and large developers own a lot of real estate, the bulk is still owned by smaller investors and developers, as well as owner-occupiers, who are not acting in the absence of regulatory pressure. However, Elke Kornalijnslijper, sustainability consulting head, Asia-Pacific, at JLL, says: “Some of the smaller firms are also conscious of decarbonization – about 70 percent of the 880 or so Japanese companies signed up for the Science-Based Targets initiative are small or medium enterprises.”

Getting to it

With the focus on certification, most of the efforts in low-carbon construction are in developing new assets, rather than existing stock.

However, Japan’s Ministry of Land, Infrastructure, Transport and Tourism’s focus on the decarbonization of the built environment has expanded to include embodied carbon.

“The biggest challenge is how and how fast and how much Japan can increase renewable energy in the total energy market”

Ryuichi Horie
CSR Design Green Investment Advisory

“A tool to calculate embodied carbon has been developed by a government-backed committee, which will be released later this year,” says GRESB’s Langbroek. Taking embodied carbon into account may encourage a greater focus on retrofitting.

Some market players are ahead of the curve in that regard. Smith says: “The investment landscape has also shifted, with managers establishing funds and investing in assets that offer significant value enhancement opportunities through the implementation of low-carbon, sustainable improvements.”

Green leases should play a greater role, which should help to drive down the energy consumption of the tenants, says Kornalijnslijper.

“Tenants are anywhere between 40 and 90 percent of the contributors through their energy consumption or waste,” she says. “In many asset classes, such as logistics, multifamily and data centers, the control of reducing emissions is with the tenants.”

Real estate has two areas in which it can contribute to decarbonization: making buildings as energy efficient as possible and using clean renewable energy. The second part is challenging for Japanese asset owners.

Horie explains: “Companies are undertaking energy efficiency retrofits and making new projects as efficient as possible. Some are using renewable energy. However, at this moment, this is mostly renewables without additionality, meaning they are not contributing to added renewable energy supply.”

The most significant obstacle to Japan’s climate goals is the challenge of providing renewable energy.

Under the Sixth Strategic Energy Plan of 2021, which targeted carbon neutrality by 2050, renewables should account for 36-38 percent of power supplies in 2030, an uptick from the previous 2030 target of 22-24 percent. This target is lower than those set by many other countries, says Kornalijnslijper.

22.5%

Proportion of Japan’s total energy mix produced from renewables, according to IEA data from 2022

Nonetheless, IEA data for 2022 shows Japan producing only 22.5 percent of its energy from renewables, mainly solar PV (9.4 percent) and hydro (9.2 percent). Electricity production from wind was minimal.

“There are a number of factors which make producing renewable energy in Japan more difficult than in other markets. It is densely populated and the landscape is ill-suited to large scale renewable projects. I think the biggest challenge is how and how fast and how much Japan can increase renewable energy in the total energy market,” says Horie.

“Japanese land is very hilly, which makes solar farms difficult, and the seas around Japan are too deep for offshore wind platforms. The Japanese grid is not connected to other countries so it will require substantial upgrades to deal with the fluctuations you get from renewable energy.”

“We have observed a significant alignment between sustainable practices and asset values in Japan’s real estate market”

Doug Smith
GreenGen

More energy could be produced onsite, suggests Kornalijnslijper. “Real estate is floor space and hence a potential carrier for renewable energy. In particular logistics, single-family assets and data centers are great spaces to install renewable energy. Energy storage systems could be an added solution to complement on-site renewable energy. There are also other emerging technologies such as small wind and geothermal.”

However, she notes that many of these technologies are very expensive in Japan, which is a barrier to more widespread adoption, and suggests the government should “push for such technologies to become economically viable through incentive programs such as subsidies.”

There are moves to encourage wider use of onsite power. For example, Tokyo has introduced a requirement that all new homes built by large-scale homebuilders after April 2025 have solar panels.

Decentralization of electricity production and storage may be a partial solution to both lack of renewables and the capacity of the grid. Nonetheless, the bulky towers which dominate the Tokyo skyline are both energy-intensive and ill-suited to onsite power generation.

With its engineering expertise, Japan ought to be able to boost its production of electricity from nuclear plants, which accounted for only 5.5 percent of total electricity in 2022. However, following the Fukushima disaster in 2011, public opinion turned strongly anti-nuclear.

Before Fukushima, Japan had 54 reactors, supplying 30 percent of the nation’s energy needs. Today, the nation has 33 available reactors, of which only 10 are up and running, although there are plans to restart more.

Public opinion has shifted on this issue due to rising energy costs, which means a future nuclear renaissance is not out of the question. Prime minister Fumio Kishida has called for the construction of a new wave of next-generation reactors.

However, construction of more nuclear capacity will be slow and no help toward meeting the nation’s 2030 goals.

The key to this will be government action, says CSR Design’s Horie. “There needs to be more pressure from the government, particularly directed at existing stock.”