Ardian’s Fjer: Existing carbon reduction measuring tools ‘have limitations’

Measuring emissions of properties needs to be a holistic exercise, encompassing both operational and embedded carbon, says Omar Fjer, managing director in Ardian’s Real Estate team. He says his firm has devised a calculation methodology which does just that.

It is well known that 40 percent of global greenhouse gas emissions are generated by the real estate sector. The operational use of buildings is responsible for nearly two-thirds of those emissions. As such, that has been at the heart of the debate about how to reduce the property industry’s impact on the environment.

Europe is rising to this challenge. New regulations aim to establish a roadmap for each sector to meet the ambitions set out in the 2015 Paris Agreement and future agreements. Renovating existing properties to ensure greater efficiency and minimize carbon has been established as a clear priority. In recent months, this has been driven in part by the current energy crisis, as well as an impetus to reduce consumption.

In this context, property owners are increasingly measuring and reporting the emissions generated by their portfolios and seeking ways to reduce operational CO2. There are several methodologies that managers already use to support this process, such as the Carbon Risk Real Estate Monitor, a science-based methodology, which is pan-European benchmarked against the Paris Agreement.

However, we should be honest that existing tools have limitations. Benchmarks like CRREM do not consider the specific energy mix of a given region, therefore making it difficult to compare the impact of energy consumption between buildings in different countries.

More importantly, though, current models only cover the operational consumption of a building’s life cycle without considering the steps it took to get there. That means one-third of a building’s lifetime emissions are currently disregarded. For instance, a building powered primarily by solar energy will be considered very ‘green,’ even if its panels were produced on the other side of the world, in factories powered by coal combustion, and then transported on polluting ships.

Embodied carbon, which is the CO2 generated during the construction and refurbishment phase of a building, has been at the center of much debate in recent months. What is clear is that the real estate sector needs a way to measure both embodied and operational carbon with clear market standards. Such a measure needs to be comprehensive in its approach, covering CO2 emissions associated with construction, including the manufacture and transport of construction materials, plus those from building maintenance and possible demolition, transport of waste materials and their recycling.

The real estate sector needs a way to measure both embodied and operational carbon with clear market standards

Having a holistic picture will enable fund managers to understand the full impact of their plans, and more effectively assess investment and redevelopment strategies based on what will make the biggest difference to emissions.

At Ardian, to measure the overall carbon impact of our refurbishment projects, we have begun using a new indicator: the return on carbon invested. Just as the return on investment, or ROI, is used as a financial indicator, the ROCI multiple is a ratio of the future operational carbon savings generated by the works on the embodied carbon emitted during the renovation, considering the life of the building.

To measure the future operational emissions, it takes a benchmark of operational carbon before acquisition then models, based on the proposed refurbishment, what the projected consumption of the building would be. The embodied carbon resulting from both the development phase and from the ongoing maintenance over a 50-year use period are considered. The operational carbon savings generated are then divided by the ‘carbon invested’ in refurbishing the asset, providing the ROCI figure.

Having identified the difficulty as investors to demonstrate alignment with the 2-degree temperature rise limit while considering embodied carbon, we ensure the ROCI is transparent, auditable by third parties and enables comparison across assets and portfolios.

While it is necessary to invest carbon to renovate obsolete buildings, our industry has a responsibility to ensure that the CO2 we emit during our refurbishments is minimized and generates real savings over time. This new method makes it possible to forecast, quantify and make trade-offs to reduce and control the impact of the work to be carried out.

We urge other real estate investors to apply this thinking to their operations as we work together to mitigate the impact of the built environment on our world.