Could the Low Carbon Building Initiative help establish a common framework for carbon accounting?

Heavy rains, heatwaves and other extreme weather events across Europe have brought the reality of climate change to the continent’s doorstep. The importance of reducing greenhouse gases and transitioning to a more sustainable future is clear, but pathways toward decarbonization in real estate remain clouded by a lack of standardization in carbon accounting methods.

The Low Carbon Building Initiative (LCBI), a non-profit aiming to reduce carbon emissions in the real estate industry, is working with the biggest names across Europe to develop a harmonized approach to carbon accounting. Nearing the end of the six-month pilot phase involving 15 projects across seven countries, the LCBI is establishing a common carbon accounting methodology, aiming for it to be scaled across Europe and beyond.

Translating costs

“Nobody does the same analysis in Europe. How is it possible to use the same contractors but in the end, we don’t have the same level of CO2 accounting?” asks Arnaud Regout, president of the LCBI’s advisory committee and chief investment officer at BPI Real Estate. “We quickly understood that what people were counting was not the same even between Luxembourg and Belgium.”

A low-carbon building means something different in every country, explains Regout. Along with BPI, the LCBI was co-founded by BNP Paribas Real Estate, Colonial, Covivio, Ivanhoé Cambridge, AXA IM Alts, NSI, Signa, WO2 and ICAMAP. Each business has its own robust climate goals, seeking a better path forward. With the LCBI, the private sector is aiming to help lead the way toward a more effective methodology by combining each institution’s technical expertise to create a harmonized methodology across Europe for carbon accounting.

“The first objective is to account for and analyze what we do. Once we understand our impact, we can do something,” Regout says. “A lot of people speak about helping, but it is only speaking. When you understand, you can be proactive.”

Illuminating shadow pricing

The LCBI is built to bring together disparate decarbonization efforts into a unified approach. Every major European property owner is already working to reduce their carbon footprint, but companies’ methods are as varied as the regulations in the multiple countries in which they operate. Working to establish a common framework for sustainable buildings is critical to hitting internal ESG targets.

“The current reality, which is a big challenge, is that most appraisals and valuations do not capture carbon or energy efficiency performance to the extent they should,” says Stéphane Villemain, head of sustainable investment at Ivanhoé Cambridge. “That is a hurdle because the way the assets are valued is not aligned with their potential carbon-related liabilities.”

Carbon accounting processes in real estate are grappling with a major issue the LCBI is helping to define: whole-building lifecycle carbon accounting. A lifecycle analysis looks at a building’s carbon footprint over its entire lifecycle, from the design stage through decommissioning – its embodied carbon.

“We strive to make that assessment a concrete element of the underwriting. We have introduced an internal green IRR metric, a carbon-adjusted IRR, to capture a shadow cost of carbon,” Villemain says.

It all goes downstream from the first moment of the design stage. From the very first sketch, you can save or waste energy. Developers contribute to emissions with the use of materials and equipment, while owners are responsible for operational emissions and energy consumption.

But building materials and construction methods significantly influence carbon emissions, even from the utilization phase of the building. Tenants have a major impact on emission levels based on energy intensity, but this is beyond the direct control of owners. End-of-life emissions associated with demolition or disposal can spike emissions. The durability and adaptability of buildings play a crucial role in lifecycle carbon accounting, requiring a detailed understanding of the materials used in construction and how the building is used.

Retrofits are even more complex as the materials used in the original construction cannot be certified and, in most cases, cannot be replaced economically. Creating an analysis that can accommodate that much information and nuance is especially difficult given how typical use cases are changing.

“What is the normal use of a hotel? These kinds of things vary calculations dramatically from one asset to another,” notes Germain Aunidas, global head of development at AXA IM Alts. “We are working on these kinds of normative questions with the technical committee to try to set the right norms for decision-making.”

These debates may sound trivial, but they are essential in carbon accounting. How often an office is used directly impacts operational emissions throughout a building’s lifecycle. Having every employee in the office eight hours a day drastically changes calculations compared with just five hours a day, or a hybrid work schedule. Carbon calculations change based on whether each restroom has one sink faucet or two, such is the level of detail the LCBI is capturing in a framework, including embodied, as well as operational, carbon.

Each office’s carbon emissions are related to its energy source, further skewing results. Offices in France draw more nuclear energy, so office use has a lower impact on emissions than offices in Germany or Italy.

Offices are just one asset class. The debates start all over again when assessing residential, industrial and retail buildings, adding even more layers of complexity to any attempt at formal carbon accounting standardization.

Research and analysis have shown the carbon benefits of wood, lowering emissions from construction and storing carbon in the structure itself. Using materials with a long life, sourcing locally, sealing the building envelope, painting rooftops white, using more natural materials, implementing AI to better control heating and cooling and generating on-site renewables have all been shown to dramatically lower carbon emissions, but how they all work together throughout the lifecycle is what the LCBI’s pilot phase is studying.

“It may be detailed, but if we want to compare apples to apples, we have to agree on a common framework,” Villemain says. “We have multiple local frameworks at the moment.”

Meeting market demands

Real estate stakeholders and portfolio managers are taking climate commitments seriously because regulations require it. “Our business is to build new buildings or redevelop existing ones, and our large corporate clients have their own low-carbon targets. If we are able to build offices that match with their requirements, it is much easier,” says Alexei Dal Pastro, CEO Italy of Covivio, European real estate operator. “Most of our clients have these policies – if the building doesn’t meet the policy, they cannot rent it.”

Bankers now expect detailed sustainability reports before issuing new loans. If a real estate developer is unable to secure financing, it is unable to do business. Innovative, sustainable projects with a high standard are top of bankers’ minds, Regout says. A framework such as the LCBI helps to translate carbon accounting initiatives into a common language that the real estate and banking sectors can both understand.

The LCBI is not a solution itself, but rather a common language to engage in an ongoing conversation about the solution. Fighting against the cascading impacts of climate change will be a decades-long process.

“These laws evolve over time and criteria become stricter, so it makes sense to look beyond our current targets in order to have a buffer that keeps our buildings in line,” says Dal Pastro.

Europe has a regulation-driven approach. The benefit is that everyone gets on board because there is no choice, but real estate is a long-term industry by nature. Industry stakeholders do not want to see volatility in regulation. Some change is expected but transparency is needed.

That is where the LCBI can have the most impact. Investors like a long-term vision and capacity to anticipate what is upcoming. Making sure asset management stays aligned with decarbonization pathways is not possible without a common language to assess those efforts over time.

Next steps 

With the pilot phase wrapping up, the LCBI is aiming to finalize the revised methodology framework by the end of 2023. The LCBI is working with the Association for the Development of Low Carbon Buildings (BBCA) in France, whose membership includes two-thirds of the 20 largest French property developers.

The harmonized European methodology includes specific carbon emissions targets, providing a clear path towards achieving lower carbon emissions and alignment with CRREM pathways and the EU Taxonomy.

Achievement of those targets, combined with a completion score, will give access to a recognized certification. Verification will be handled by Bureau Veritas, an expert in laboratory testing, inspection and certification services. Labels and Low Carbon Building certificates will begin to be distributed in Q1 2024.

“The goal is to have first projects labelized by Q1 2024, in order for real estate stakeholders to start speaking the same carbon language at European level, and highlight the most exemplary buildings,” says the LCBI director Cécile Dap.

Nuance and intricacies have a profound impact on the carbon footprint of buildings, underscoring the need for a common language to accurately assess and compare sustainability efforts. As European real estate moves to a more sustainable future, the LCBI’s role in providing a standardized approach to carbon accounting is a critical step toward a more resilient industry. If the LCBI can scale across Europe, it will serve as a model for future carbon accounting practices across the globe.