An estimated 40,000-plus property professionals descended on the Messe München in Germany last week for the 2023 edition of Expo Real. Amid the swirling talk that interest rates may have peaked, heralding a return to more confident investing in the months to come, the organizers of Europe’s largest property conference had their own agenda to push.

In recognition of the built environment’s contribution to global emissions, how the real estate sector can help limit the global temperature increase to 1.5C as per the 2015 Paris Agreement was a key focus of the week’s program.

The opening panel, moderated by PERE, brought together four investment and research executives to discuss the progress the industry has made thus far. It was unanimously agreed there is still a long way to go for the sector to meaningfully lower emissions. But the discussion quickly arrived at a sticking point: whose responsibility is that, exactly?

Minutes in, Julie Townsend, ESG lead for Europe & Asia Pacific at PGIM Real Estate, the global investment arm of US insurer Prudential, pointed out that where the buck lies with managers to decarbonize the sector, their efforts can only address operational carbon, one side of a two-sided equation also including embodied carbon. On the latter, the fact the strongest investment proposition is often a new, energy-efficient building, despite its larger carbon footprint compared with a refurbished standing asset, represents a key disconnect in the relationship between sustainability and value. “That’s the challenge we have before 2050,” she reminded the audience, adding: “It’s not the institutional investor’s role to be able to shift that.

“It’s not going to be the tenant who pays more for a reduction in embodied [carbon] – it’s not in their commitment, it’s not in their footprint – it has to come through from value or it has to come through from regulation or tax incentives. We can’t sit here with a fiduciary responsibility and reduce embodied carbon – that’s not our place and our role. But what we can do is we can make the business case work when it presents itself, and we’ll manage regulation.”

To address the issue, Townsend called for industry-wide change and education to reassess the relationship between value and embodied carbon, and “make the regulations work in the right way.” She said embodied carbon needs a similar certification to the energy performance certificate, for example, which measures operational energy efficiency.

Hélène Demay, executive director for real assets product management at research provider MSCI, agreed the industry is eating a “free meal” as far as embodied carbon is concerned. With no regulation around embodied carbon yet, “people can ignore it.” However, she acknowledged this is changing, citing a research report published the week before Expo Real by CRREM, the Carbon Risk Real Estate Monitor. The report focuses on the trade-off between operational carbon savings and embodied carbon via energetic retrofits, arguing the calculation of a “carbon payback period” should represent a key performance indicator in decision-making, given the majority of today’s buildings are due to still be standing in 2050.

Improve or protect?

For all the talk of how to tackle embodied carbon, or how to improve the collection and processing of data to reduce operational carbon, on the panel – which also featured Beverley Kilbride, chief operating officer for Europe at manager LaSalle Investment Management, and Aneta Rusiniak, director ESG for real estate, Europe at manager Invesco – the idea the sector might be better off managing assets for resilience to a warmer climate was also mooted.

“I don’t think we’re going to [limit] to 1.5 degrees by 2050,” said Townsend. “So, if I have a fiduciary responsibility and I’m decarbonizing to 1.5, is that actually my responsibility, or should I be managing risk out to 2.6 degrees, which is more than likely the reality?”

She said the industry should be talking more about the possibility of translating capex savings across to protecting assets from the physical risk of a 2.6-degree climate. “My point isn’t to give up on 1.5, but it is a reality to think that capex is better probably spent in managing resilience to a changing environment.”

“You would never have heard such talk last year,” said Michael Hughes, chief executive officer at London-based logistics manager Verdion, later at the conference.

Bill Hughes, global head of real assets at UK-based manager Legal & General Investment Management, did not agree that shifting the focus away from limiting global warming and toward managing assets for climate resilience would be to the industry’s benefit. “1.5 degrees is not as binary as it sounds,” he told PERE. “The protection of assets will be an issue either side of that temperature goal. It just gets less manageable the further away from 1.5 degrees we get.”

Annette Kröger, chief executive officer for Europe at Munich-headquartered manager PIMCO Prime Real Estate, said the industry cannot afford to give up on 1.5 degrees as there is much progress still to be made. “Working to decarbonize assets doesn’t mean you can’t also have resilience in mind – the two types of climate risk are not contradicting each other, but are both assessed to mitigate impact on value,” she added.