Innovation in real estate is helping to meet decarbonization challenge

The real estate industry has become far more focused on reducing carbon emissions. PERE’s 2023 LP Perspectives Study found 23 percent of investors intended to invest primarily in ground-up development to help meet the decarbonization challenge, while another 33 percent would prefer to focus on retrofitting assets. Both approaches will be important.

There is a long way to go. Although 83 percent of real estate investors and corporate occupiers are actively looking at ways to innovate and accelerate their sustainability strategies, according to a JLL survey, only 6 percent see themselves as “leaders.” On a similar theme, a GRESB real estate assessment shows that, with more than 2,000 firms now participating, 72 percent have a net-zero policy in place, but only 50 percent have an established target.

Five stars

Direction is needed, which is one of the reasons we have picked out our five stars of sustainability success (starting on p. 41). In order to make quantifiable progress in sustainability, managers and occupiers need to measure and manage the right things.

If setting a goal is the first step, then tracking progress against it is the second.

Unfortunately, in real estate, a huge proportion of emissions are the so-called Scope 3 emissions, which are beyond direct control. That is why it is also so important to work collaboratively with tenants or other partners.

It is also vital, however, to remember that sustainability goes beyond decarbonization. From water use to waste, recycling and biodiversity, there is so much more to focus on than carbon, and more to this report than the five stars of sustainability.

Big on biodiversity

Biodiversity is a particular focus in the UK, where, from 2024, planning applications in England will have to show a biodiversity net gain. A required 10 percent enhancement will go well beyond simply maintaining biodiversity or replacing what is lost.

As Georgie Nelson, head of ESG at manager Abrdn’s real estate arm, notes: “We are having to do more now to understand biodiversity… in more depth than we would have had to do before.”

Part of the plans in the UK would be the introduction of biodiversity credits to encourage nature-based investing. An Environment Bank has been established as part of the initiative and forms part of a sustainable fund run by real assets manager Gresham House and capitalized with £240 million ($299 million; €274 million).

Carbon accounting

It is by working together that the greatest progress is achieved, which is one of the reasons the Low Carbon Building Initiative has sought to bring together some of the largest managers in the industry in Europe to develop a harmonized approach to carbon accounting. It has run a pilot phase covering 15 projects across seven countries over six months.

The intention is that lessons learned from this will help to establish a common framework for sustainable buildings, to move forward from the patchwork of methods companies are currently using. With the pilot phase drawing to a close toward the end of 2023, labels and low-carbon building certificates are intended to be distributed in Q1 2024.

Digging into data

Another area of considerable concern is data centers, where demand for new assets continues to grow, with no end in sight – especially as AI advances and the hyperscalers get ever larger. It is not just that more data centers are required and being built, but that individual data centers consume more power than they used to.

However, nor is it just power demands for running data centers that make them challenging from a sustainability standpoint. They also require cooling, which is getting harder – and not to mention more expensive – as climate change heats up the planet.

Technology, particularly around rack cooling, is making data centers more efficient, while there are also efforts to create extra renewable energy generation. However, in the race to go green, those assets that can’t keep up run the risk of being left behind, with all the valuation risks that entails.

Indeed, that is a state of affairs that could be applied in all real estate sectors. Sustainability has never been more important, and sustainable investing is increasingly being prioritized.