The real estate sector has been one of the worst carbon culprits, but there is an opportunity for it to lead the way with a radical decarbonization agenda. “Real estate today is a big contributor to greenhouse gas emissions, but it has great potential to transform through energy efficiency, renewable energy sources and by developing new low carbon buildings,” says Helena Olin, head of real assets at Swedish pension plan AP2. The World Green Building Council goes further, claiming all properties must have net-zero operating emissions by 2030 if the Paris Agreement is to be fulfilled.
In many respects, real estate managers have no choice but to embark on wholesale decarbonization. Many of the institutional investors behind them have made it clear they will only commit to funds invested in low carbon, or even zero carbon, assets.
In September, the Net-Zero Asset Owner Alliance was launched by a group of the world’s largest pension funds and insurers, responsible for more than $2.4 trillion of assets under management. The alliance has committed to carbon-neutral investment portfolios by 2050.
A new initiative funded by Dutch pension plans APG and PGGM specifically aims to help real estate investors develop decarbonization strategies. The initiative will develop 1.5 and 2-degree decarbonization pathways for real estate assets by applying global carbon budgets. “Each pathway will extend to 2050 and will be comprised of annual estimates of building-related carbon emissions and energy performance, aligned with global warming goals as set out in the Paris agreement,” explains PGGM’s Mathieu Elshout.
Investor pressure, regulation and fiscal incentive will all dictate a low-carbon approach to real estate. European policymakers are leading the charge, but over the past two years more than 100 cities in the US have set climate mitigation commitments, with many already being worked into building codes (and taxes and fees for non-compliant properties).
“California requires all new construction to be net zero by 2030 and Washington, DC requires all large commercial and multifamily new construction to be net zero by 2026,” says Billy Grayson, executive director of the ULI Center for Sustainability and Economic Performance. “Developers in these markets are starting to focus more on deeper investments in energy efficiency and exploring the types of on and off-site renewable energy and energy storage they can integrate into their development projects.”
Ultimately, net-zero carbon buildings are likely to prove both easier to sell and more attractive to tenants. And increasingly pursuing an aggressive decarbonization agenda will be key to generating returns and avoiding obsolescence. Investors are taking note.
“Property owners are contributing to a low-carbon economy by improving the energy efficiency of buildings, reducing or eliminating direct emissions,” says Rik Recourt, associate, real estate at GRESB. “They are reducing indirect emissions associated with purchased electricity and heat, reducing supply chain-related emissions and installing renewable energy. A growing number have pledged to have net zero carbon operating assets by 2030 in line with the challenge laid down by the World Green Building Council.”