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      • Speaking louder than regulation
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      • Sky clouds climate change 411 2
        Influential investors hold the real power when it comes to prompting real estate investment managers to tackle climate change.
        By: Evelyn Lee
        Published: 03 November 2016
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        Today, the Paris Agreement, a global accord signed by nearly 200 nations last December to combat climate change through carbon emissions reduction, goes into effect. The agreement’s key goals include keeping the increase in global average temperature to less than 2 degrees centigrade above pre-industrial levels and better enabling countries to deal with the impacts of climate change.

        As the agreement starts to be implemented worldwide, however, the issue of climate change still appears to be far from the minds of many private real estate managers.

        ‘Risks from extreme weather’ was considered to be the lowest in importance on a list of eight real estate and development issues for 2017, according to survey respondents in the Urban Land Institute (ULI) and PwC Emerging Trends in Real Estatereport released last week. From a scale of one for ‘no importance’ to five for ‘great importance,’ climate change got a rating of 2.47, compared with the top issue in the category, land and construction costs, which received a 4.3 rating.

        The issue gets a low ranking despite the fact real estate is a key target for carbon emission reductions, since energy usage in building accounts for nearly one-third of emissions – the largest source of carbon pollution globally, according to the report.

        Moreover, some of the top US real estate markets face significant financial risks associated with rising sea levels from emissions-induced global temperature increases; Los Angeles and New York, for example, are among the cities with the highest proportion of gross domestic product at risk from flooding in the world, according to a Lloyd’s index.

        Sarene Marshall, executive director of ULI’s Sustainability Center, told PERE this week the low ranking of climate change on the importance scale was partly due to the one-year timeframe of the survey question, and that over a longer period of time, the issue rises in significance.

        But while most firms recognize the importance of the matter, many still have yet to address the risks and impacts of climate change within their own businesses. Two managers told PERE that it can be difficult to justify the economics of making properties more sustainable, given the high upfront costs that can be involved – especially when it potentially comes at the expense of returns.

        To be sure, some private equity real estate firms already have taken steps to address climate change. For example, last December AXA IM – Real Assets, the real assets investment management arm of French insurer AXA, announced that it was targeting that 75 percent of its total direct property holdings be certified as green buildings – which produce significantly lower emissions than conventional properties – by 2030. Bentall Kennedy and Hines similarly have made sustainability a focus.

        But what will spur more real estate managers to take action? Certainly, policy changes would be a prime motivator, but new regulation typically takes a number of years to be drafted, passed and adopted. The Paris Agreement will not be enforced until 2020.

        In the meantime, however, there is already a powerful driver at work to get firms moving on climate change – major capital providers. For example, the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System have both publicly pledged to mitigate the risks of climate change within their overall investment portfolios.

        In fact, just last week at the ULI Fall Conference in Dallas, Eric Schlenker, a portfolio manager at CalPERS, noted that sustainability has become a major focus for the pension system because environmental risks have a “material impact” on returns. Crucially, he noted that a firm cannot be a manager for CalPERS unless it embraces and incorporates sustainability practices into its business practices.

        It is forceful statements like these from the sector’s capital providers – coupled with resolute refusal to back non-complying managers – that will compel more real estate managers to stop kicking the can down the road.

        Indeed, thanks to highly influential investors like CalPERS, the message from the money is loud and clear on the subject of climate change. Managers would do well to start making changes now – long before they will be mandated to do so by regulation – or risk losing commitments with forward-thinking investors.

        The 2016 Global PERE Awards are now open for nominations. Firms that wish to be considered should submit their achievements and milestones from the past 12 months through this page.  



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