Real estate owners expect future pricing to reflect embodied carbon

While real estate investors have yet to account for embodied carbon in their investments, buyers will be increasingly taking it into account when underwriting assets in the future, members heard at the PERE Network Decarb Forum in London.

Claus Mathisen, co-CEO and partner at NREP-backed investment firm Urban Partners, said on an asset manager panel that the firm has not yet seen buyer preference for assets with low levels of embodied carbon. This is because it has been very difficult for real estate investors to measure embodied carbon with a relatively “disparate and fragmented” database.

However, some investors are expecting embodied carbon to be increasingly factored into investment decision-making as industry awareness continues to grow around decarbonization.

“I don’t see a green premium on embodied carbon. We do see a green premium or rather a brown discount on operational carbon or energy efficiency,” said Annachiara Torciano, head of ESG and communications at Swedish real estate investment firm Slättö, speaking on the asset managers panel. With that in mind, she thought investors should start thinking about embodied carbon because the green premium for assets with low levels of embodied carbon will come in the future.

Data challenge

A major challenge around embodied carbon is the lack of available data. “It is hard to have a good database for existing buildings in the operational phase. And it is even harder, from my point of view, to have the data for embodied carbon as well,” said Diana Louis, head of alternative assets ESG integration at German real estate company MEAG. Similar to Mathisen, she noted the firm has also not factored embodied carbon into its investment decisions yet because of the challenges of measuring this type of carbon emissions.

In an innovation panel at the event, Rebecca Pearce, co-founder and director at real estate consultant firm Territorio, explained that the different methodologies, tools and ways of doing individual product disclosure have made the standardization of embodied carbon data very tricky.

Without a standardized system, results are very difficult to interpret from the variety of studies that have been released over the years, according to Erik Landry, director, climate change, at GRESB. “So they’re talking about different lifecycle stages, they’re talking about different building layers. And depending on the combination of the two, you could be talking about wildly different things,” he explained.

Apart from the complexity of data standardization and interpretation, data collection is also very limited for embodied carbon, according to Nagadarsan Suresh, project manager at Partnership for Carbon Accounting Financials, an industry organization focusing on greenhouse gas emissions.

For example, only eight countries participated in the guidance published by the organization in September 2023 on how one can measure embodied carbon in the different stages of the building lifecycle. All the eight countries that contributed to the guidance are in Europe: the UK, Netherlands, Belgium, Germany, Austria, Switzerland, Denmark and Sweden.

“And likewise, there’s a significant regional variation as well,” Suresh added.

Changes underway

However, changes are already underway to make embodied carbon a bigger focus for the industry, with regulation being a key driver, according to Mathisen. “We do see the regulatory environment changing,” he said. For example, in Copenhagen, Denmark, the local building code requires assets to be declining in carbon emissions over the coming years.

Embodied carbon can also weigh on the financing of real estate investments in the future, according to Pearce. “Who knows when the banks will start to consider and ask the questions around what is the embodied carbon of this building that you are about to build, or of this asset that you were about to purchase and then improve?” she said. As banks are increasingly taking ESG credentials into their lending activities, Pearce thought real estate investors should act ahead by accounting for embodied carbon in their investments.

However, real estate owners can take relatively simple steps to lower the amount of embodied carbon in their assets, according to Thomas Stanchak, director of sustainability at real estate investment firm Stoneweg US.

For example, investors can focus on “thoughtful, effective, and durable use” of steel and concrete. Doing so can lower emissions by up to 30 percent, according to Stanchak. Additionally, investors can do a carbon accounting study by looking at whether a building is using recycled steel and lower-carbon concrete.

“This is fairly cheap compared to the whole cost of the development and it gives you basically a non-biased check on your material cost,” said Stanchak.

Torciano also agreed that many of the measures to start addressing embodied carbon are cost neutral. “It’s about building efficiently, and it’s about choosing the best technologies and materials available today. And often there’s no price difference, but there’s a CO2 difference,” she said.