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Real estate leaders are starkly aware of the criticality of transitioning the built environment away from its unsustainable trajectory - an effort accelerated by mounting pressure to contribute to goals set out in international climate agreements. Sustainability has evolved to be not only part of the fiduciary duty of investors, but also a strategic imperative necessary if firms are to capitalise on the increased demand, revenue and value of sustainable assets. Despite this shift, the real estate sector remains uniquely challenged when it comes to effectively capturing these opportunities to enhance value.
One of the primary reasons for this is that it is difficult to accurately gauge the carbon intensity of real estate portfolios. This information is crucial for identifying assets at risk of becoming stranded and leveraging opportunities to enhance value. Just 5 percent of consumption data capture is automated, and much of the exercise still comes down to physically gathering data points from individual tenants [1]. Central to this problem is that many occupiers are not legally obligated to share this information, and when they do it is often a voluntary gesture in support of the landlord’s sustainability efforts, or simply to align with their own targets. As a result, it is widely accepted across the industry that full portfolio coverage is difficult to obtain, and data gaps are likely.
These data gaps are leading to damaging inaccuracies when it comes to the identification, quantification, and mitigation of risk. One example can be seen at acquisition, where it is the investor’s responsibility to appraise the impact of sustainability factors on the risk-adjusted investment returns of assets. In the absence of complete consumption data, visual surveys are often relied upon to determine the capex required to meet carbon targets[2]. If high capex levels are assumed, the lack of evidence surrounding value premiums and cost savings from green retrofitting can make arguing the business case for expenditure difficult[3]. This feeds the growing investor bias favouring newer green assets, where the time taken to recover the extensive carbon costs associated with construction is often overlooked[4].
Although 82 percent of real estate investors now consider sustainability when making operational or investment decisions[5], it is clear that the ability of the industry to react proportionately to the risks of climate change will depend on data acquisition on the ground. Implementing effective data collection and management processes requires the participation of a diversity of stakeholders with different levels of experience, willingness and knowledge. To achieve net zero carbon, there needs to be synergy between investors, asset managers, consultants and occupiers to improve the quality of consumption datasets. Real estate firms can do more to address this issue through well executed engagement strategies with key stakeholders[6].
To tackle this obstacle, there are five immediate actions can be taken:
- ENGAGE
Engage with occupiers to educate them on the reasons behind data needs and promote a mutual commitment to the landlord’s net zero pathway.
- OBLIGATE
Ensure data sharing obligations are embedded in tenancies through green lease clauses.
- ASSURE
Provide occupiers with assurances over the security and purpose of data, and educate them on potential cost saving advantages.
- EDUCATE
Educate asset services teams on environmental sustainability to promote identification with the organisations’ climate goals and encourage acquisition efforts.
- AUTOMATE
Prioritise the installation of automated technologies to improve the seamlessness of data acquisition.
The most effective engagement strategies will be those that focus on forming strong relationships with occupiers, educating them on the value of sharing their consumption data and the associated cost savings from green retrofitting. Opening up this dialogue with occupiers will allow for mutual wins while assisting the global effort to limit warming to 1.5° Celsius above preindustrial levels.
[1] Evora Annual Investor Survey Report (2022), FC780-EVORA-Investor-Survey-2021-Combined-20220118-v3.pdf
[2] ibid
[3] CRREM (2020), Carbon Risk Real Estate Monitor, Accessed: https://www.crrem.eu/wp-content/uploads/2019/12/CRREM-Carbon-Risk-Integration-in-Corporate-Strategies-within-the-Real-Estate-Sector.pdf
[4] CRREM (2019), “Carbon Risk Integration in Corporate Strategies within the Real Estate Sector”, CRREM Report No. 2, December 2019, Wörgl, Austria
[5] JLL (2021) The impact of sustainability on value. Developing the business case for net zero carbon buildings in central London. https://content.yudu.com/web/43k7f/0A43pae/JLL-sust-value/html/index.html?origin=reader
[6] CRREM (2020), Carbon Risk Real Estate Monitor, Accessed: https://www.crrem.eu/wp-content/uploads/2019/12/CRREM-Carbon-Risk-Integration-in-Corporate-Strategies-within-the-Real-Estate-Sector.pdf
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