The real estate industry and climate change
We already have all the necessary tools at hand: the technology to construct energy-efficient buildings; local building materials that can later be recycled; certification that provides a framework for sustainable building; and industry benchmarks that measure sustainable real estate funds.
Yet, despite all this, sustainability typically falls into the ‘extra’ risk column in business plans. To accelerate responsible investment in our sector, sustainability needs to be integrated into every investment decision, while environmental and social impact considerations need to become as important as financial performance.
The responsibilities of real estate
In discussions that led to the 2015 Paris Agreement, the building sector was identified as having one of the world’s highest carbon footprints. Our sector consumes over 40% of global energy annually and produces 30% of total global greenhouse gas emissions.
As part of their commitment to the Paris Agreement, nations are enacting legislation to mitigate climate change. The EU, for example, has passed legislation requiring member states to collectively reduce greenhouse emissions by 80-95% from their 1990 levels by 2050, and increase energy efficiency by 32.5% by 2030.
"If the real estate sector takes the threat of climate change seriously, then we should be transitioning building stock to become highly efficient and low carbon more earnestly than we are."
Everyone should be preparing for these changes. They impose stringent requirements that will be reflected in building codes and disclosure requirements.
Sustainability as an opportunity
Companies that view sustainability regulation as a simple cost of doing business are underestimating the changing reality. In August, the Business Roundtable, an association of leading US chief executives, announced plans to repudiate a singular focus on the interests of shareholders and instead pledged to ‘deliver value’ to all stakeholders.
This is a dramatic about-face for a group that always argued that the interest of stockholders was paramount. But even shareholders are now demanding more of companies than just financial performance, as Larry Fink, CEO of BlackRock, acknowledged in a recent letter to the heads of companies in which his group invests.
Institutional investors are also often a step ahead of legislation. Large pension funds and sovereign wealth funds are divesting from companies that fail to meet ESG standards. With some $30tn of global investable assets now managed by socially responsible vehicles, that is a large source of potential investors to be cut off from.
Sustainability should be seen as an opportunity to create value, make a positive impact and ensure investments are made in products that are resilient and low in risk. If the real estate sector takes the threat of climate change seriously, then we should be transitioning building stock to become highly efficient and low carbon more earnestly than we are.
The sales angle is that sustainable buildings are equipped with the latest technology, so they offer occupiers higher comfort levels and greater benefits.
High time for action
What is holding us back in prioritising the creation of sustainable buildings?
One aspect is our approach to understanding investments. We describe investment decisions by using financial models that are not suited to reflecting their sustainable value. Categories that fall out of financial models are ‘soft criteria’.
An often-heard argument is that no one wants to pay for sustainability. But the question should not be ‘who pays?’ – if our models were able to better integrate sustainable value and social impact then it should be ‘who gains?’
Another issue is our perception of time. We believe climate change is an abstract issue concerning the future. This summer, wildfires scorched much of the Arctic, releasing 100 megatons of carbon dioxide into the atmosphere, while Indonesia announced it will relocate its capital as Jakarta is sinking and could be submerged by 2050. These consequences of climate change are all likely to intensify and they will be felt by the assets that we manage. According to a report by climate scientists at the Crowther Lab, a research group based at ETH Zurich, cities in Europe will be warmer by 3.5 degrees warmer in the summer and 4.7 degrees in the winter by 2050. The question is no longer whether or not our industry can afford to opt in and out of sustainable investment. It is whether it comes at our convenience — or at a cost.