Towards standardising decarbonisation audits in real estate

Decarbonisation audits are essential for commercial real estate capital expenditure (cap-ex) planning if assets are to remain competitive in a market transitioning into a resource-efficient and decarbonised economy.

This article uses the term 'decarbonisation audits' to include the different terms currently used in the European market, such as net zero audit or roadmap, greenhouse gas emission reduction, energy audits, environmental, social and governance (ESG) audits, sustainability cap-ex assessments, and other naming variations of services looking at operational and embodied emissions, energy use, and other sustainability performance aspects of commercial real estate assets. 

Asset managers use decarbonisation audits to show which investments are needed to ensure that their assets are meeting both regulations and stakeholder ambitions. These reports are also part of a standard due diligence process during transactions.

The outcome of decarbonisation audits can have a significant effect on asset management plans and the underwriting of an asset.

Even core-rated assets often require sustainability cap-ex at levels that are traditionally not expected for these types of investment.

Although these cap-ex figures are not yet part of the standard valuation process, things are moving in that direction.

For this reason, the RICS European Sustainability Working Group has begun an open discussion of how to improve the net-zero audit process, as there are many problems with how they are currently offered and conducted.

At present, many methods used to answer the sustainability cap-ex question are unsuitable.

This article aims to foster discussion around standardising the decarbonisation audit process, while the next two articles in this series will look at current legislation and case studies to understand the European market better.

Typically, this entire process takes between four and 12 weeks to complete for assets of 5,000m² in size and upwards.

Auditors must be able to predict as precisely as possible what effect energy conservation measures (ECMs) and other optimisations will have on a building. There are two main calculation methods.

• Static calculations, also known as steady-state, linear or Excel-based calculations, are the most widely used method. Static models can take into account a limited number of dynamic effects, such as external temperatures and simplified interactive effects between a limited number of ECMs. EPCs are typically static-based, which allows them to be consistent but not very accurate. They can be preprogrammed for certain ECMs. Uncommon ECMs often require the judgement of an experienced energy engineer. 

• Dynamic modelling, also known as energy modelling or dynamic building performance simulation, involves using a 3D digital twin and simulations that account for additional influences and synergic effects. This type of model provides a more accurate representation of actual and future potential outcomes. Although dynamic simulations are more time-consuming and expensive to establish, they are being used increasingly due to this lower margin of error on predictions. 

The synergic or interactive effect is a term describing how different properties affect each other. For example, efficient lighting saves electricity, and installing an advanced cooling system will help save on cooling costs.

Simply adding up these two savings isn't correct because with less heating waste coming from light fixtures, there is less demand for cooling; adopting this approach would result in an inaccurate measurement of possible savings and provide incorrect return-on-investment figures.

How buildings are constructed is influenced by several factors, many of which significantly affect their final energy needs, such as insulation properties, orientation, and heating, ventilation and air conditioning equipment. Benchmarks are typically segmented by asset class, location and (sometimes) EPC rating.

Consider this example. A building performance engineer creates two models.

One represents an office building with a tenant having their own servers and maintaining a cooling setpoint of 21°C, while the other model represents a building in the same city with a tenant using cloud computing and a thermostat set at 23°C during summer.

All being equal, including the calculated EPC rating, the first building's energy demand would be nearly double that of the second building.

This example illustrates that benchmarks do not take unique circumstances into account, which makes them unsuitable for an asset-by-asset assessment approach.

As a result, there is enough data to examine the implementation of proposed measures, assess their actual impact, and calculate the true accuracy of decarbonisation audits.

Recommended investments often fail to deliver the performance gains promised by auditors. The reason for this inaccuracy can be attributed to the following factors.

• Consultants may make incorrect assumptions if they do not follow guidelines or if they lack access to extensive reference projects to address data gaps. 
• The calculations used lack consistency, and there is no transparency to verify the accuracy of the model used.
• A sense-check of the modelled outcome is missing or was done by an inexperienced specialist.
• The synergic or interactive effects of different measures are not considered.
• The cap-ex figures are inconsistent or not based on a large data set, or the consultant had no access to suitably experienced quantity surveyors.
• The cap-ex figures are not realistic as they do not account for the full scope of the retrofit project, such as project management costs or secondary and tertiary adjustments required to accommodate a new system. 
• There is no adherence to standards, such as those from RICS – for example Whole life carbon assessment (WLCA) for the built environment and RICS Valuation – Global Standards (Red Book Global Standards) – or from the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE), the Chartered Institution of Building Services Engineers (CIBSE), the International Cost Management Standard Coalition (ICMSC).
• Not enough measures are evaluated to determine what it would take to make the building meet the targeted performance without offsetting or renewable energy procurement.
• The proposed energy conservation measures are either oversimplified or not realistic.
• There is excessive focus on technical aspects of the retrofit project and insufficient attention given to possible commercial impacts and asset management executability. 

A lack of precision in these areas increases the risk of introducing bias and subjectivity into the audit process. For example, studies conducted by buyers often show significantly different results compared to those conducted by sellers.

Buyers typically underestimate the impact of measures, whereas sellers tend to be optimistic about the impact.

Moreover, buyers would argue that more measures (and more cap-ex) are required to make the building achieve a certain performance, resulting in price chipping during negotiations.

In addition to the issues mentioned earlier, there is also the risk of confusion on the client side due to a lack of knowledge.

This affects the credibility of an audit even further. Clients are often unable to distinguish between different product offerings, such as decarbonisation audits, high-level roadmaps, scans, quick scans, estimates and surveys.

As a result, they are unable to assess whether the outcomes are suitable to help them make reliable business decisions.

The goal is to demystify the opaque processes that consultants can operate under and make it more difficult to take shortcuts in the auditing process.

The following guidelines should be remembered by real estate investors, owners, and asset managers when engaging an auditor for a decarbonisation audit.

• Sustainability is not a standalone area of expertise, and it affects all real estate activities. Therefore, clients should ensure that the auditor is not solely an energy engineer. 
• Clients should ask about the fees charged for updating the decarbonisation audit report, as these reports have an expiry date, especially when there are changes in operations, tenancy or equipment.
• Clients should ensure that dynamic modelling is the basis of an audit, as static calculations will give results with much lower accuracy. Static calculations should not be used for budgeting or underwriting due to potential variations in actual investment needs.
• Clients should request to see the raw files used for the project, including a demonstration with the energy engineer to run through the model and simulate different measures.
• Clients should ensure that the auditor has proper accreditation and follows certain standards, such as those developed by ASHRAE or CIBSE.
• Clients should inquire about how the cap-ex figures were established. If the consultant's organisation also manages implementation projects, better estimates can be expected. 

Audits should meet the requirements set out by the EU's new EPBD Renovation Passport initiative, which is a digital, tailored, step-by-step roadmap for upgrading a building to zero-emission standards by 2050.

This will ensure that audits are a reliable source of information on which real estate professionals can base investment decisions. This topic will be further explored in the second article in this series.

The author would like to thank Pal Baross, David Lázaro, John Newton, Krysta Petropoulou, Leticia Pérez Galán, Federica Saccani and Adam Targowski for their contributions to this article.