Illustrations by The Project Twins
It’s when the big money moves that we can see real progress on fighting climate change. But while climate-linked destruction grows more and more dire, the investment efforts of ‘green’ finance in real estate have so far failed to produce any result beyond a lot of talk. What action needs to happen?
A recent KPMG report Can Capital Markets Help Save the Planet? notes that environment-focused investment has not yet had the desired effect of transitioning the world to a low carbon economy. There has not been clear policy on where companies should go with their green initiatives, meaning it has been hard to compare results, while capital markets have not yet been pricing the impact of climate-change action accurately.
“The invisible hand of markets needs to be matched by the visible boot of governments,” the report states. “So far, a green property portfolio does not equate to a green planet. There is currently no clear line of sight between climate investing and its impacts.”
Pre-pandemic, the real-estate sector accounted for 38% of all carbon-dioxide emissions in 2019, according to the 2020 Global Status Report for Buildings and Construction, while the property sector also demands 35% of all the world’s energy. Unfortunately, the sector has not been getting better or reducing this share.
If we are to get on track to achieving net-zero carbon building stock by 2050, the International Energy Agency says direct carbon-dioxide emissions from buildings need to fall by 50%, and indirect building emissions need to fall 60% through lower power-generation causes. These efforts mean sector emissions must fall around 6% each and every year through to 2030. By comparison, global energy-sector carbon-dioxide emissions fell 7% during the pandemic.
In other words, the property industry needs the equivalent of a pandemic lockdown every year to reduce its emissions. Is there any real urgency to make that happen? It seems not.
There are positive-sounding initiatives. The world’s largest asset manager, BlackRock, said in April that it is teaming up with Singapore government portfolio manager Temasek to form Decarbonization Partners. They have jointly committed US$600m towards private-equity and venture-capital investments into companies creating decarbonisation tech, including in the buildings industry as well as renewable and alternative energy, battery storage, transportation and manufacturing.
Decarbonization Partners aims to close on US$1bn in assets for its first fund, including BlackRock and Temasek money. The fund manager has appointed Teresa O’Flynn to head the launch, a full-time role she will take on having served as the global head of sustainable investing at BlackRock Alternative Investors.
Other than that, though, BlackRock could not cite any progress when contacted in November, seven months after the splashy announcement. A spokesperson said Decarbonization Partners will have “more news on this strategy in the coming months.”
One noteworthy change coming out of COP26 is the tone of financial regulators. At ‘Finance Day’ on 3 November, the standards-setting authority announced the creation of a new International Sustainability Standards Board (ISSB), which will construct the global baseline for sustainability-disclosure standards.
It will surely be positive to see regulators requiring and forcing change rather than initiatives being entirely voluntarily, as has been the case to date. Investors have for the last 15 or so years been implementing voluntary schemes for responsible and environment-conscious investment. But regulators have so far been loath to elbow their way into the discussion.
The result is a plethora of different focuses, and in-house assessments. Each investor has charted a different course in chasing environmental, social and governance (ESG) – highlighting board diversity or LGBTQ+ inclusivity, as much as focusing on decarbonisation or combatting climate change.
It’s more and more accepted that a focus on ESG is useful if not essential for a company to create profits and value. ‘ESG investing’ will simply become ‘investing'. Those three letters can then be put to rest.
Union Investment Real Estate, which manages around €50bn within the Union group’s total assets of €430bn, has developed its own proprietary investment-scoring method, the Sustainable Investment Research Information System. New acquisitions must demonstrate that they generate sustainable cashflow. For existing legacy assets that don’t match the new standards, Union drafts a capital-expenditure budget or explores other options to bring the asset up to scratch.
“The journey starts with the examination of the asset manager’s existing portfolio,” says Erich Cheah MRICS, Union Investment Real Estate’s head of investment management for the Asia Pacific region. “Then the future of the portfolio and how the asset manager wishes to grow a decarbonised and sustainable portfolio needs to be clearly determined.” A conversation with the investors will be essential, since additional spending is necessary that should create higher valuations.
Cheah, who is also the chairman of the RICS Asia Pacific World Regional Board, notes that “not all the pieces of the puzzle are in place” for the entire property industry to rise to the challenge of the new, elevated climate standards that are being established. One difficulty is that property assets are not homogenous across the world. It is therefore difficult to compare assets across geographies, property sectors and markets.
“It’s like going to the supermarket to find a low-fat dairy product,” Cheah explains. “The first question is to define what low-fat means, and then determine how to measure and benchmark a product to the market.” Is there the ability in each market to assess an asset for energy efficiency and benchmark it against other buildings?
Capital and the desires of investors will ultimately drive the direction and pace of decarbonisation and sustainability, Cheah believes. “Start now!” he exhorts institutional investors. “There’s a real urgency to do more.” The target will be dynamic and quick-moving but one we need to hit, pushed by better technology, new regulation, increased transparency and greater knowledge.
“The invisible hand of markets needs to be matched by the visible boot of governments” KPMG report, Can Capital Markets Save the Planet?
Companies will be rewarded for advancing their own timeframes for reducing emissions and achieving net-zero that are more ambitious than those set out at COP26 and in the Paris Agreement of 2015. Lineage Logistics, which runs a network of 400 temperature-controlled warehouses across 19 countries, pledged in early November that its operations will be net-zero on carbon emissions by 2040 – a decade earlier than the COP26 timeframe for net-zero. An initiative orchestrated in 2019 by Amazon and the climate-partnership activists Global Optimism seeks to bring forward the 2050 Paris Agreement targets by 10 years.
Lineage Logistics has already made good progress. The company committed in 2015 to decrease its energy use by 25% over the next decade, but met that target within two years. It will be installing 85 megawatts of onsite solar energy at its warehouses by 2025. Its facility in Colton, California will be its first to generate 100% of its energy use “at home,” and on site.
Asset managers are maturing in their approach. Where previously they simply looked to avoid ‘bad’ companies and sectors, and favour companies with good ESG scores, now they are looking to identify proactive companies that are already succeeding in making real change. Lenders in particular can also structure loans to reward strong performance that meets and exceeds certain yardsticks, while penalising companies that fail to hit their targets.
We’ve heard the promises and pledges. The politicians have had their say in Glasgow. Engineers, property surveyors, energy auditors, construction fabricators, retrofitters and emissions mappers must take over, funded and rewarded appropriately. They need the backing, and we need their success.
“The journey starts with the examination of the asset manager’s existing portfolio” Erich Cheah MRICS, Union Investment Real Estate
Ann Gray FRICS 01 June 2023
Logan Nagel 25 May 2023
Mark Williams 23 May 2023