By Guy Wilkinson, ESG Analyst & Claudia Ravat, ESG Analyst
Given the real estate sector’s near 40% attribution to global GHG emissions, it is vital that this sector is tackled quickly and robustly. As a result, NGOs, corporates and regulators alike must come together to ensure the rapid and permanent decarbonisation of the sector. Clearly, in order for the real estate industry to reduce its emissions, so must cement and steel manufacturers. Whilst steel has a clearer pathway, it is difficult to see a similar path for cement without significant technological advancement, which must outpace the expected increase in overall demand.
However, emphasis around the building ‘envelope’ is also a vital lever for emissions reduction, and we expect a reinvigoration of policies and incentives to improve building efficiency. This does however require additional buy-in from the building user, which is perhaps the most important stakeholder in the process of decarbonisation. Regulations, subsidies and taxes continue to come to the market in abundance. Regulations around disclosure are particularly important for ESG-oriented investors, and disclosure through the EU Taxonomy will allow investors to more accurately identify those companies in the best position to decarbonise in the future.
Numerous initiatives, frameworks and certifications have been developed that will help support this and allow companies to set targets around industry specific frameworks. The percentage of buildings certified to LEED, BREEAM and other such standards should be a key determining factor when looking at listed real estate companies for decarbonisation progress. Not only will these initiatives drive climate mitigation efforts, but they also create an environment of significant financial opportunity.
Those listed real estate companies that are able to decarbonise their portfolios will be able to charge ‘green’ premiums, and thus achieve a higher revenue stream. In terms of identifying which listed real estate companies are most ready to transition and decarbonise, the disparate tapestry of the market makes it difficult to compare companies. Their ability to decarbonise depends on a variety of factors, such as the mix of office, retail and residential buildings in their portfolio, as well as the locations (geography) of the assets. The publication of final deliverables of the Science Based Targets initiative’s(1) sector guidance for buildings will be a key catalyst for the real estate industry, but this is not due until October 2023.
Overall, for the decarbonisation of the listed real estate sector to be a success, financial institutions must support their transition. Our framework is one example of a template for understanding those companies that are most ready to transition.