Commercial Real Estate Emissions are Significant
No matter how you look at the breakdown of global Greenhouse Gas (GHG) emissions, buildings always make up a significant portion.
Some estimates have buildings generating close to 40% of annual global emissions, split between building operations (28%), and building materials and construction (11%), the latter often referred to as embodied carbon.
Whether 40% or 14%, GHG emissions from buildings and commercial real estate in particular is very significant and therefore, the sector’s focus on emissions reductions, and ESG more broadly, is particularly important.
ESG – A Key Consideration in Commercial Real Estate
ESG has become an increasingly important and interwoven aspect of business and corporate culture during the last decade. Public companies rely on ESG scores from third party evaluators to reflect their business ethos, with evaluations being assessed over a myriad of topics associated with Environmental, Social and Governance stewardship. Like nearly all companies and sectors, commercial real estate faces the same ESG goals to satisfy stakeholders’ demand to invest in ethically impactful organizations.
Several major US commercial real estate companies are adapting to the pressures of corporate ESG, designing and retrofitting existing commercial buildings in a sustainable manner, much the same way as most of the auto industry has steered towards all electric vehicles. With commercial real estate investing highly correlated to ESG efforts, the first green building exchange traded fund (ETF), Invesco MSCI Green Building ETF (NYSE: GBLD) was created to represent companies who design, construct and redevelop buildings in an environmentally conscious manner.
The most common measurement of environmentally robustness is the LEED scale and rating system, with four levels of certification (Certified, Silver, Gold, and Platinum), and seven areas of focus including Sustainable Sites, Water Efficiency, Energy and Atmosphere, Materials and Resources, and Indoor Environmental Quality.
ESG Frameworks Gaining Traction
Around the world, commercial real estate looks to be headed in an environmentally friendly and socially responsible direction. Many countries are now utilizing and considering ESG frameworks and metrics specific to commercial and residential buildings which helps evaluate and improve the sustainability performance of real estate assets.
One renowned framework, GRESB (Global Real Estate Sustainability Benchmark), ranks a building on its energy efficiency, carbon emissions, air quality, and occupancy turnover rates.
During 2020, GRESB processed submissions for more than 96,000 assets, from over 1,200 property companies, across 64 countries, with a real estate value of $4.8 trillion. Estimates show that this would represent close to one third of total global commercial real estate asset value.
ESG Regulatory Developments
The European Union continues to be a leader in ESG efforts. It has redefined its financial regulatory system to incorporate ESG and the Sustainable Finance Disclosure Regulation (SFDR) reflects sustainability and ESG considerations.
In the United States, there are federal financial tax incentives for property development to be constructed with sustainability at its core including section 45L tax credit which has a monetary value on energy efficiency, section 179D commercial buildings energy efficiency tax deductions, and section 48 investment tax credit for renewable energy usage.
Many real estate companies are also finding tenants willing to pay a premium for an eco-conscious building. With an all-time high demand for sustainable housing and commercial space, the supply seems to be actively catching up.
Innovation in ESG and Commercial Real Estate
Innovation is a major driver in creating opportunities to develop and redefine the commercial real estate landscape to encompass ESG initiatives. The major motivators seem to be millennial investors who value a balance of social culture with sustainability.
Startups are driving the ESG boom in a major way by redefining many outdated processes. Many startups and small businesses are making sustainable real estate imaginable at scale with offerings such as a platform for circular construction material procurement, sustainable material-based building insulation, container homes or buildings, and non-toxic thermochromic coatings.
Innovative companies are more frequently advancing the science of building materials, property development, natural ecosystem management and construction processes to meet a higher level of efficiency. Advancements in tracking and monitoring systems make energy and water usage consumptions trackable and more predictable than ever before.
The future of commercial real estate will incorporate a sustainable lens with government incentives, innovative solutions, and demand for investments to represent a greater good.
Regulatory requirements have been tightening and are expected to continue a similar trajectory moving forward. With more than half of all US portfolios having ESG investments, there is great evidence of further incorporation of ESG investments among future investors.
As for the commercial real estate industry, adaptation to the ESG demand is a pivotal factor in securing future investments. ESG is a risk mitigation strategy in terms of climate change.
Those companies and nations who adopt standards associated with responsible construction set by Energy Star, LEED, GRESB and other ESG and sustainability frameworks, represent the future of commercial real estate as they will be providing their stakeholders with what they need, a de-risked proposition.