EU policies on buildings’ carbon emissions are changing market behaviour, with implications for investors, say Stephanie Pfiefer and Tatiana Bosteels

Buildings are a significant contributor to carbon emissions in the EU, accounting for 40% of final energy use and 35% of carbon emissions. Across Europe, serious concerns over the impact of building emissions have led to the adoption of ambitious carbon targets, including a 20-35% reduction in emissions by 2020. These targets are supported by a range of policies, including the introduction of Energy Performance Certificates through the Energy Performance of Buildings Directive, passed in 2009, and the Energy Efficiency Directive, signed into law at the end of last year.

Whenever climate regulation is introduced, there is always uncertainty about how the market will respond. The effects of these policies are now becoming clearer. Recent research by the Institutional Investors Group on Climate Change, ‘Protecting Value in Real Estate – Managing investment risks from climate change’, provides evidence that some of the largest, most influential market participants are responding to regulatory changes by incorporating green building programmes in their investment and asset management practices. Examples include low-energy certificate ratings being used to reduce acquisition prices; energy performance certificate requests and sustainability risk assessments becoming part of the standard due diligence process; and the introduction of formal ‘green’ clauses in standard tenant leases.

This demonstrates that the sector is responsive to the policy environment and is working to protect the value of assets. It should also lead to real emissions reductions in the coming years. However, changes in the market are at an early stage and much of the evidence for behavioural change remains anecdotal. There is still much that can not be known about how market behaviour will evolve. What is known, however, is that regulatory pressures from EU institutions and member states governing the sustainability of buildings will continue to grow and, as they do, so will impacts on property values.

Policymakers are acutely aware of the sector’s potential to deliver on efficiency targets in a cost-effective manner. Mandating more effective energy use in buildings is seen as more achievable, both politically and financially, than many other carbon-reduction alternatives.

A recent non-binding European Parliament vote called for an 80% cut in energy used in buildings relative to 2010 levels by 2050. More regulation is coming. Alongside, and related to this regulatory push, market demand for green buildings is very likely to increase, as will the physical wear and tear on buildings as a result of more extreme weather. These changes place the onus on investors to understand shifting conditions so they can put methods in place that mitigate investment risks and help preserve, or even boost, the value of their assets.

Investment decisions made today will have an impact on the value and financial returns of real estate investments in the future. By taking action now, when regulation is at a relatively early stage, investors can make the policy landscape work for them and ensure they maintain long-term control over the value of their investments. The leading real estate participants are already doing this, and it is imperative that the wider market follows.

Failure to do so in the face of further regulation could have potentially serious and negative effects on an investor’s ability to influence financial performance.

Policymakers also have an important part to play in ensuring that the real estate sector is able to meet the envisaged contribution to emissions reduction. The evidence so far is that policy frameworks are making a difference, but this should not lead to a sense of complacency. To hit the ambitious emissions reduction targets set by the EU, deeper building renovation levels will be necessary across the building stock in Europe.

This will require supportive policy frameworks and financial mechanisms that stimulate investment, lead to cleaner buildings and drive further progress.

Stephanie Pfiefer, executive director of IIGCC, and Tatiana Bosteels, head of responsible property investment at Hermes Real Estate