Will Robson and Antonios Panagiotopoulos examine the progress real estate investors are making towards net zero

Many real estate companies and funds have committed to decarbonising their portfolios, with the target of net-zero carbon emissions. But not all net-zero targets are created equal. 

They can differ widely in scale, scope, timeframe and implementation. To get a better understanding of how credible a real estate fund’s net-zero target is, we have outlined an approach that evaluates them using three broad qualities – comprehensiveness, ambition, and feasibility. 

To test our approach, we piloted it on the 16 constituents of the MSCI Pan-European Quarterly Property Fund index (unfrozen) (PEPFI). Using both self-reported and publicly available data, we analysed PEPFI targets and identified trends and key takeaways. While all the PEPFI funds have set decarbonisation or net-zero targets, there is a spectrum of maturity in terms of their credibility. 

Our analysis, which builds on a previous study that evaluated corporate decarbonisation targets ‘Breaking Down Corporate Net-Zero Climate Targets’, supports asset owners in evaluating the decarbonisation targets of the companies and funds that they invest in. 

Comprehensiveness: The comprehensiveness of a net-zero target depends on how well a fund or company understands the full emissions profile of its portfolio, the scope of its emissions data, and whether it includes all emissions in the target. This raises several questions. How are emissions quantified? What is the level of data coverage within the portfolio? Are emissions based on actual or estimated data? Which emissions are included in the target? What percentage of a portfolio do these targets apply to? 

Our study found that all PEPFI managers measure and report on the direct (scope 1) and indirect (scope 2) emissions, from sources like on-site combustion and purchased energy, and most (69%) measure downstream indirect (scope 3) emissions from tenant-controlled energy use. Reporting on upstream indirect (scope 3) emissions resulting from the embodied carbon of building materials in development and construction activities, however, remains a challenge – only 29% of PEPFI funds reported doing this. 

Since target comprehensiveness scales with the availability of actual (not estimated) emissions data, it is also important to assess the data coverage within a fund or company’s portfolio. For the PEPFI funds that responded to our request for emissions data (fund-level emissions and coverage data was publicly available), we found that data coverage ranged from 24% to 100%. This wide variability may be attributed to differing strategies for collecting data and differences in portfolio composition. 

Portfolio data coverage helps differentiate leaders who have taken the steps to understand their portfolio coverage despite data-collecting challenges. Where there are gaps in emissions data, funds may strive to attain high portfolio data coverage and apply verified estimates. 

Comprehensiveness depends on the emissions scopes included in the target. We found that all PEPFI fund managers have set scope 1 and 2 emissions targets and a majority (81%) include scope 3 tenant emissions. The 57% of funds and companies whose targets include scope 3 emissions associated with developments, redevelopments and embodied carbon have more comprehensive targets and are at a more mature stage towards net zero. 

To fully understand fund emissions data, one must not only look at which scopes are included in a target, but also what percentage of emissions those targets cover. For example, a fund target might only apply to scope 1 and 2 emissions but, depending on the portfolio composition, this could equate to a high or low percentage of the portfolio’s total emissions. The greater the percentage of emissions included in a target, the more comprehensive it is – to meet the requirements of the science-based target initiative, targets must cover at least 95% of total emissions.

Among the PEPFI funds that provided operational emissions data, target coverage ranged from 3% to 100% of total emissions. The fact that some net-zero targets cover only 3% of operational portfolio emissions suggests that not all net-zero targets can be taken equally. 

Ambition: The second quality for evaluating the credibility of a net-zero target is ambition. We assessed how much and how quickly funds and companies intend to reduce emissions, and whether these reductions align with accepted third-party, science-based reduction pathways. 

Setting short-term (five to 15 years) and long-term (over 15 years) targets provides a measure of a fund’s or company’s ability to meet their net-zero targets. If only a short-term target is set, it may indicate a lack of long-term vision in line with net-zero expectations; implementing only a long-term target may demonstrate a lack of accountability. We found that almost all (94%) of PEPFI funds have set long-term green-house gas targets – and all but one of those are net zero – but only 62% have short-term targets. 

Evaluating whether a fund or company has its target aligned with an accepted pathway, or approved by a credible third party, is also an indicator of ambition. Since assessing country and asset-class-specific absolute reductions is data and time intensive, many companies and funds use third-party tools and frameworks to achieve alignment with accepted emissions reduction pathways. 

MSCI has developed real estate decarbonisation pathways covering 1.5°C, 2°C and 3°C and both the SBTi and Carbon Risk Real Estate Monitor verify targets against a 1.5°C or 2°C pathway. We found that the majority (88%) of PEPFI funds were aligned with a 1.5°C decarbonisation pathway simply by pledging to achieve a net-zero target by 2050. Third-party reduction pathways were used by 44% of funds to inform the required trajectory for their emissions reductions – demonstrating greater credibility. But only 19% of funds reported having a science-based target. 

Feasibility: No matter how comprehensive or ambitious an emissions reduction target may be, it needs to be feasible to demonstrate real progress. The better a fund or company can demonstrate that it is on track to meet its target, the more feasible, and therefore, more credible, the target. Evaluating feasibility requires looking at the progress a company or fund has made towards reducing its emissions, a comparison of how its current performance compares to accepted decarbonisation pathways, and whether there are relevant strategies and implementation plans integrated throughout the business, from planning to budgets and incentives, as well as stakeholder engagement. 

All PEPFI funds that responded to our information request reported having a relevant strategy in place. The sophistication of the strategy varied from fund to fund, and there appears to be a common maturity curve. For example, funds that have only just begun to implement a net-zero strategy might start by making a public commitment to reduce emissions and publicly disclosing their approach, while more mature funds formally integrate net-zero strategies into plans and policies and set timelines. The most advanced funds costed decarbonisation initiatives, for example by linking executive/fund management compensation to target or incorporating an internal price on carbon into decision making. 

Our approach in evaluating net-zero target credibility is intended to guide the many real estate funds and companies that still need to set targets and develop implementation plans. However, building the framework is only the foundation. Aggregation of published target information can help firms contextualise and benchmark their approach against peers and the market. 

Where this information feeds into wider real estate transition risk and implied temperature rise models, such forward-looking management targets may form key elements of compliance to global temperature targets, helping the industry assess, manage and report its climate risk. 

Will Robson is global head of real estate solutions research and Antonios Panagiotopoulos is vice-president of ESG research at MSCI