A report by UNEP FI and CRREM has uncovered the inadequacies of current net-zero plans among real estate investors and managers. Christopher Walker talks to Julia Wein

A new report by United Nations Environment Programme Finance Initiative (UNEP FI) and the Carbon Risk Real Estate Monitor (CRREM) initiative outlines the scale of the task ahead for real estate owners to meet the Task Force on Climate-related Financial Disclosures (TCFD) requirements.

The owners of real estate are in the front line of fighting climate change, with the built environment contributing some 39% of greenhouse-gas emissions. “You must take action more quickly,” urges Julia Wein, one of the authors of the report. The study found that 44% of assets are held over 10 to 20 years, and 31% for more than 20 years. These long holding periods show why it is important “to conduct transition risk analyses on their assets”, she says.

Wein, an associate at the Institute of Real Estate Economics in Austria, explains: “The importance of this issue is ever increasing as we work to update our analysis of the pathways to net zero.”

Wein and her colleagues found many faults in companies’ net-zero roadmaps. “In our many discussions with investors, we continue to see a large discrepancy between commitments and clear roadmaps to fulfil these commitments.” 

Often, decisions are made solely on the basis of internal company-level return requirements. Management often underestimates fundamental climate changes and the tightening regulatory framework already under way.

Perhaps because there is a lack of qualified in-house specialists or external consultants, meaning there is insufficient knowledge about potential solutions.

“In theory, most grids will achieve decarbonization by 2040, but you have to question whether this is realistic, and it certainly doesn’t let managers off the hook,” says Wein.

The report was written before the outbreak of the Ukraine war. When challenged on how substituting high-emitting German coal for Russian gas will affect grid decarbonisation, Wein says: “This is an important issue, and we will update our pathways in May but, to me, it emphasises the importance of on-site renewables. As of 2020, less than 2% of total energy consumed was supplied from renewables, a figure I found very surprising.”

The report suggests there may be very limited potential for high-rise office towers to produce a significant amount of renewable energy on-site. However, other properties, such as shopping centres and logistics facilities, have rooftops and large land areas that may enable their owners to generate renewable energy on-site.

“There is a lot more people can do – real ways to improve an asset’s energy performance, not just greenwashing,” Wein says.

Wein was also surprised at “just how many assets will be stranded quite early”. It is the first project to assess Paris alignment of real estate portfolios in Asia and North America and the Asian findings were startling. 

The report notes that “by 2050, only around 1% of all assets will be Paris-compliant. As a majority of properties in the sample portfolio were top-certified ‘trophy’ assets”. Even properties achieving a ‘gold’ sustainability label today “will still have to undergo massive energetic retrofits and other measures to decarbonise to net zero by 2050”.

The report says: “There is a growing risk of stranded assets and write-downs” particularly in South Korea, China, Singapore, and Hong Kong.

“Urgent action is required now, most especially on retrofitting, since most buildings that will exist in 2050 have already been built,” says Wein.

The report finds that, thanks to calculations of embodied carbon, the construction of a new commercial property generates approximately one ton of embodied CO₂ equivalent emitted per sqm. “This means that a new office building or shopping centre with even the best energy certificate starts its lifecycle with a huge carbon footprint. This fact shows that simply constructing highly  efficient or even ‘zero-energy’ buildings cannot deliver decarbonisation.”

If, rather than demolishing and rebuilding an existing building, say 60-80% of its structure can continue to be used, this avoids the emissions associated with 25 to 35 years of use. “Retrofitting should come first,” says Wein.

“The most important message to come out of the report is that so much transparency is simply missing in real estate markets,” she adds.

Almost a quarter of institutions were surprised to learn that they were exposed to substantial transition risk and will need to take action. Only 6% of respondents were happy with the positioning of their assets.

To overcome industry challenges, asset owners and investment managers need to prioritise improving data collection and management. The survey found that 41% of respondents “only had some of the asset-level information needed to carry out transition-risk analysis”, while 29% said “did not have enough information available”.

The report says: “Further improvements in data coverage and tracking energy consumption within tenant areas is needed. A ‘whole-building’ approach must be applied.”

Using assumptions to fill gaps in the data is likely to lead to more risks in the future. A quarter of respondents at least partially used their own assumptions for asset-level data. Only 6% did not need to make any assumptions.

“Even a slight difference in the methodology for calculating floor area will change.… the carbon assessment,” the report says. “To ensure a like-for-like comparison, users should report the gross internal area of the asset, aligned with the International Property Measurement Standards.”