8 December 2020
In 2015, the United States of America entered the Paris Accord. For those who don’t spend their days with their noses buried in climate policy, the Paris Accord was a compact which committed individual countries to specific carbon budgets (known as nationally determined contributions, or NDCs). The United States, for example, promised to reduce its emissions about 28 percent below 2005 levels by 2025. (We are not on track to meet this.) Although the agreement is entirely non-binding, it set the stage for international collaboration on climate issues in a way that had largely failed previously.
President Trump later withdrew the United States from the Paris Accord—notably, the only country in the world to do so—but didn’t stop there. In the last four years the administration loosened or eliminated nearly 100 pieces of environmental regulation. Analysis by the Rhodium Group shows that the five biggest rollbacks of environmental regulations in the last presidential term could result in 1.8 billion metric tons of greenhouse gas emissions by 2035.
The next administration is set to re-prioritize climate change in a serious way. However, a Biden administration will not only mean a stark reversal deregulation; many experts also predict the change can also usher in an era of climate-focused policies across multiple departments. For starters, a COVID relief package under Biden has the potential to inject significant capital into green industries and could put pressure on other global actors. John Kerry has just been named “climate czar.” Biden’s climate plan aims for the construction of 500,000 electric vehicle charging stations and 1.5 million new energy-efficient homes. Although some of Biden’s loftier goals may not pass, at least some green stimulus is likely. According to The Washington Post, “A recent analysis by the Climate Action Tracker shows that if the president-elect’s plan is fully realized it would shave 0.1 degree C off global temperature rise by 2100.”
This renewed focus on sustainability at a federal level simply complements what has already been underway the last few years. Because although efforts to fight climate change have not been consolidated at the top, a quiet sea change has been taking place in the business community and at the city level to cut carbon emissions in a systematic way. Nowhere is this more true than in the real estate sector, which contributes approximately 40% of global greenhouse gas emissions.
At a city level, there has been a renewed focus on building energy efficiency and renewable energy proliferation. In 2019, over 18,000 Energy Star-certified homes were built in Arizona. Utah has seen 23 cities and counties commit to adopt 100 percent renewable electricity by 2030. Not to mention that dozens of cities have passed stricter building regulations in the last few years, including 35 cities in California which have prohibited gas in some form.
Likewise for the real estate investment community. In September, the amount of money in index funds that prioritize ESG (environmental, social, and governance) factors reached $250 billion. Dozens of real estate owners have committed to achieving net zero operational carbon emissions by 2050, with many of them seeking earlier deadlines. The Net Zero Asset Owners Alliance, which has over $5 trillion in AUM globally, has set a decarbonization target for real estate investments of 16-29% by 2025.
New policies which prioritize climate change at the city, state, and federal level therefore simply build on existing momentum. Real estate owners would do well to embrace the “green wave” and get ahead of the curve.
Here are three shifts in real estate sustainability we expect to see more of in the next few years:
1. Energy efficiency as a primary focus
The Biden plan pledges to “upgrade 4 million buildings and weatherize 2 million homes over 4 years, creating at least 1 million good-paying jobs with a choice to join a union; and also spur the building retrofit and efficient-appliance manufacturing supply chain by funding direct cash rebates and low-cost financing to upgrade and electrify home appliances and install more efficient windows, which will cut residential energy bills.”
This is no small promise, and one that could have huge implications for real estate. There are some questions around just how feasible it is to upskill a million workers in just four years, but enhanced technical expertise would do wonders for setting a standard for energy efficiency, particularly in states which currently have no energy code.
Energy efficiency is the cheapest way of cutting carbon emissions and also the first step towards net zero carbon. Especially for value-added types of real estate investments, there is a huge opportunity to retrofit assets and drive further value.
This also comes at the same time that many cities around the country are mandating energy benchmarking, including New York City. As a result, some firms which are currently seen to be market-leading will instead simply be compliant. Expect energy efficiency to become the norm, rather than the exception, for large commercial properties, and we would strongly suggest getting prepared for that.
2. Taking climate risk seriously
Recently the U.K. announced that reporting on climate risk would be mandatory for big financial corporations by 2025. Although there has been more lobbying against such requirements from U.S. firms, enhanced focus on climate risk reporting is only likely to continue. This is especially true given that 2020 has seen an onslaught of incredibly expensive natural disasters in the U.S., with over 50 costing over a billion dollars. Recently, Moody’s and Trepp began including climate risk scores in CMBS reports. Climate risk is simply too costly for firms to keep ignoring. Lary Fink, CEO of BlackRock (the world’s largest asset manager) said recently that he supported making climate risk disclosure mandatory.
Assuming investors can get up to speed on the nuts and bolts of climate risk, expect sustainability due diligence to play more of a starring role in the acquisitions process.
3. Large-scale investment in renewable energy technologies
Even without the imperative of tackling climate change, investing in renewable energy just makes sense. Although the value of oil dipped into the negative digits this spring, solar investments continued to do well. By August, the U.S. solar market had soared to a YTD growth rate of over 100%. The expectation is that a Biden administration will seek to pass stimulus packages that focus heavily on creating jobs in renewables.
What does this mean for real estate owners? Hard to say for sure, but one thing is for sure: renewables are more widespread and cheaper, making renewable energy procurement a no-brainer. Owners can get additional income from their properties and solar has become a huge opportunity to increase NOI and boost returns in a sustainable way. Furthermore, property owners can directly respond to market demand for companies who need to deliver on climate goals. More regulations are also likely to follow at a city and state level, with California already having implemented a requirement for all new buildings to have solar panels.
Despite all of this, progress on climate change won’t be easy. Still, with any luck, more federal climate change policies will spur interest in sustainable real estate investments, especially among investors who may have been dragging their feet. If you were waiting for the right time to start thinking about tackling your carbon emissions, this is it.
We at Longevity Partners are here to help the real estate market in the U.S. get up to speed. With offices in Austin, San Francisco, and New York, as well as London, Paris, Amsterdam, and Munich, we can help you take a global approach to your company’s sustainability at an asset or portfolio level.