18 December 2024
Etienne Cadestin, CEO and Founder
As we approach the end of 2024, and begin preparing 2025, I’d like to use this Winter newsletter to share some strategic insights on sustainability, engineering and real estate.
Over the past year, we’ve seen a notable shift in industry rhetoric. Asset management firms have become more discreet in communicating their sustainability programs compared to 18 months ago. This shift reflects a fundamental change in the market. With fewer transactions taking place, asset managers are focusing heavily on preserving the value for their properties. This includes revisiting their asset management strategies and adapting their approach towards managing climate risk.
A clear distinction has emerged between companies for whom sustainability is integral to their operations and those that approach it as a box-ticking exercise. The firms that remain committed to their values have continued to push their sustainability programs forward. These companies are undertaking detailed climate risk assessments across their portfolios, initiating deep transformational projects and advancing embodied carbon reduction through detailed sustainable asset guidelines.
Does that mean other firms have reduced their focus on sustainability? Not necessarily. These companies recognise that climate risk is a critical component of their operations. However, they are beginning to view it through different lenses, perhaps focusing less on GRESB points, and more on asset-level optimisation, value retention and value creation. Ina world where inaction equates to value erosion, this shift is essential.
The main 10 focus areas for 2025 will be:
- Carbon pricing
Understanding the cost of transition will become a fundamental aspect of asset management. Combining both bottom-up and top-down approaches will be crucial, and tools like our decarbonization dashboard will allow for live tracking of progress at an asset and portfolio level.
- Climate risk assessments
With the increasing frequency of extreme weather events, climate change poses tangible risks to properties and their value. Rising insurance premiums and adaptation costs make comprehensive climate risk assessment essential to understand both financial and physical exposure.
- Data means data centers
Our growing reliance on data and AI comes with an environmental cost, increasing the share of C02 of the built environment. In 2022, data centers consumed 2% of the world’s electricity, or 460 TWh. As both global population and AI demand increase, this number will only rise, putting significant pressure on grid capacity. We face tough decisions about prioritizing energy for data centers versus human settlements. Developing sustainable data centers is critical, and Longevity are proud to have certified the first BREEAM Excellent data center in the US, Integrating innovative technologies in the process.
- System programming and monitoring
One of the main challenges for investment managers is the lack of digital tools for tracking sustainability initiatives. Our new Integrated Service Platform (ISP) will address this by enabling detailed tracking of every aspect of a climate risk management program from corporate, fund, and asset levels, allowing for retrospective analysis of actions taken, against future targets such as Net Zero Carbon.
- Value at risk assessment
At this pivotal moment, understanding the potential value at risk from the climate transition is crucial for preserving asset value. Our climate team, alongside Deloitte’s valuation team has developed RECVR, a tool destined to identify financial risk associated with climate change and offer scenario-based solutions to optimise risk management.
- Legislation monitoring
Failure to comply with local or national legislation can result in significant reputational and financial damage. Investors expect their partners to stay ahead of the curve by anticipating legislative changes with material impacts. Examples such as the UK’s Minimum Energy Efficiency Standards and New York City’s Local Law 97, highlight the growing complexity of these requirements. Our policy and legislation dashboard can provide a useful global summary of compliance requirements to help companies navigate this rapidly changing landscape
- Data assurance
Accurate sustainability data is essential to meet reporting requirements as well as to meet the increased scrutiny of investors and the general public. Third-party assurance can help identify any data gaps and ensure the integrity of sustainability reporting, reducing the risk of misreporting and ‘greenwashing’ accusations.
- Sustainable design guidelines
While deep retrofits require creativity and effort, they present one of the best opportunities for adding value to real estate. Establishing a clear set of sustainable design guidelines enables developers and asset managers to maximise both financial and social value. The real estate sector is a significant contributor to pollution, not only through CO2 emissions but also through high Global Warming Potential GWP gases used in building materials. For example, the release of (a gas 17,000 times more harmful than CO2), during photovoltaic (PV) panel production is an issue I’ve personally raised with the United Nations.
- Tenants first
Rather than speculating on what tenants want, it’s critical to engage with them directly to understand their sustainability goals. Tenants care about the total cost of occupancy, so increasing rent while simultaneously reducing utility and service charge costs creates a win-win scenario.
- Validation of decarbonization programs
As new tools for validating decarbonization programs emerge in the future, it will be increasingly important for asset managers to have their decarbonization strategies validated and audited. This will ensure that they have allocated sufficient resources for transitioning their assets and that they’re on track to meet their sustainability targets. Longevity have developed a validation tool, called Paris Proof which addresses these key requirements and we are now looking for businesses to trial it, before its official launch in early 2025.