Stephanie Aznavour, Associate Director Strategy, Longevity Partners France & Belux

Integrating climate risks and opportunities into commercial real estate ESG strategy

The early summer temperatures in Texas are breaking records. An unbearable heat index of 125 was recorded in Corpus Christi. In Austin, the highest low temperature ever recorded for June was 82. Both heat extremes limit the human body’s natural cooling abilities and increase incidences of heat related illnesses. The earth is warming and new tools like Climate Central’s Climate Shift Index can link the effect of climate change to local weather. Companies are partly responsible for this negative climate impact that affects our lives. The built environment sector accounts for nearly 40% of global greenhouse gas emissions and its role is not to be underestimated in the pathway we’re on.

The real estate sector negatively affects climate change through the consumption of carbon-intensive resources. This is the concept of “inside out,”  while the concept of “outside in” refers to the consequences of climate change on real estate through transitional, physical, reputational and financial risks and opportunities. The notion of inside out and outside in is the basis of double materiality which is central to the Corporate Sustainability Reporting Directive (CSRD) that entered into force on 5 January 2023. Commercial real estate owners and investors must acknowledge both the risks and opportunities associated with climate change.

To be resilient, real estate companies can no longer carry on in a business-as-usual mode. Carbon neutrality is a crucial objective for limiting the negative impacts of climate change, and the 2050 target stems from the Paris Climate agreement, which aims to limit the increase in the planet’s average temperature to less than 2 degrees Celsius above its pre-industrial level. Understanding and mitigating climate risks has become increasingly important for investors as evidenced by the growing influence and importance of the Task Force on Climate-related Financial Disclosures (TCFD).

An ESG strategy should be a company’s first step in their commitment to decarbonization and a key component of that strategy should include identifying materiality. Real estate companies with ESG strategies that are more than three years old are due for an update because materiality is dynamic. The ~50,000 companies that are subject to the CSRD directive will have to now report on double materiality. Our view is that CRE investors can level up their ESG programs by integrating climate risks and opportunities into their strategy in three ways.

1. Risks and Opportunities across the Value Chain

Commercial real estate owners will have to examine their entire value chain to identify risks and opportunities. Where there are potential negative impacts that can affect their business (ex: risk of lack of material resources) and where they have direct (Scope 1 and 2) or indirect (Scope 3) control, CRE owners will have to develop plans to manage . The same exercise of examining the value chain can reveal opportunities for new income streams. The US Inflation Reduction Act, for example, creates market liquidity by allowing companies to monetize clean energy tax credits that were previously illegal to transfer. These transferable investment tax credits would be most relevant to PV installations.

Forecasting uncertain futures through scenario analysis can be a fruitful way to identify climate-related risks and opportunities across the value chain. Longevity Partners can guide clients through the process of scenario analysis to facilitate the identification of risks and opportunities. A value-added outcome is that scenario analysis builds resilience in the short-, medium-, and long-term because it exposes decision-makers to the company’s positioning relative to future climate scenarios that take into account political/regulatory, environmental, economic, social, and technological drivers.  

2. Decarbonizing assets and portfolios

Successful transition to a net zero-carbon economy will require significant increases in allocation of investment funds to transition-aligned projects. Longevity Partners’ Sustainable Finance and Energy teams provide expertise to support clients in allocating capital to investments that directly tackle climate change. We advise five processes to decarbonize assets and portfolios.

  • Optimization of energy efficiency is the first step towards decreasing the carbon emissions of a building. For a typical office building, around 45% of carbon emissions can be reduced via onsite improvements: 10% by controls optimization, 20% by plant upgrade, 10% by fabric upgrade and 5% by onsite renewables. All aspects of the building must be considered, such as the HVAC systems, lighting, and other technical plants, as well as its insulation. Asset optimization can be performed via energy audits but also by changes in users’ attitudes that are quick win and low-cost solutions.
  • Tackle embodied carbon for construction or renovation: evaluate each design choice in terms of the upfront carbon reductions and as part of a whole lifecycle approach and set targets regarding construction, demolition and excavation waste on all developments or renovation. For example it is possible to achieve 75% of waste recycling.
  • Increase renewable sources: solar panels installation, heat pump, subscriptions to green energy contract, geothermal energy, urban district networks. As mentioned previously, the US Inflation Reduction Act will enable these changes.
  • Enhance eco-mobility solutions: PV recharging, bike racks, car-sharing promotions, and walkability are, in many places across Europe and the UK standard options.
  • Offset remaining carbon. All remaining carbon emissions can be offset via certified offsetting schemes. Offsetting the final step and the aim should be to decrease carbon emissions as much as possible before offsetting carbon. By prioritising the improvement of the assets’ energy efficiency and on-site energy generation Longevity Partners emphasizes the importance of developing sustainable solutions that provide long-term benefits.

3. Building resilience into assessments and adapting buildings

Stakeholders can take actions to promote resilience to climate change for existing assets. Assessing the exposure of assets to physical climate risk is now seen as standard practice during the due diligence process. Like any property condition assessment, quantifying the physical risk that the asset is exposed to demonstrates an understanding of financial risk due to climate change. Tools like Moody’s Climate Risk and Munich RE are affordable and easily understood. Not only should owners evaluate risk during due diligence, but also at regular intervals (3-5 years) during the hold period to capture changing risk profiles. Investment policies should take into account risk profiles and provide guidelines on how to mitigate those risks through capex.

In the commercial real estate ecosystem, property managers, brokers, tenants, and local communities are all key players. Their buy-in to ESG is critical to making progress in ESG. At Longevity Partners, our holistic and international perspective allows us to be uniquely positioned to partner with our clients to achieve their ESG goals, whether it be developing a new strategy, refreshing an existing strategy, designing low carbon buildings, or conducting best-in-class energy audits.

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