Real Estate - the conversation about ESG is changing

15 December, 2021

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It is hard to escape the conclusion that of all the many and varied real estate trends accelerated or reinforced by COVID-19, it is the drive towards higher environmental, social and governance (ESG) standards that is the most significant for the industry. The urgent need to reach Net Zero being the chief concern.

Though the Net Zero agenda was promoted as an important part of real estate investment before the pandemic, there was not quite the same conviction as we see today. Net Zero is now uppermost in the minds of all industry players, and increasingly important investment criteria on any new acquisition or development. This together with concerns about repositioning costs and potentially trapped assets is fuelling widespread urgency across the industry.

Impetus here comes from both corporate occupiers and institutional investors. Increasingly both have made Net Zero pledges and see real estate as key. Regulators are also making demands. The market seems to have jumped from a position where being “green” was something you paid extra for to now it's just part of business as usual. With both investors and occupiers demanding greater transparency and accountability the challenges with many buildings are becoming stark. Discussing the key challenges here for investment managers was a recurring theme at PwC’s recent EMEA Real Estate Conference.

With carbon offsetting increasingly seen as a secondary solution at best, the industry is looking to new technologies to improve the carbon performance of buildings.

It's certainly exciting to see the innovations coming through the proptech world addressing this. Modern buildings often lend themselves to these new tools and many can be retrofitted to accommodate them at reasonable cost if not already in use. Older buildings are more problematic.

There is increasing awareness that major repositioning or in some cases demolition of these older buildings not only has financial cost consequences but also a significant carbon cost as well. The carbon created through the manufacture of high-volume building materials such as cement, steel and glass together with that generated in the actual construction process (all known as embodied carbon) is in many cases equivalent to or higher than the carbon created over a natural cycle of occupation. We will be hearing a lot more about “stranded assets” and “brown blight” over the coming year or so unless or until this embodied carbon challenge is resolved.

But as our conference also highlighted, there is a sense that the conversation about Net Zero is changing. To date, the focus has been on the carbon that’s produced by operating a building. This runs the risk of driving investors and occupiers towards new-build which may well have the effect of accelerating carbon production. Clearly not the outcome we are looking for! It's clear that we need a way of looking at carbon production holistically across the building life cycle which encourages carbon reduction now and at the same time incentivises innovation in the construction industry and related supply chain.

Joined up thinking with governments and regulators will be key here. There are wide variations across Europe in terms of government policy on Net Zero in the built environment. In some countries, there is very little incentive for investors to act. Also, whether and how embodied carbon is measured by investors and occupiers that themselves didn’t commission the works leading to the creation of embodied carbon is a major challenge that needs addressing here.

Another big challenge lies in the Real Estate industry’s lack of visibility and influence at government policy making level when it comes to ESG. This is all the more remarkable when we consider real estate’s overall impact on the environment. It was no surprise, therefore, that one of the key conclusions from the conference was around the need for the industry not just to improve measurement and reporting but to establish a common ground on Net Zero between investors and occupiers. Get that right and there is every opportunity for the real estate industry to engage with governments and regulators across Europe and make a truly positive impact on this vital, global challenge.

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