40% Of Emissions Come From Real Estate; Here’s How The Sector Can Decarbonize

From rising sea levels that sweep away coastal properties to heatwaves that cause energy bills to spike, real estate assets face a diverse set of threats from climate change. However, while these physical risks from climate change are often well known to real estate investors, less appreciated are the challenges presented by the low-carbon transition. Nearly 40% of global carbon dioxide emissions come from the real estate sector. Of these emissions, approximately 70% are produced by building operations, while the remaining 30% comes from construction. Global and national climate goals demand sharp emissions reductions in both operations and construction, which can only be achieved through significant changes within the real estate sector.

Governments, investors, and the public have become increasingly committed to reaching net-zero emissions by 2050. This ambition intends to mitigate the worst potential effects of climate change by limiting warming to 1.5˚ C above pre-industrial levels. Policies to achieve net zero that impact the real estate sector include rising carbon prices, building and energy efficiency standards, and renewable energy mandates. High carbon prices can translate into higher energy costs and increased operating expenses for real assets. Property owners may need to make investments to meet new energy efficiency standards to avoid restrictions on renting or sales. These additional costs may make outmoded, high-emitting assets less desirable. In a study by the Bank of England, high emitting properties saw reductions in value after climate policies were enacted. Real estate market actors from large institutional investors to homeowners are also expressing a preference for sustainable assets. These shifts both reflect concerns about high-emitting properties increasing costs and their diminished desirability among the climate-conscious.

Real estate investors face dual imperatives: to produce returns and to advance the low-carbon transition. Successful investors must effectively manage climate risks and aggressively capitalize on climate opportunities, which is why many have begun collaborations with tool and data providers.

The Carbon Risk Real Estate Monitor Project (CRREM) is an open-source tool developed in conjunction with the EU to improve the quantification of real estate transition risk and accelerate low-carbon investments in the sector. CRREM provides investors with emissions requirements at the company and property level in line with science-based decarbonization scenarios. It identifies potentially stranded assets and strategic actions to take. Finally, it allows for the quantitative reporting of transition risks in a standard format.

The CRREM tool offers some proactive steps to mitigate the transition risks within real estate portfolios. Reducing the carbon footprint of properties will ensure those assets remain desirable in the future. New construction and existing buildings may require different sustainability strategies. However, on the path to net-zero, real estate investors must consider both types of assets.

New construction

As world population continues to grow and urbanize, the globe is experiencing an unprecedented building boom. Based on current estimates, the rate of global building stock growth is equivalent to adding a new New York City every month for the next four decades. Choices about the types of buildings built and the materials used to construct them will have major implications of the real estate sector’s future carbon footprint. The first question before undertaking new construction should be to determine whether existing structures can be renovated or adaptively reused. Renovation and reuse can greatly reduce costs and demand on carbon-intensive materials. Where new construction is necessary, considerations around building design and location can impact both the materials required and future energy needs. New buildings should be constructed to the highest energy efficiency standards and with the aim of producing net-zero emissions. The materials used in the construction have a large impact on sustainability as well. Construction should promote resource efficiency by reducing waste, reusing materials, and selecting recycled products (e.g., scrap-based steel production creates far fewer emissions than new steel) and those produced using low-carbon methods. The inclusion of sustainably-sourced organic materials, such as wood, can sequester carbon in the structure, boosting its climate benefits.

Existing buildings

Approximately two-thirds of the global building area today will still be around in 2040. While net-zero aligned construction is an important component of sustainability, emissions reduction strategies must incorporate existing buildings too. Retrofits to boost energy efficiency can lower future energy bills, meet rising efficiency standards, and improve property desirability. Three areas of particular focus for retrofits include heating, ventilation, and air conditioning systems (HVAC), lighting (which can represent up to 40% of a commercial property’s energy consumption), and water use. Closely related to the retrofitting of these important operational systems is electrification. A significant contributor to building emissions can be heating oil or gas. Shifting away from these fossil fuels and towards the use of electric heat pumps can meaningfully reduce a property’s carbon footprint. However, a vital consideration is how the electricity is produced. Electricity must come from low-carbon sources and property owners should commit to purchasing an increasing share of their electricity from clean sources going forward. Many buildings may also be suitable for on-site electricity generation, such as the installation of rooftop solar panels (and even wind turbines), which can both shrink carbon footprints and energy bills.

In real estate markets around the world, astute investors are exploring the implications of climate change on their portfolios. Their plans should consider both the resiliency of properties to climate-related damages and preparedness for a net-zero future. Those that effectively manage both these considerations will be well-positioned to profit in the years ahead.

For more insights on this topic, the United Nations Environment Programme- Finance Initiative (UNEP FI), along with CRREM recently released a report on real estate transition risks and assessment methodologies.