A Decarbonization Blueprint For The Commercial Real Estate Sector
As the Intergovernmental Panel on Climate Change (IPCC) has confirmed, our world is now facing a "rapidly closing window of opportunity" for addressing global climate change. More troubling still is the meager rate at which the organizations most responsible for planet-warming greenhouse gas emissions—including those among the private sector—are taking the unequivocally necessary actions.
Shifting Priorities
The number of publicly traded companies either beginning to issue standardized environmental, social and governance (ESG) performance disclosures or staking their reputations against professed climate change mitigation and adaptation goals is growing. This gives reason for optimism, but there’s room for improvement yet. Not only do a paltry share of professionals have confidence in their companies’ ESG reporting capabilities, but only a handful of companies’ disclosed climate transition plans are considered credible according to the non-profit CDP.
There are also some more concrete deliverables to celebrate. The electric power sector, which is the second largest source of carbon emissions in the U.S., is rapidly adding renewable generation, investing in energy efficiency, applying innovative grid management solutions and advancing nascent clean tech—trends that will likely continue with recent enabling legislation. Similarly, with the country’s largest source of emissions, the transportation sector, the accelerating consumer and commercial adoption of electric vehicles, widespread application of carbon-sensitive logistics and other net zero-enabling trends give cause for some comfort, if not celebration.
However, I've noticed there is one noteworthy exception: the global built environment.
The Commercial Real Estate Sector
The commercial real estate (CRE) sector, responsible for as much as a fifth of U.S. annual energy-related emissions, is underperforming, both in its commitments to climate goals and its material contributions to climate action.
There are some promising developments in the right direction, but evidence to the contrary shows there is still plenty of work to do. A recent report suggests as much as 44% of sector companies have no publicly-disclosed emissions reduction targets, and more than half don’t have a low-carbon transition plan. Worse still, emissions attributable to buildings and construction not only reached anall-time high in 2021,but, in 2022, were the source of emissions that saw the largestyear-over-year increasein the U.S. compared to the transport, industry and power sectors.
A Blueprint For CRE Leaders
As far as a diagnosis, consensus posits that these trends are the results of market failure. Many business leaders in this industry, be they CRE property managers, owners or investors, lack a clear incentive for climate action. Indeed, while the ROI of adapting real assets to physical climate risks may be straightforward, these rent-seeking enterprises have little justification to invest toward the mitigation of their contributions to climate change.
But this is not only untenable for Paris Agreement goals, but for these companies’ bottom lines and the lived experiences of their stakeholders. What’s needed is a reassessment of the opportunity at hand, as well as an incrementally scalable blueprint for building decarbonization.
Commercial Property Managers
Start with commercial property managers. From offices and industrial sites to multifamily buildings and big-box stores, the overhead costs associated with operating a commercial facility are conveniently predictable, if not fairly well fixed. But that doesn’t mean they can’t be reduced, or at least counterbalanced by improved revenues.
For any credible ESG disclosure and, ideally, climate transition plan, property managers should perform comprehensive energy audits, apply standardized conversion methodologies to the operational energy data generated by their energy-consuming equipment and devices and ultimately construct an operational emissions footprint.
Then, set targets for operational emissions, such as energy usage per square foot of floor space or occupancy rate. The selection of net zero-enabling measures can then be informed by an evaluation of potential lifecycle emissions reductions with traditional dollars and cents considerations, inclusive of HVAC retrofit costs, renewable PPA procurement costs and application of a building energy management system.
But it's important to acknowledge that not all emissions from a building can be eliminated through operational emissions reductions alone. Many emissions are either "embedded" or "embodied" in the materials used to construct and maintain a building, or otherwise produced in the property managers’ value chain. As such, I suggest commercial property managers incorporate verifiably high-quality carbon offsets into their decarbonization strategies, but only when necessary.
Commercial Property Developers
Property management is only one part of the journey ahead. The call to action for commercial property developers with large portfolios of numerous buildings is to adopt a portfolio-wide decarbonization strategy that includes a full spectrum of stakeholders.
This involves developers prioritizing the execution of comprehensive energy audits and emissions footprints for all buildings in the portfolio, setting emissions reduction targets and implementing net zero-enabling measures. Developers can also leverage their purchasing power to source materials from suppliers with low-carbon footprints and incentivize tenants to adopt sustainable practices, such as with green leasing arrangements.
CRE Investors
Commercial real estate investors also have a crucial role to play in decarbonizing the sector. They can pressure property managers and developers to prioritize climate action by incorporating ESG metrics into investment decision-making and either divesting from companies that fail to meet climate goals or, ideally, working with their investee companies to implement incremental ESG performance improvement plans.
Investors can also allocate capital to fund decarbonization initiatives, such as on-site renewable energy projects or building energy efficiency retrofits.
Commercial property managers, developers and investors are all invaluable to this generational, existential effort—both on their own and, more importantly, as a coordinated whole. And by prioritizing climate action and investing in net zero-enabling measures and carbon offsets, the sector can demonstrate its commitment to a sustainable future while also improving its bottom line and creating a better quality of life for its stakeholders.
The time for action is now.
This piece by Mahesh Ramanujam was originally published in Forbes Business Council.