ESG Club


REAL ESTATE: OVERCOMING THE DECARBONISATION DATA CHALLENGE


Investors are increasingly backing the case for decarbonisation in real estate, but to achieve net zero in the industry, clean and reliable data on emissions and energy consumption is crucial.


A growing number of investors are seek- ing ways to decarbonise real estate. In 2019, for example, the UK’s Better Build- ings Partnership launched its climate commitment. It has since amassed 33 sig- natories, who collectively manage more than £380bn of assets globally, pledging to publish a net-zero pathway for their portfolios, as well as a plan of action. The case for decarbonisation in real estate is gaining momentum. But to achieve net zero, all stakeholders – from investors to regulators – need to work towards the same goal.


Inconsistent carbon data reporting may have important implications on investment decisions.


This can prove challenging as there is no unified definition of net zero in


real


estate, nor on operational carbon – which accounts for the bigger share of emis- sions. The road to net zero in real estate is hindered by a lack of complete data on energy use and associated emissions from building tenants.


Defining carbon in real estate Building emissions are broadly catego- rised as either ‘operational carbon’ or ‘embodied carbon’. Being responsible for the larger portion of real estate emissions, operational carbon has gained more


attention from regulators and investors alike.


Embodied carbon – the carbon footprint of a building before it becomes operational – accounts for a smaller share of the industry’s emissions. To date, it has been less of a focus in regulations and net zero investor frameworks. The Institutional Investors Group on Cli- mate Change’s Net Zero Investment Framework still does not include embod- ied carbon in its emissions scope for real estate assets. A lack of definition and inconsistent car- bon data reporting may have important implications on investment decisions, particularly regarding where and when to incur refurbishment costs within busi- ness plans for real estate assets.


Building emissions data


Despite a growing number of investors making net-zero commitments in real estate, without complete emissions and energy consumption data they will strug- gle to realise their decarbonisation goals. A useful tool to aid net zero endeavours is the EU-backed Carbon Risk Real Estate Monitor (CRREM). It helps investors set emissions reduction targets, as well as monitor the performance of their real estate assets while assessing the risk of assets becoming stranded as a result of the transition to a low carbon economy. Nina Reid, head of sustainability for pri- vate and alternative assets at M&G Invest- ments, explains: “Essentially CRREM sets out operational net-zero pathways for dif- ferent building types in different markets. It’s not entirely global, but it’s becoming a global tool. “A number of the green building certifica- tions are starting to look at the use of the CRREM tool as part of the way that they define net zero, so we expect that that will


Read more from M&G Investments about decarbonisation in real estate https://www.mandg.com/investments/institutional/en-gb/insights/2022/q3/decarbonisation


The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.


40 | portfolio institutional | March 2023 | Issue 121


PI Partnership – M&G Investments


become more integrated and used with operational net zero.”


Net zero data limitations Yet CRREM still has its limitations. Cur- rently, the model is too generic to be applied to all types of assets. Supermar- kets, for example, are categorised as retail warehouses but their energy profile is substantially different than a retail ware- house used for fashion.


The CRREM model also only provides pathways for operational carbon and not embodied carbon. The tool’s efficacy is reliant on having the necessary data. “There’s a lot of inconsistency around embodied carbon,” Reid says. “However, there are some markets where we’re see- ing regulation coming through. We expect a number of European countries will start to bring in more embodied carbon and/or whole life carbon regulation over time. “In the interim, while we don’t have that regulation, it makes it more challenging to tackle some of the embodied carbon piece in real estate as there isn’t that regulatory backstop to drive the market,” she adds. Although enhancing energy efficiency in buildings is necessary to decarbonise, failing to tackle embodied carbon will hinder net-zero goals in the industry due to the impact of emissions created across the construction supply chain. As buildings become more operationally efficient, embodied carbon will come to represent the larger portion of emissions caused by the built environment. In the absence of mandatory disclosure, obtaining embodied carbon data from supply chains is challenging. In the meantime, for net zero in real estate to be successful, in our view, the industry needs to take lead, setting its own requirements for emissions standards in real estate to facilitate the decarbonisation journey.


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