By David Carlin, TCFD Programme Lead, UNEP FI (this article was originally published on Forbes)
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.
UNEP FI recently released a report assessing how to manage transition risks in real estate. Download here.