Greg Borel 30/05/2022
It’s hard to miss the daily headlines on how net zero is reshaping every sector of the economy. But when it comes to real estate, meeting climate targets requires deep industry transformation. Greg explains more in EG.
From the total emissions caused by the UK’s built environment, commercial real estate is responsible for a massive 30%. To stand any chance of turning this around, it’s critical for net zero to become a collective responsibility; industry-wide change can only be achieved through radical collaboration.
There are several levers that individual commercial real estate companies can already begin to pull on for their net zero journeys, such as improving energy efficiency and sourcing renewable energy. However, looking at decarbonisation only on the basis of individual action, rather than holistically, paints an incomplete picture. While companies should certainly harness these many existing solutions, eliminating carbon from the built environment requires us to dream much bigger.
The sector must move collectively – and at pace – to overcome the larger hurdles and unlock the inherent value from market transformation. Take green leases for example. Unless there is more widespread uptake of ambitious leases that tackle split incentives, landlords may be tempted to stick to current lease structures to avoid losing potential customers. This keeps the market in a “business as usual” state for much longer than is necessary to tackle the climate crisis. Another priority that cannot be solved alone is creating circular material marketplaces to tackle the embodied carbon in supply chains. By definition, it is difficult to have a fully functioning marketplace with only one participant involved; it would be cost-prohibitive even to attempt it.
Everyone is net zero or no one is
Achieving this necessary pace in a cost-effective way is only possible if endorsement moves beyond the early adopters leading the way. The truth is that unless everyone is net zero, no one is.
BlackRock chief Larry Fink put it well recently:
“Every company and every industry will be transformed by the transition to a net zero world. The question is, will you lead, or will you be led?” He adds that placing stakeholder engagement first is not “woke” but the only way to achieve long-term value. Real leadership is not only about setting net zero targets and doing your bit, but also about promoting and encouraging collective action.
Ultimately, collaboration helps companies be faster and smarter. Instead of delaying action, companies can start seeing the value of net zero sooner. They can win and retain clients – Fidelity International estimates that 97% of Europe’s commercial buildings will not be able to make the move to net zero in their present form so, if no action is taken, it will be increasingly challenging to attract buyers or occupiers. They will also hit their own sustainability KPIs and protect reputations and share prices – who can forget the impact of Volkswagen’s emissions scandal on its share price, which fell by more than 30% in a day?
It also keeps investors happy by demonstrating robust long-term sustainability strategies. SP Global reveals how ESG criteria are impacting almost a quarter of potential asset downgrades, and we have also seen how major investment banks, such as Jefferies, have downgraded companies in the space in light of government calls for commercial assets to meet minimum energy standards.
Big opportunities
In commercial real estate, both innovation and the circular economy are areas ripe for collaboration, however neither has been taken advantage of fully. There are still several big opportunities available to drive value and efficiency.
Looking at energy procurement as an example, historically, only large energy firms had the buying power to arrange power purchase agreements. However if, when procuring green energy, commercial real estate companies could join forces to aggregate demand, they too could benefit from access to more financially attractive PPAs.
Next, low-carbon solutions, such as sustainable steel or concrete, are still too expensive for individual businesses to implement widely because the technology is in its infancy. By forming coalitions to create a critical mass to jointly invest and accelerate the scaling of the tech, though, there is an opportunity to share both in the costs and risks.
Lastly, sourcing materials with low embodied carbon can be difficult due to limited supplies, but collaborating on building a thriving marketplace for sustainable materials, connecting suppliers and customers, can bring net zero construction and retrofits into the mainstream.
While collaborative structures are emerging for specific topics, such as SteelZero, we need more opportunities to have industry-wide collaboration that move beyond providing guidance and into supporting active measures. The CUBE Competition, for instance, draws on the spirit of gamification and competition to bring all the various building stakeholders together to take action around energy usage in their commercial buildings.
Although this may not have been the industry norm previously, it has become clear that success will only come through teamwork where everyone contributes to the same goal. To accelerate impact and smooth the transition to net zero, collaboration is key.
Greg Borel is chief ambassador for CUBE and managing partner at Ampersand Partners