The commitments made in the Paris Agreement on climate change have serious ramifications for global real estate portfolios, writes Aberdeen Standard Investments’ Ruairi Revell.
The Paris Agreement, signed by 195 countries last year, committed the international community to limiting the global increase in temperature to 2 degrees above pre-industrial levels, while pursuing efforts to limit it to 1.5 degrees.
The scale of this challenge is unprecedented given recent trends in greenhouse gas emissions, but ignoring it could mean global adaptation costs of up to $500 billion by 2050.
Up to 45 per cent of the value of global investment portfolios is vulnerable to climate-related risks.
Despite the decision by the US administration to withdraw from the Paris Agreement, the topic isn’t dropping down the global agenda, especially as events like Hurricane Harvey bring the human and economic costs of climate change into sharp focus.
Real estate accounts for around 40 per cent of energy use globally and to meet the 2-degree target, around 60 per cent of the reduction in global emissions this century will have to come from buildings.
Considering that 85 per cent of the building stock that most countries will have in 2050 is already built, this puts into context the challenge facing owners of real estate assets.
Shiny new green buildings are important, but the real challenge is how to improve existing stock.
What’s more, climate change isn’t the only important sustainability issue for commercial real estate – it has an equally important role to play in addressing other global challenges including resource depletion and health.
Armed with this knowledge, investors are seeking clear and detailed sustainability strategies plus full transparency from fund managers – as demonstrated by the rapid growth of the GRESB benchmark in recent years (the global ESG benchmark for real estate).
This presents a significant opportunity for asset owners who act decisively.
Embedding emissions reduction and wider sustainability improvements into the investment process can enhance value and protect against future obsolescence.
For operational buildings, this means monitoring performance, evaluating all opportunities to make improvements and incorporating them into the property’s long term business plan.
Energy savings of 20 per cent can be realised by simply ensuring a building is running properly (i.e. that systems operate only when and where needed). Once that’s done, energy efficiency measures such as LED lighting deliver additional savings.
Assets are also energy generators themselves. Despite reductions in government feed-in-tariff incentives, falling costs mean that solar power arrays offers a win-win solution – income for landlords and lower electricity costs for occupiers.
Major refurbishments of existing buildings offer the opportunity to think about long-term sustainability improvements to occupier health, wellbeing and productivity.
While the focus must be on existing assets, new-build developments offer the opportunity to test innovations in sustainable design.
Commercial real estate plays an important role in addressing global challenges. Investors know this, and are increasingly looking to make sure their money is helping and not hindering.
For commercial property owners, it’s no longer about just ‘doing the right thing’; there is demonstrable value in ‘greening’ real estate portfolios and those who act decisively will reap the rewards.
Ruairi Revell is a real estate sustainability analyst at Aberdeen Standard Investments.
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