In our last blog, we celebrated Earth Day with a series of uplifting stories highlighting recent progress made towards fighting climate change that could advance decarbonization efforts in the commercial real estate (CRE) sector. While we celebrate these achievements, the world is still far from the Paris Agreement-aligned, science-based 1.5°C trajectory goal of net zero by 2050, even as countries around the world continue to strengthen climate change legislation. In this blog, we will focus on the benefits of setting near-term science-based emissions targets, which will be followed by a blog outlining the components of a Decarbonization Playbook for meeting these targets.

Waiting on the sidelines
Representing nearly 40% of global greenhouse gas (GHG) emissions, the CRE industry is primed to play an outsized role in combating climate change. In recent years, we have begun to feel the acute impacts of climate change through more frequent natural disasters and rising insurance premiums (see recent blog). Amid these changes, many organizations remain relatively flat-footed, only plucking the low-hanging fruit, setting arbitrary targets, and waiting on the sidelines until they are forced to act through legislation and/or changing market dynamics. While this reactive strategy may provide near-term financial gains, it exposes organizations to future enterprise risk, limited business growth potential, and a shrinking pool of available investment capital.

Why set near-term science-based targets?
Meanwhile, organizations on the forefront of this movement are setting near-term science-based targets and taking action by developing high-performing, resilient properties and hardening existing assets, all while strengthening their balance sheets. Typically catalyzed by investor pressure, these efforts can unlock a variety of new business opportunities:

  • Attracting new capital domestically and overseas.
  • Attracting and retaining like-minded tenants working toward their own corporate science-based targets.
  • Capitalizing on the attractive financial returns of energy efficiency upgrades through green leases.
  • Creating more comfortable and dynamic spaces for tenants.
  • Mitigating the risk of future energy cost increases through investments in on-site renewable energy technologies.
  • Future proofing assets to avoid obsolescence.
    • Mitigating exposure to physical risks, including the greatest impacts of severe weather events.
    • Mitigating exposure to transition risks, including existing and future regulatory requirements.
  • Attracting younger, top-tier talent that want to make a positive impact on the environment in their careers.
  • Leveraging sustainability and environmental stewardship to strengthen branding and marketing strategies.

And the business case?
When approached purposefully, setting near-term science-based targets and taking action achieve similar goals to the common “flight to quality” strategy; acquiring, developing, and/or creating higher quality, safer assets insulated from tenant vacancies and economic obsolescence. Just like a building lobby facelift or expanding amenity offerings, actively pursuing science-based targets can differentiate and future proof assets, attract and retain tenants, and grow asset and enterprise value. Simply put, leading organizations view this as a sound business strategy rather than a reactive exercise in compliance.

Setting a near-term science-based target
Historically, CRE organizations have set near-term energy and GHG emissions reduction goals based on arbitrary targets they can confidently achieve (e.g., 2% annual reduction). A strategy is then developed to achieve these goals, which typically involves energy efficiency upgrades and strategic energy sourcing. The goals are ultimately achieved, typically ahead of schedule, and new targets are set following the same approach. Why not convert these arbitrary goals into near-term science-based targets?

The idea of committing to a 2050 target (26 years in the future!) is quite daunting. Most organizations setting science-based targets today realize that factors outside of their control need to evolve to achieve net zero by 2050. For example, extensive grid modernization and an influx of grid-tied clean energy will be critical. Considering these realities, most organizations taking action are setting near-term science-based targets and are focusing on site-based decarbonization measures they can control today. Looking out only 5-10 years into the future is more palatable for Boards and investors, allowing organizations to plan for and reach each milestone on the longer road to net zero.

The Paris Agreement has given rise to a variety of standards that provide corporations guidance on setting science-based targets. Currently, the Science-Based Targets Initiative (SBTi) and Carbon Risk Real Estate Monitor (CRREM) are the gold standards in CRE. And these organizations partnered in 2022 to provide “one global standard for the operational decarbonization of buildings.”

At a high level, SBTi and CRREM endeavor to establish a building sector carbon budget, and then assign asset-level emissions intensity transition pathways aligned with the science-based 1.5°C trajectory goal of net zero by 2050. The asset-level targets can then be rolled up into short-, medium, and long-term portfolio-level emissions reduction targets. As mentioned, most CRE organizations taking action are focused on achieving near-term targets.

With the guiding science in place and technology quickly evolving, the CRE industry is primed for great transformation. The road to net zero will be paved with leadership, innovation, and unlimited growth opportunities.

In our next blog, we will outline the components of a Decarbonization Playbook for meeting near-term science-based targets.

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By Drew Yetter- Managing Partner- breea

-GRESB

About breea
We are breea, a boutique ESG advisory company that advises sophisticated real estate portfolios on corporate responsibility and the transition to a lower carbon future. We take great pride in the expertise, responsiveness, and dependable service we provide our clients.