Recently, we shared our plans to invest in innovative technology and business models aimed at helping the global real estate industry minimize, and ultimately eradicate, its greenhouse gas (GHG) footprint via the Fifth Wall Carbon Impact Fund (see coverage in The Wall Street Journal).
Why are we doing this? To state it simply: We believe the real estate industry is the world’s largest contributor to the climate crisis.
Real estate is the largest asset class on earth and one of the largest sectors of the global economy. So it shouldn’t come as a surprise to learn that the sector consumes about 40% of the world’s energy, emits 30% of all GHGs, and consumes 40% of all raw materials.
Given this reality, as the global community realigns culturally, economically, and politically around addressing climate change, it’s likely real estate will take center stage. We believe that the people who manage global real estate assets — valued at around US$50 trillion — are therefore one of the most important decision-making groups on earth to be a part of this urgent conversation.
This data leads one to a remarkable and broadly underappreciated fact: as a consumer, investor, or business leader, the single-largest impact we can have towards mitigating climate change are the choices we make around real estate: where we live, where we work, where we spend our free time, and the carbon footprint of the buildings where those activities take place.
Which raises the question: Why has the real estate industry been (mostly) absent from the public conversation here? Given the numbers, it’s puzzling that to date media and public attention on climate issues seem most centered around other industries like transportation, packaging, and food production to name a few examples. Whatever has driven this oversight in the past, we believe that it should provide no comfort nor instill complacency in real estate leaders. Over the last six months, we’ve witnessed a tipping point for the industry and the conversation is changing rapidly.
We are in the midst of a watershed moment for the real estate community. Over the past six months, three critical stakeholder groups have put real estate leaders on notice around their responsibilities here:
1) Regulators have enacted legislation that specifically targets real estate with aggressive, near-term emissions reduction requirements.
While this trend has been developing globally for some time, 2019 was the year that US city governments, led by organizations such as Climate Mayors, started to flex their muscle. Mayors and City Councils discovered that while alignment around the Paris Agreement at the federal level may not be forthcoming, there is one sector of the economy (the largest and most climate-impacting sector) that city governments are in a unique position to regulate: real estate. Building owners can’t threaten to pick up their assets and move to another jurisdiction. Cities can be particularly high-leverage actors here — 66% of New York City’s GHG emissions come from buildings.
New York’s Climate Mobilization Act, which passed in May 2019, is a package of bills and includes Local Law 97 (LL97) that requires an incredible 40% drop in GHG emissions by 2030 and an 80% drop by 2050, with enforcement beginning in 2024. This law applies to all buildings over 25,000 square feet, which today is about 50,000 assets across the city. LL97 also creates the Office of Building Energy and Emissions Performance which will be responsible for monitoring, effectuating compliance, and levying fines. In what’s sure to become the most visible and discussed aspect of this law, buildings will be graded and required to post their grades in a public space, similar to restaurant grades.
Los Angeles’ Green New Deal, also passed in May 2019 and requires that all new buildings be net-zero carbon by 2030, with the entire building stock converted to zero-emission technologies by 2050. While many of the operational details are forthcoming, it’s not hard to imagine a ramp up, monitoring, and enforcement regime similar to New York’s example.
Looking around the world, we’ve seen this same trend taking shape at an incredible pace over the past couple of weeks:
- Presidential hopeful Mike Bloomberg unveiled a plan to make new buildings carbon neutral by 2025 (via The Washington Post).
- London Mayor Sadiq Khan said if he’s re-elected he will make London carbon neutral by 2030 (via The Guardian).
- Canada’s Finance Minister reported that climate change will be a centerpiece of the country’s 2020 budget (via The Wall Street Journal).
- The European Union released details around a $1 trillion plan to make the whole continent carbon neutral by 2050 (via Forbes).
The real estate business has always been intimately connected to local governments and legislation. But what appears to be unique to this moment is that a topic which directly impacts the business through legislation is also at the center of a political and cultural tsunami.
2) Investors have stated clear mandates to preferentially deploy capital into companies and assets with low and net-zero carbon performance.
Some of the world’s largest and most influential capital allocators have been explicit that climate impact is now core to their investment decisions. Recent examples include:
- In his 2020 annual letter to CEOs, BlackRock’s CEO Larry Fink describes climate change as the driver behind “a fundamental reshaping of finance” and “a significant reallocation of capital.”
- The United Nations Net-Zero Asset Owner’s Alliance, a group of pension funds and insurers, announced a commitment to make its combined $4 trillion-worth of assets carbon-neutral by 2050.
- A group of investors led by APG, PGGM, and Norges Bank funded a new initiative to create a real estate benchmark to assess climate change risk in its global real estate investment portfolios. Note that these are the same managers who a decade ago co-founded and popularized the influential GRESB framework to allow them to deploy capital into real estate investments according to their environmental, social, and governance (ESG) requirements.
We believe that these initiatives will put pressure on asset owners and business owners alike, who will need to account for the fact that their GHG footprint will directly affect their cost of debt and equity, in both public and private markets.
3) Customers (e.g., tenants) are beginning to demand low carbon performance from their landlords.
Driven by a workforce increasingly made up of a generation of professionals for whom this topic is non-negotiable, a growing number of firms have low carbon requirements for their commercial spaces. Two recent examples from big tech include:
- Microsoft announced that it will be carbon negative by 2030, which includes the buildings it owns and leases.
- Alphabet Inc.’s Google, one of the largest tenants in New York City, has aggressive carbon-neutrality goals for its offices.
While office owners seem to be feeling this pressure most directly at moment, we believe that the macro forces identified in this post will affect all asset classes. As firms across all industries move to require net-zero carbon products and services from all of their vendors, real estate owners will need to figure out how to deliver the product their customers are demanding.
Each of these aforementioned stakeholders (regulators, investors, customers) individually represent a trend with the ability to disrupt the real estate business. We believe, taken together, climate change and the actions put into motion across society constitute a tectonic force and could be the most significant event in real estate during our lifetime.
Fifth Wall’s Responsibility
The real estate industry needs to come together, get a plan, and get moving. And this is where Fifth Wall has a unique ability to contribute.
Fifth Wall is very different from most venture capital firms. Our LP base includes over 50 of the world’s largest owners and operators of real estate, including CBRE, Cushman & Wakefield, Hines, Gecina, Marriott, GLP to name a few (see the complete list here), who trust us as their front line eyes and ears to find and partner with the best emerging tech and entrepreneurs who are reimagining the Built World. With over $1 billion in deployable capital, we’ve convened the world’s largest consortium of forward-thinking real estate leaders from 11 countries around the globe.
Our Carbon Impact Initiative will bring this consortium to bear on the problem at hand, and will invest a meaningful amount of capital in the process. Breaking this down, the Fifth Wall Carbon Impact Initiative has two components:
First, is the venture fund — the Carbon Impact Fund. Decarbonization of the Built World is both an engineering and innovation problem. So, we are going to do what venture capital does best — invest in what we believe will be the most promising new technologies, businesses, and people who are trying to solve some of our hardest problems. We are optimistic about the ability of entrepreneurship and new technology to invent solutions for reducing the GHG footprint of our cities and buildings, and aim to invest approximately $200 million into these solutions over the next few years.
Second, is the alliance. What needs to be done is a collective action problem. By convening the world’s largest and most forward-thinking real estate leaders in this alliance, we can collectively take responsibility and bold, proactive actions to identify, develop, and adopt critical new technologies to reduce the industry’s GHG footprint.
The Built World’s moonshot
Decarbonizing our homes, offices, communities, and cities isn’t optional. And the way forward won’t be easy, for the Built World or any other sector. It’s no exaggeration to liken the scope and scale of this effort to the moonshot of our time. We are excited about the role Fifth Wall is able to play here, bringing the real estate community together to place bold bets on the new technologies that we need to make our buildings net-zero carbon.
We invite the whole community — entrepreneurs, investors, tenants, and real estate owners & operators — to be a part of this effort. It’s time to do what the real estate industry does best: build the future.
— This article was authored by Tyson Woeste, a Partner at Fifth Wall
No assurances can be given that any of the carbon reduction initiatives described herein will be implemented or, if implemented, will be successful in affecting carbon reductions. Further, no assurances can be given that the Fifth Wall Carbon Impact Fund (the “Fund”) will be established to invest in these technologies or that the Fund will identify investments that meet its investment objectives. The investments made by the Fund targeting carbon emission reductions will involve substantial risks and may not ultimately meet the investment objectives of the Fund. Investors in the Fund should consult their own financial, tax, legal and other advisors in connection with any proposed investment and should carefully review all disclosures provided by Fifth Wall in connection with the formation of the Fund prior to making an investment.