Managing real estate’s $16 trillion environmental risk
Real estate investors and developers are making short-, medium- and long-term choices that are locking in environmental footprints well beyond 2050. At the same time, the recent COP26 summit in Glasgow shed additional light on environmental commitments being made by governments. With real estate representing 30% of global greenhouse gas emissions and 40% of energy consumption, buildings are very much in the sights of legislators and regulators. Regulations involving energy performance certificates (EPCs) in the UK are one of many examples.
The Pi Labs research team and I recently authored a white paper titled Real estate and environmental performance — Bridging the gap with PropTech. In it, we address some of the environmental challenges facing real estate, and how they can be managed through technology. In this article, I will discuss some of the themes, but would direct you to the report for a more comprehensive overview.
When buildings come into conflict with current and future government standards, they risk being stranded. Stranded assets are assets that have ‘suffered from premature or unanticipated write-downs, devaluations or conversions to liabilities’.¹ This is not a new phenomenon in real estate (e.g. the changing demands of occupiers can render a building obsolete), but climate risk adds an extra dimension. To put this into perspective, it is estimated that $5 trillion of commercial real estate and $16 trillion of residential real estate is exposed to environmentally-linked stranded asset risk.² Therefore, inaction in the real estate sector has both financial and environmental consequences.
The role of ESG scores
Some firms disclose their environmental performance as part of a broader sustainability effort — using a combination of environmental, social and governance (ESG) indicators to measure progress. However, ESG scores and ratings aggregate many factors, which brings into question their environmental relevance. For example, an organisation can attain a high ESG score with strong S and G components that overshadow a lack of progress in E (such as decarbonisation efforts). This is further complicated by rating systems which weigh E, S and G differently (see below graphic). PropTech can offer practitioners a solution in this area by generating, aggregating, and contextualising environmental data.
The role of continuous improvement
Continuous improvement is a business process that identifies where the waste is hidden within an organisation and creates a system to root it out. Firmly grounded in data, the method gets people and processes across multiple departments to collaborate with each other to improve quality and satisfy customers. Regular business processes impact the environment at different times. Thus, environmental indicators can be organised into an operational sequence that is based on a firm’s regular decision-making process. Leading indicators include those that give focus and direction, such as vision, or those whose outcomes have a long duration and impact future decisions. Present or real-time indicators are those that affect real-time operational processes. Lagging indicators are the resources consumed because of operational processes, or as a necessity to achieve strategic visions.
If we bring this feedback loop into the context of PropTech, we could consider sustainable design software as involving leading indicators; building automation systems and energy management systems as examples of a real-time indicator; and a smart meter as a conduit for lagging indicators. In this scenario, technology facilitates more clarity throughout the feedback loop, further enabling continuous improvement.
Decisions for the long-, medium-, and short-term
Decisions made today will set in motion environmental externalities far beyond 2030. Some decisions, such as structural and land use, will last for decades, if not centuries. Other decisions, such as equipment selection and fit-out renovations, will last for 7 to 15 years. At the same time, managers will be making real-time decisions, whether to streamline a construction process or efficiently operate a building. For each of the three decision durations, our paper examines three common scenarios: (i) developing bare earth, (ii) acquiring a new build, or (iii) acquiring an older, existing building (see below table).
Although real estate is one of the largest consumers of environmental resources globally, it is promising that there exists a plethora of technologies and practices that can achieve net-zero carbon. Managers need to start considering and implementing these solutions today if we are to reach net-zero targets by the end of this decade. To access a more detailed outline of what actions you can take, as well as tangible case studies of others doing so successfully, feel free to download the report.
¹ Caldecott, Harnett, Cojoianu, Kok & Pfeiffer (2016) in Muldoon-Smith & Greenhalgh (2019), ‘Suspect foundations: Developing an understanding of climate-related stranded assets in the global real estate sector’, Energy Research and Social Science.
² Muldoon-Smith & Greenhalgh (2019), ‘Suspect foundations: Developing an understanding of climate-related stranded assets in the global real estate sector’, Energy Research and Social Science.