Decarbonization of Real Estate: End-to-End Business Transformation

Take a look around – the built environment surrounds us. It’s no secret that man-made structures and infrastructure contribute heavily to global pollution. The built environment has a significant impact on the changing climate we are experiencing.

The buildings sector alone contributes to 40 percent of global carbon emissions, inclusive of construction and operation. Decarbonizing the sector is crucial to achieving the commitments made under the Paris Agreement and the United Nations Sustainable Development Goals. When done right, decarbonization not only addresses global environmental challenges, but can also contribute to cost savings, social equity, tenant and employee health and well-being.

Driving Decarbonization

The 2015 Paris Agreement provided a directional shift in global decarbonization efforts, with the long-term intention to limit global warming to well-below 2 degrees Celsius. Stakeholders are increasing their demands for action, and the factors driving decarbonization of real estate include:

• Investor Pressure – The Sustainability Accounting Standards Board notes that environmental, social and governance (ESG) factors can greatly impact an organization’s operational and financial performance. Investors are aligning their portfolios with the Paris Agreement, and are placing ESG, and climate change in particular, central to their investment strategies. For example, asset owners in the Net Zero Asset Owner Alliance, representing roughly $5 trillion in assets under management, have made a pledge to transition their investment portfolios to net zero emissions by 2050. As part of Climate Action 100+, over 500 global investors with over $47 trillion in assets are calling companies in which they invest to commit to net-zero business strategies, and disclose their climate-related risks in line with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations.
• Employee, Customer and Tenant Expectations – These parties are increasingly expecting more from real estate companies in terms of curtailing emissions. In fact, the Deloitte Global Millennial Survey found climate change and protecting the environment to be the top global concern among younger generations. Additionally, a separate Deloitte survey found 74 percent of customers demanding businesses source electricity from renewable sources.
• Policy Adoption – Regulation in general is increasingly driving change. This can be seen on a national scale in the UK, which became the first major economy to pass legislation ending contributions to global warming, and to achieve net zero greenhouse gas emissions by 2050. Such regulations can also be seen at the city and state levels such as with New York’s Climate Mobilization Act and Los Angeles’s New Green Deal, which put the real estate sector at the center of their decarbonization targets.

At the same time, the price pathways and adoption rates of clean technology are significantly challenging the economics and performance of traditional energy systems, while shaping the opportunity for a transition to clean energy. 

Social Impact: The Broader Purpose

The impacts of decarbonizing real estate are far reaching. Beyond emission reduction, it can improve the quality of life among tenants, employees and the surrounding community. Specifically, real estate has the power to positively impact two significant social issues today:

• Managing the COVID-19 Pandemic, Public Health and Well-Being – With the COVID-19 pandemic causing many people to work remotely, an opportunity exists to accelerate decarbonization as part of workspace redesign. Innovation is already underway around greener and healthier practices in real estate through enhanced indoor air circulation and quality, and greater access to outdoor space and natural light. Innovation in green and smart design is underway to limit carbon emissions (e.g. Deloitte’s Netherlands office The Edge), reduce the potential spread of disease, and improve the well-being of building users. At the same time, green building certification standards are modifying their criteria to adjust to the COVID-19 era.
• Social Equity – Buildings touch many lives: construction workers, designers, engineers, tenants, the surrounding community, and those involved in the building’s materials supply chain. There’s a real potential for green buildings to enhance community, social equity, environmental justice, quality of life and the transition to a more sustainable economy. For example, green buildings can be designed to provide affordable housing. Greenhouse gas emission reduction efforts can be tied to equity by reducing the energy burden on low-income households, enabling resilience to climate risks like wildfires, floods or extreme heat, decreasing asthma-related hospital admissions, and providing green job training programs. Some of these social impact considerations were, for example, central to the city of Cincinnati’s long-term sustainability plan, and 80 percent emission reduction target by 2050.

Where Do You Start? How Far Do You Go?

Energy use in buildings for lighting, heating, or cooling leads to direct or indirect CO₂ emissions. Building materials, such as steel and cement, also carry embodied carbon resulting from their mining, processing, manufacturing, transportation and installation. With carbon embedded in nearly every phase of building construction and operation – where can decarbonization begin?

Decarbonization starts with an accurate measurement of the carbon footprint across the operations and value chain, as well as an assessment of climate-related risks and opportunities that might impact the business across different time horizons and potential future scenarios.  Such an understanding helps establish the foundation for defining long-term decarbonization targets. Integration of climate and social impact considerations into strategic and operational business plans helps real estate companies to meet or exceed stated goals and targets. It’s important to define the appropriate metrics to track progress against targets and strategy, and refine—or establish—the processes and controls required to deliver effective measurement and continuous improvement.

Reducing greenhouse gas emissions from building operations and value chains involves making strategic carbon abatement and investment choices to meet targets such as energy efficiency, electrification of energy sources, deploying new technologies, building design, and innovation in building materials. It is important to consider procurement, financing, accounting, and tax implications as part of defining and deploying these choices.

Given the interdependence of a building with a wider value chain, effective decarbonization necessitates partnership with tenants, utilities, suppliers, the community and employees to meet common goals and capture shared value.

In For The Long Haul

Decarbonization won’t happen overnight. It’s a long-term journey where integration of climate considerations across the organization will be key to success.  Establishing the appropriate governance and oversight by defining management and board roles and responsibilities, and tying decarbonization to remuneration and accountability policies, is essential to driving the business toward its long-term goals. Embedding climate into different business-function decision-making and transformation efforts, defining climate-risk appetite, and integrating climate considerations into enterprise risk management enable the business transformation toward a low-carbon future.

While tracking performance and monitoring emission reduction efforts, it is important to also measure the impacts and effectiveness of decarbonization through cost savings, risk mitigation, social impacts, and reputation enhancement opportunities. Finally, it is essential to consider a disclosure strategy in line with recognized reporting frameworks and standards to enable effective communication that supports decision making, enhances trust, enables partnership, increases transparency, and strengthens access to capital.