By Raphael Rosen
In recent years, there has been a profound resurgence of climate change awareness. Compared to a decade ago, more Americans say that protecting the environment and dealing with global climate change should be a top priority for the President and Congress. With increased public awareness, a significant and clear societal shift has made the “E” in ESG (environmental, social, governance) and carbon reduction a top priority worldwide.
This shift is driving change all around us. As new federal policies are brought forth and passed, state and local policies have also prioritized carbon reduction with their plans and regulations. Further, capital markets’ ESG demands, like those led by CRE investors BlackRock and the New York State Pension, set the new standard for their investment strategies and the need for data-backed proof of ESG impact moving forward.
As CRE grapples with the economic fallout of COVID-19, ESG investments offer an opportunity and pathway to recovery. However, with rigorous climate policies in motion, CRE owners and operators must look at the immediate actions available to keep pace with the looming environmental mandates.
Federal policies trickle down to the regional level
A pillar of President Joe Biden’s climate change proposal is decreasing carbon emissions of commercial real estate buildings specifically. This is a must-have for a cleaner future, as the built environment currently contributes 40% of total U.S. carbon emissions. Biden aims to set a target of reducing the carbon footprint of the U.S. building stock by 50% by 2035, creating incentives for deep retrofits that combine appliance electrification, efficiency, and on-site clean power generation.
Federal regulations will increasingly influence states and cities to develop similar plans to those of Biden’s or amend existing ones to have tighter guidelines. We can expect to see more local policies like a bill being considered in Massachusetts that would lock the state into its goal of achieving net-zero carbon emissions by 2025 or Local Law 97 (LL97) in New York City, which requires buildings larger than 25K square feet to reduce carbon emissions by 40% by 2030 and 80% by 2050. In its first phase, starting in 2024, around 20% of the city’s most carbon-intensive buildings will have to meet a lowered emission threshold, facing fines administered as early as 2025. In its second phase, starting in 2030, emission limits will be reduced further, which will impact close to 80% of the buildings in NYC. Non-compliant landlords could face hefty tax penalties and fees associated with these federal, state and local regulations.
It will become more critical than ever for CRE owners to not only have the ability to reduce carbon emissions to meet these new mandates, but that they are also able to show evidence of these efforts.
Capital markets’ and tenant ESG requirements
The world’s leading pension funds and investors use ESG frameworks to evaluate investment opportunities and are divesting from those that don’t adhere to new requirements. Limited Partners (LPs) and other CRE investors, including Blackstone, BlackRock and Goldman Sachs, will not invest without proof of measurable, trackable carbon emission reductions.
Tenants and guests alike have become increasingly well-versed on ESG, now holding commercial buildings accountable for their environmental impact. CRE owners must recognize the value of ESG initiatives from this standpoint, as well. This is especially true of the larger, long-term corporate tenants or hotel group bookings that often have an outsized impact on a portfolio.
The owners and hoteliers that can prove their ESG initiatives are more than corporate greenwashing will undoubtedly establish a competitive advantage over those who cannot. Taking a data-backed approach is critical to successfully market achieved ESG impact to all stakeholders during this economic recovery period when the competition is higher than normal.
CRE building owners must mobilize now to ensure they can comply with the new administration’s goals and likely legislation. Here’s how:
1) Use emerging technology to tap into building data: Many U.S. buildings were constructed before the mid-20th Century and have had minimal updates to heating, ventilation and air conditioning (HVAC) and other systems since. The current building stock lacks the systems and tools needed to meet energy use and carbon reduction requirements, much less to prove any results.
Today, technology advancements in AI, machine learning, sensors and analytics allow building owners to tap insights from building data to better manage the energy use (and therefore carbon emissions) of that building. For example, L&B Realty Advisors established a data stream to one of its buildings and uncovered opportunities to optimize its building systems further, eliminating 142 tons of carbon dioxide from their operations.
CRE now has the tools to quickly and easily mine insights from existing building systems that account for the most carbon emissions. In doing so, owners and operators become empowered to move forward with the accountability, flexibility and resilience needed to meet the CRE industry’s evolving demands.
2) Market your real carbon impact: The ability to prove true carbon emissions reduction will provide unparalleled competitive advantages for CRE. Selecting the right technologies that provide data-backed proof of any impact is critical. Once you have carbon reduction data, you have all the ingredients to confidently market your building’s impact to current and potential tenants, investors and staff alike. With so many stakeholders prioritizing sustainable work environments and investments, offering irrefutable data can instill the confidence needed for tenants to return to your building, continued investor support, and the overall health and wellness of your staff.
For Ohana Real Estate Investors, who previously owned the Montage Beverly Hills, making simple optimizations to its cooling tower enabled the hotel to reduce 1,789 tons of carbon. This contributed to an increase in Net Operating Income (NOI) and allowed the company to sell the Montage Beverly Hills for a larger profit.
Marketing this impact to tenants can provide a critical competitive edge during the economic recovery. Other companies, including Alexander & Baldwin, Ventas and The Carlyle Group, also include energy efficiency data in their annual ESG reports.
3) Continue to prioritize ESG for long-term value: ESG’s momentum didn’t even slow down during the height of the pandemic and is only growing. Flows into sustainable investment funds doubled to $54.6 billion in the second quarter of 2020 compared to the first.
It will be essential for CRE owners to make the right ESG investments in the short-term and find climate solutions that will continue to yield value and impact in the long-term. Asset management strategies will enable CRE to stay competitive against ever-changing demands.
An opportunity to optimize
So much of the built environment can be optimized for enhanced societal and environmental benefits. Today’s building owners are empowered with the energy efficiency and operational solutions required to do so and, in tandem, to meet government, industry, vendors and occupants’ changing needs.
With this, the CRE industry can seize the opportunity to blaze a path forward and define the improved, sustainable CRE of the future.
Rosen is CEO & Co-founder of Carbon Lighthouse, where he is responsible for corporate finance and capital raising, long-term planning, and the company’s operations strategy. He has led Carbon Lighthouse’s scale and growth over the past decade to deliver true environmental and operational impact and more than $250 million in savings for clients including Goldman Sachs, Hawaiian Airlines, L&B, The Carlyle Group, The Moinian Group, Madison International Realty, and AEW. Previously, Rosen served as VP of Corporate Development at Safari Energy where he grew Safari’s operational capacity to more than 25 solar projects worth $24 million.
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