Lack Of U.S. Climate Finance Regulation Presents Unique Opportunity For CRE Investors
CEO and Co-Founder of Green Generation, which engineers and implements comprehensive integrated energy efficiency solutions.
This year’s Earth Day held particular importance. I didn’t need to revisit the doomsday statistics or look to signs of progress to substantiate that point. After all, measures of the efforts to mitigate and ultimately reverse anthropogenic climate change were front and center throughout the Biden-Harris administration’s recent Leaders Summit on Climate and will remain salient for the foreseeable future.
But on a personal level, this year’s observance of Earth Day gave special cause for reflection. Earth Day 2021 coincided with the 10th anniversary of the day my wife and I decided to launch Green Generation, fully committing to the urgent need to decarbonize the built environment.
Much has changed in the decade since. What started as a humble effort to deliver proven building energy efficiency solutions across the addressable markets too often missed by the incumbent energy service company (ESCO) model — commercial real estate (CRE) and private equity (PE) — has since flourished into a global enterprise situated at the nexus of real estate, sustainability, technology and capital markets.
The CRE and PE industries, to be sure, have changed, too. Since the rebound from the financial crisis of the late 2000s especially, the premium that CRE developers and investors assign to “green” or sustainable building construction and, among building owners, operators and tenants, climate-aligned operations, has grown increasingly well-established. At the same time, investor interest in digital building performance enhancement solutions — including environmental and climate proptech — has seen impressive growth in recent years. And that’s to say nothing of the customer-centricity movement that’s given rise to the “space as a service” model championed by the office-leasing behemoth WeWork, among others.
Looking ahead, the concomitant pandemic-era needs for CRE to better enable public health measures like social distancing and adapt to the increased leverage of health- and sustainability-conscious investors and consumers will intensify these trends. CRE digitization will continue. ESG investing will grow more ubiquitous. The value of proptech innovations and building management solutions that support community well-being and, importantly, environmental sustainability will strengthen.
And for a sector that in 2020 was responsible for nearly 30% of the U.S.’s annual energy consumption, this is an encouraging outlook. But when we stop and take stock of the comparatively poor progress made toward decarbonizing the U.S. commercial buildings sector and acknowledge that the global buildings sector recorded its highest-ever annual operational emissions in 2019, it’s excruciatingly clear that CRE needs to pick up the pace.
It’s this persistence of the building emissions challenge that led me this Earth Day to wonder what the next era of sustainability might look like for CRE. What, if any, resources and strategies for building decarbonization remain untapped and unexploited? And for those solutions, what levers exist to thrust them from the margins and into the limelight?
One particularly conspicuous and yet underleveraged resource is private finance. But that’s quickly changing.
Beginning in 2021, Blackstone, one of the world’s largest CRE investors, has committed to reducing the carbon intensity of its holdings by 15%, including real estate assets and private equity, within three years of acquisition. Nuveen, another U.S.-based investment firm with a multibillion-dollar CRE portfolio, has pledged to implement onsite renewable generation, deep energy retrofits and other measures across its properties to achieve net-zero carbon emissions by 2040. The Urban Land Institute’s (ULI) Greenprint Center for Building Performance, whose membership represents upwards of $1.2 trillion in real estate assets under management, has been so successful in its pursuit of a 50% reduction in carbon emissions by 2030 that it’s established a new, more ambitious target of net-zero by 2050. And Allianz Real Estate is on track to reduce portfolio emissions by 25% by implementing a structured ESG framework modeled after Carbon Risk Real Estate Monitor decarbonization pathways. Indeed, global investors’ demand for sustainable CRE investment opportunities is so strong that, in April, the American investment manager Invesco launched the world’s first green building ETF on the NYSE.
Still, there’s significant ground to cover. As recently as 2019, only 3.3% of investment-grade multifamily units and 13.8% of all commercial office buildings in the top 30 multifamily and office markets in the U.S., respectively, were certified “green,” according to CBRE Group. Moreover, respondents to a recent survey on CRE trends conducted by PwC and ULI indicated they are less concerned with adapting to climate change and complying with sustainability requirements than perhaps more salient, immediately impactful challenges.
More aggressively leveraging the demonstrated willingness of major institutional investors across CRE, then, is key. Fortunately, the Biden-Harris administration appears to understand this. President Biden is expected to issue an executive order regarding federal regulation of climate-related financial risks. And he has already begun to lean on the Securities and Exchange Commission to oversee institutional investors’ use of ESG investment practices and disclosures, moves in line with what UNEP Finance Initiative and Climate-KIC found in a recent report is advocated by global sustainable finance experts.
More robust, responsive regulation of sustainable finance definitions, monitoring and disclosure is critical to advancing climate alignment across CRE. Its comparative absence in the U.S., for instance, is at least partly responsible for U.S. real estate companies’ lagging their European and Asian counterparts on environmental sustainability performance in the latest S&P Global Corporate Sustainability Assessment.
CRE investors that produce functional and, importantly, accessible methods of monitoring, implementing and disclosing portfolio sustainability measures can expect to strengthen their double bottom lines. Yet, whether they realize it or not, the absence of a climate-aligned financial regulatory framework is as much a challenge for U.S. CRE investors as it is an opportunity to advance the decarbonization of their industry.
How is that? As we’ve seen in the E.U. and, more recently, New York state, CRE investors that succeed in implementing these sustainability frameworks may reasonably expect to be involved in the development and implementation of industry regulation, too. This is a unique opportunity for those who best understand the sector to mitigate the negative climate impacts associated with still more delays in supportive regulation.
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