Investment manager Union Investment Real Estate has an international portfolio of around 400 properties – and ambitious plans to make them all carbon-neutral as a matter of urgency. Redevco is another company following a similar path, while asset manager DWS is gearing up to do the same.
There are multiple reasons why these major property companies are embracing sustainability and in particular aiming to cut their greenhouse gas emissions. Firstly, sustainability has become a prominent political issue due to pressure from climate activists. Secondly, an increasing number of investors expect compliance with ESG criteria (see box). And thirdly, more and more countries now require property owners to meet specific climate protection standards.
Carbon neutral by 2050
The Paris Agreement on climate change, signed in 2015, established a global action plan to limit the rise in average temperature to less than 2 °C above pre-industrial levels. The EU aims to reduce greenhouse gas emissions by at least 40 per cent by 2030 compared with 1990 levels. This goal is laid out in a new green deal, the Sustainable Europe Investment Plan. Germany is also taking steps at national level, having introduced its Climate Action Plan 2050 at the end of 2019 with the aim of achieving full carbon neutrality for the country’s building stock. One of the key instruments in this German initiative is the introduction of CO2 pricing.
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Even in the United States – a country generally perceived as less climate-aware – there are now stringent legal requirements. For example, a new local law in New York City gives property owners until 2023 to present a roadmap on reducing CO2 emissions by 40 per cent by 2030. Non-compliance could result in millions of dollars in fines.
Answering society’s questions
Despite this growing pressure, 49 per cent of institutional real estate investors do not currently believe that climate change constitutes an additional risk to their portfolios. That is the finding of a joint survey by PwC and the Urban Land Institute entitled “Emerging Trends in Real Estate: Europe 2020”. According to Susanne Eickermann-Riepe, PwC Real Estate Leader (Germany), those who delay their response to the challenges of climate change “will struggle to answer the inevitable questions from investors, tenants and wider society.”
Union Investment Real Estate is taking action now: “We want to make a clear statement about the sustainability performance of our properties and portfolios as soon as we possibly can,” says Jan von Mallinckrodt, Head of Sustainability at Union Investment Real Estate. To do this, the Hamburg-based company has joined forces with consultancy firm atmosgrad° to create a new sustainability label called “atmosphere”.
A new sustainability label
“Initially, the label is focused on the interim goal for 2030, showing the percentage by which a property or portfolio already meets this target,” explains Jan von Mallinckrodt. Forty per cent of the score is based on consumption and emissions values. A further 40 per cent is generated by Union Investment’s Sustainable Investment Check – covering qualitative sustainability aspects such as building automation and user comfort. The remaining 20 per cent reflects various aspects of the fund strategy, e.g. the use of green leases or exclusion criteria for low-sustainability tenants.
Energy monitoring is a key element here, and Union Investment has already installed sensors in some 27 properties as of the end of 2019. These provide accurate information on energy consumption which is then used to formulate specific CO2 savings targets. Union Investment will set one such target for a sub-portfolio as early as 2020, comments Jan von Mallinckrodt.
“The ‘atmosphere’ label is an important element in our Manage to Green strategy,” adds Jan von Mallinckrodt. The aim of this strategy is to boost sustainability and carbon savings not only for new, highly efficient buildings but also for existing stock.
The risk of stranded assets
The Manage to Green strategy is also good for the commercial sustainability of assets. Many experts believe that low-sustainability properties may become increasingly difficult to market and end up as “stranded assets”. To mitigate against this, Union Investment participated in a joint research project with the German Industry Initiative for Energy Efficiency (DENEFF).
One of the outcomes of this project is a risk management tool that calculates when and where investment is required to prevent a commercial property becoming “stranded” – for example, if it emits so much CO2 that it is massively devalued and becomes practically unmarketable.
Government should use tax breaks for owners to promote energy efficiency refurbishment.
Germany introduces CO2 pricing
In Germany, this issue is particularly pressing due to the introduction of CO2 pricing as part of the government’s Climate Action Plan 2050. In the transport and energy sectors (and thus the property sector as well), the price for one tonne of CO2 emissions will be set at EUR 25 from 2021, rising gradually to EUR 65 by 2026.
The new pricing system is widely supported in the real estate industry. Maria Hill, Chair of the Energy & Building Technologies Committee of the German Property Federation (ZIA), describes it as a “positive impulse” and a “market-based alternative”. However, she also believes it will take more than CO2 pricing alone to ensure current climate targets are met: “Studies show that even with a price path of EUR 245 per tonne, the necessary measures are not economically viable,” she argues. Instead, Hill suggests that government should use tax breaks for owners to promote energy efficiency refurbishment. Incentives of this kind are currently available only for owner-occupiers, not for professional landlords
The rising CO2 price will hopefully force owners to take additional measures to reduce CO2.
Other commentators are rather more optimistic – for example Hermann Horster, Head of Sustainability at BNP Paribas Real Estate. “Even if the impact is small at first, the rising CO2 price will hopefully force owners to take additional measures to reduce CO2,” says Horster, who is also Vice President of the German Sustainable Building Council (DGNB).
“An unavoidable issue”
Under current legislation, it is the tenants who have to pay the additional CO2 costs. However, according to Maria Hill of the ZIA, “this is bound to change since the federal government wants to make owners more responsible under the Climate Action Plan.”
For this reason (among others), long-term portfolio holders now have no alternative but to reduce their greenhouse gas emissions. “Currently, it’s still only a minority of real estate companies that are actively engaging with sustainability,” says Hermann Horster of BNP Paribas Real Estate. “This is an unavoidable issue, though – and it won’t be long before the entire industry understands that fact.”