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Not only do 40 per cent of greenhouse gas (GHG) emissions in developed economies come from buildings, but the pandemic has changed how retail and office space is used. From now on, success will be measured not just by the size of financial returns, but by carbon emission and energy use levels, the wellbeing of employees and overall societal impact.
A net zero strategy is essential
More than 110 countries (around 70 per cent of the world’s economy) now have explicit plans to achieve net zero carbon emissions by 2050 (and China by 2060). Companies, suppliers, distributors, property developers and fund managers are following suit, adopting detailed strategies for becoming climate neutral. Some, such as the property firm Hammerson, are even committing to ‘climate positive’ carbon emissions (i.e. emissions avoided exceeding, not just equalling, emissions generated).
Companies with no net zero strategy will soon begin to be excluded from tenders, and the impact on growth prospects will be tangible. This in turn will drive down prices for new decarbonisation technologies and make it easier to adapt to a low-carbon world. This could happen sooner in the real estate sector than elsewhere, as the buildings used for work, leisure or living in need to be part of the solution within the next 5-10 years to avoid a climate crisis.
Chart 1: A hypothetical net zero pathway for real estate in line with 1.5ºC
Source: Fidelity International, July 2021. For illustrative purposes only.
The renovation wave
Historically, the real estate industry has been slower to innovate than other sectors. It has taken longer than public markets to gather data and produce performance benchmarks, and to adopt new technologies and ways of operating. Now, it quickly has to become a leader. It has to measure a whole new set of different environmental and social metrics that have become as, if not more, important than traditional measures like cashflows. It has to ensure that less energy efficient property assets do not become ‘stranded’.
The risk of stranded assets is high because around 97 per cent of the buildings in Western Europe are not up to the required sustainability standards for the industry to achieve net zero. Only 1-2 per cent of the entire building stock is renewed each year, so existing buildings have to be renovated. Hence why the EU has listed ‘green buildings’ as a key area and estimates that by 2030, 35 million buildings could be refurbished across Europe in a wave of renovation similar to the rebuilding that followed the devastation of WWII.
Back then, the US-led Marshall Plan ($12 billion of state aid - $134 billion at 2021 prices ) alongside policy incentives and private investment helped Europe to rebuild and enjoy the fastest ever expansion in European economic growth from 1948 to 1952. We could well be on the cusp of something similar.
To participate in this wave and drive improvements, real estate investors will need to map out a path to net zero for every building and measure the impact in many areas, including:
- Building materials: Using wood from certified sustainable sources and minimising the use of plastics when refurbishing are easy ways to reduce carbon footprints, but negating ‘embedded carbon’ (i.e. the damage already done in the original building process) will also be necessary.
- Energy use: Installing energy efficient lighting in buildings is fast becoming standard; phasing out gas boilers and only using electricity from renewable sources is a much bigger challenge.
- Transport: Charging points for electric cars and plenty of bike racks are now a minimum requirement for new office buildings, but ways of collecting so-called ‘Scope 3’ emissions data, such as customer supply chain and visitor/employee transport emissions, will also have to become standard
- Water use and waste recycling: Ensuring efficient use of water and having robust recycling systems in place is essential.
Playing our part
Fidelity International is playing its part, both as a company with office buildings across the world and as a European real estate portfolio manager. Our funds contribute to the GRESB (Global Real Estate Sustainability Benchmark) initiative and we have improved our GRESB scores by 25 to 40 per cent across our funds over the past three years. But we have to go faster even to stand still. The GRESB bar gets raised as the industry improves so we have set 13 specific sustainability targets for areas such as energy and carbon reduction, water and waste, and improvements in green building certification. Our team will also publish our own net zero plan later in 2021, alongside the overall Fidelity operations goal of reaching net zero by 2030.
 Source: US State Department: https://history.state.gov/milestones/1945-1952/marshall-plan