Executing an effective carbon reduction plan will be a critical component to maintaining value for institutional landlords, delegates attending a commercial real estate panel discussion at the 2021 UN Climate Change Conference heard on 4 November.
Neil Slater, global head of real assets at manager abrdn, warned how inaction would lead to the erosion of value and, ultimately, not living up to fiduciary duties. “We’re all about performance,” he said. “First, we’re about fiduciary performance for clients. If we sit here and say we’ll do nothing about decarbonisation, that will destroy value.”
He warned how buildings not offering sustainable functions would be rejected by occupiers, and that this would hinder a building’s profitability. “Bring it back to financial basics,” he said. “The IRR model starts to look very different if we don’t start to take this seriously.”
His session – which also included Shuen Chan, insurer platform Legal & General Investment Management’s head of ESG, real assets; Caroline Hill, managing director, Europe and head of real estate ESG at mega-manager Blackstone; and Michael Neal, European chief investment officer at manager Nuveen Real Estate – discussed the role commercial real estate can play in addressing climate change.
Chan said that although institutional landlords play an integral role in meeting climate change challenges, the built environment requires a collaboration between other cohorts as well. “There is a whole range of stakeholders in the value chain,” she said. “We need to bring them all along on the pathway to net zero.” By her reckoning, state agencies must provide greater levels of financial contributions and agree universal pricing mechanisms, the energy system needs overhauling to make a quicker and deeper contribution, and “radical collaboration” is required across the sector.
Panellists agreed that contributions by commercial real estate occupiers would be integral to any collaborative solution, and that embodied carbon emissions are lower than operational carbon emissions – essentially, the energy use of tenants. Nuveen’s Neal said this was easier to manage for offices than other forms of real estate, especially retail, which was currently the hardest to recapitalise as it was in the greatest need of capital expenditure. “Strong occupation there is patchy in areas,” he said.
Paul Dunne, managing director, group operations at Segro, said the London-based logistics REIT had more than 1,400 occupiers across Europe, and that it had visibility of the carbon emissions of about 60 percent of these tenants. “Some countries mandate by law a business’s energy use,” he said. “Others don’t. Until you know your use, you can’t tackle it.”
Dunne called for data transparency to accelerate the sector’s journey to achieving net-zero emission targets, but he said many landlords and occupiers did now have policies in place: “Most customers have a net-zero commitment of their own which they are trying to hit. We are not having to drag them along.”
The panel also pointed toward the proliferation of green-targeted leases and finance instruments such as green bonds as adding further weight to the sector’s fight to decarbonise, though Slater said their existence was demonstrative of how far there was still to go. “We’re far away from achieving [targets],” he said. “The ultimate destination, whether it’s 10 years or 20 years, is no green financing – [so] it’s embedded… It’s just financing. Today’s industry is starting that journey, though, and in a very sensible way.”
Read highlights of COP26’s finance-focused day at affiliate publication New Private Markets, here (registration required)