How will the climate crisis affect our real estate portfolios?

On Thursday 7 November, Alexandra Townsend-Wheeler attended the BPF Futures and AREF FutureGen panel discussion on “How will the climate crisis affect our real estate portfolios?”. In this blog post, Alexandra shares some of her key takeaways from the event:

What is the regulatory position?

The bottom line is that legislation on sustainability is not progressive enough. Buildings are designed for compliance with current statutory and regulatory standards, rather than designing for current operational requirements and the enhanced requirements that are likely to exist in fifty years’ time as a result of climate change.

The good news is that the government is responding to the need to drive sustainability forward and make it a key component of everyday life both in the public and private sectors - it has committed to reach net zero carbon emissions by 2050. Under the regime, emissions from buildings will have to be completely avoided or offset by planting trees or using technology to extract carbon dioxide from the atmosphere. Whilst the government’s commitment is a good start, the current emissions statistics show that drastic action needs to be taken in order to reach this target. Planning policy, the design process and insurance risk assessment need to be brought into the equation from the outset, as safeguarding property from the enhanced scale and frequency of natural disasters, extreme weather conditions and consequent challenges such as overheating and flooding will require a cohesive approach.

What are some of the initiatives already in place?

The view of all of the panellists was that notwithstanding the government’s commitment, it will be investors leading the change rather than regulations forcing the same. It’s good to see then that the financial and property industries are beginning to play their part in the sustainability movement and there are a number of initiatives currently in place:

1. Green Finance Strategy – this strategy recognises the role of the financial sector in delivering global and domestic climate and environmental objectives.
2. Task Force on Climate-related Financial Disclosures – this will consider the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures across industries.
3. Wild West End – the West End’s largest property owners are working together to encourage birds, bees and bats back into this iconic area of London, and create greater connections with nature for residents, visitors and workers to enjoy.
4. Ignition Project – this is the innovative financing and delivery of natural climate solutions in Greater Manchester.

Are there any other initiatives by property funds in the pipeline?

Dan Grandage, Head of Sustainability at Aberdeen Standard Investment, spoke of the “Better Building Partnership”. This is a collaboration between 20 investors, all of whom have committed to net zero emissions across their entire portfolios by 2050 in compliance with the government’s likewise commitment. The intention is to produce a “pathway” by the end of 2020 which sets out how they will achieve their aim, and thereafter to publicly disclose the results of their efforts against the targets set out in the pathway. The pathway will include some carbon offsetting to assist with reaching the target, but the primary focus will be on energy efficiency and improved design of property. Furthermore, zero net emissions will apply to the whole of the buildings comprised in the portfolios, and not just the landlord’s common parts. This is therefore something that occupiers will need to buy into to enable the investors to achieve their aim.

Dan also spoke of one fund which is currently operating a “sinking fund” mechanism to assist with sustainability in its properties. They charge their occupiers a tax on emissions above a certain level, and that tax is then placed in a sinking fund to be utilised at a future date to carry out works to reduce carbon emissions from the properties. In our experience this is not yet commonplace, but it is certainly an interesting idea which I believe could be implemented by funds without huge delay and expense.

Are there reputational risks for investors in ignoring the current climate issues?

You may recall a recent article in The Times newspaper stating that six of Britain’s best-known skyscrapers produce more than 12,000 tonnes of carbon dioxide every year, which is equal to the annual emissions of approximately 3,000 cars. There is no doubt that the owners of Tower 42; The Shard; the Gherkin; Heron Tower; the Cheesegrater; and the Walkie Talkie wouldn’t have been overjoyed to see their names connected with such a damning statistic (although it would be unfair not to point out that some if not all of the building owners are taking steps to improve energy efficiency). Currently, investors do not decide on investments based on carbon emissions, but if they want to continue to be seen as responsible investors then perhaps this needs to change quickly - scrutiny of sustainability principles and practices is only going to increase as time goes on. Perhaps carbon emissions targets and “taxes” can be incorporated into an investor’s due diligence process, and into agents’ particulars to get parties thinking about these matters as early in the process as possible?

Essentially, with climate change becoming such a global concern and ever more prevalent in discussion, property investors have to show that they have taken the sustainability values on board and are actively encouraging and facilitating compliance with those values.

Finally, Is there anything we can all be doing to help the efforts?

Don’t underestimate your power as a consumer to effect change. The general consensus seemed to be that it was better for lots of people to make an effort (even if not militantly), than for just one person to be doing it to the highest standard. Everyone in every role has the ability to drive sustainability.

With thanks to BPF Futures, AREF FutureGen and the panellists for such an interesting and thought provoking discussion.

Alexandra is an associate in our Commercial Real Estate team.