Reflections from COP26 and 3 Key Takeaways for Real Estate

Against the backdrop of a global pandemic, climate leaders from around the world recently convened in Glasgow for what felt like an especially pivotal gathering of the United Nations COP26 Climate Conference. Unlike in years past, there was little time spent debating the facts. Instead, with the tangible effects of climate change in the back of everyone’s minds, the atmosphere was at long last filled with a collective sense of urgency. This led to some strong commitments.

The good news: there was broad participation and consensus around the need to act now. Governments and private institutions alike came together to declare reduction target after reduction target, perhaps signaling that the debate about whether or not climate change exists has finally closed, and that the goalposts have shifted to encompass discussions about how far (and how quickly) to go in taking corrective action. 

The bad news: in that vein, there was significantly less discussion about the details of what, specifically, to do. Adding to the urgency (and anxiety) is the fact that experts now project that even if all entities meet the current climate commitments, it won’t be enough to keep global temperatures from rising above 1.5 degrees Celsius. 

We’ve summarized the key takeaways and themes that stood out from this year’s COP26, and highlighted the findings specific to the commercial real estate industry.

The bottom line: While commitments are a good starting point, it is now more clear than ever that we need coordinated action from governments, sectors, and companies alike to chart clear pathways to net zero.

Many Commitments, Few Plans

COP26 was filled with new commitments, with many countries settling on their Nationally Determined Contributions (NDCs), and private institutions signing onto new net zero pledges. Notably:

However, with all these new commitments comes a new elephant in the room: it is one thing to make a commitment, and quite another to achieve it. How will nations and organizations meet these ambitious goals? What are the necessary milestones between now and 2030 (and beyond) that can help us be sure we’re on track? 

While the willingness to come to the table and participate in goal-setting should not go unrecognized, it is clear that our path to decarbonization is – perhaps ironically – less clear than ever. If commitments signal a promise to act, the next step must be the action itself. Nations and companies must now develop tangible and scalable action plans to reach net-zero carbon emissions by 2050. Without clear plans in place, we cannot reasonably expect these commitments to come to fruition.

Regulation is Needed to Drive Decarbonization

Part of the problem is that decarbonization is no simple task. It will require a significant redistribution of resources and, arguably, a transformation of the global economy. 

It will also require coordination. Having so many global leaders gathered in one space offered a sobering reminder that currently, countries take widely different approaches to decarbonization – and that top-down policy is often a key factor to success. 

This is exemplified by the United States, which is lagging in comparison to its European peers. In the absence of strong federal regulation, the U.S. has largely relied on a market-based approach to decarbonization. And while the private sector has made great strides in recent years, led by forceful signals from the capital markets and organizations like Black Rock, it is also clear that there is still room to catch up. 

For example, as a result of sweeping policy, the EU was able to collectively generate 40% of its electricity from renewable sources from January to June of 2020. The U.S., on the other hand, only generated 18% of its electricity from renewable sources during the same period. Compounding the issue is the lack of a single, clear regulatory framework for understanding ESG and climate performance, which makes it harder for the markets to reward top performers. 

Overall, the U.S. has more work to do – and experts agree that additional regulation will be needed to support the level of market transformation necessary to arrest the worst effects of climate change. 

3 Key Takeaways for Real Estate

1. Strong Federal Building Emissions Policy Will Become the Norm. But When? 

With building emissions contributing to almost half of all carbon emissions in the United States, one would expect substantial investment and regulation around building energy use. But here too, the U.S. is lagging compared to its European peers. With the EU as a guide, we may anticipate similar legislation from U.S. lawmakers – but if not now, when? 

Over the years, Europe has established a strong foundation around building energy use and emissions standards, and real estate investors in the EU have built up the necessary organizational mechanisms to navigate and comply with the relevant regulations. Leading energy and carbon policy measures – such as net-zero standards for new construction, mandated building ratings schemes, and emissions limits – are far more prevalent throughout Europe than in the United States. This is likely due to the fact that energy policy in Europe is set at the national level, while in the U.S. it has predominantly been left up to state and local governments. This has created an inconsistent, piecemeal approach, with certain states (like New York and California) taking a more aggressive stance than their neighbors. 

For example, the EU now requires mandatory energy disclosures to all prospective buyers of buildings prior to the sale of a property. The United Kingdom enforces a mandatory energy performance certificate rating of “C” on new tenancies. New York City’s carbon cap policy, better known as Local Law 97, is undoubtedly one of the more sweeping pieces of legislation in the U.S., but similar policies have yet to be enacted across the rest of the country. This makes it difficult for real estate firms with regionally-distributed portfolios to adopt consistent standards. 

If the EU is any indicator, organizations should expect similar federal legislation to reach the U.S. in the coming years, as geopolitical pressures continue to increase and the policies outlined above become more and more mainstream. However, political fractures could continue to delay legislative and regulatory action. Many argue that even if Biden’s “Build Back Better” Act passes in the Senate, it will still not be sufficient to reduce emissions fast enough to meet our goals. 

The bottom line: The best defense is a good offense. Use states like California and New York as a bellwether for other areas of your portfolio. Come up with a consistent organizational plan with Building Performance Standards as your guide, so that you can stay ahead of the potential compliance burden and aren’t left unprepared. You could even make it a goal to increase the ENERGY STAR coverage of your portfolio, as ENERGY STAR Portfolio Manager has become the standard mechanism for compliance reporting.

2. “The Greenest Building is the One that Has Not Yet Been Built”

With more and more governments imposing net-zero building requirements for new construction, there has been less discussion around the role of existing building stock, in spite of the fact that 72% of floor space in the United States resides with buildings greater than 20 years old. Current efforts to improve the energy performance of existing buildings remain largely focused on monitoring and benchmarking consumption; they have not yet progressed to the level of finding and scaling opportunities to optimize and retrofit to achieve net-zero. But soon, the costs of doing nothing will outweigh the perceived upfront financial savings – the transition risk will exceed the reward. 

In other words: there will ultimately come a time when the cost to retrofit an inefficient or “brown” building will exceed its potential revenue, resulting in an influx of owners selling their buildings, and very few willing buyers. If nothing is done to begin the transition of existing buildings to net zero, it is estimated that 97 percent of today’s commercial buildings will eventually become increasingly difficult to rent or sell.  In worst-case scenarios, inefficient buildings may simply become too expensive to own and insure, and the real estate market could face obsolescence. This is a reality that real estate organizations must begin preparing for as they consider the performance of their portfolios in the coming years. 

The bottom line: Start thinking about developing a net-zero action plan for your portfolio. This can include planning for low-hanging fruit retrofits, like LED lighting upgrades, or starting to understand where it makes sense to pursue solar. The “green premium” and “brown discount” will have an increasing impact on your bottom line. 

3. What About Climate Adaptation?

While there was much talk of decarbonization at COP26, there was less discussion around how to adapt to current, near-term, and future changing climate conditions. “Transition risk” continues to be a key topic for investors, and we now have the tools to conduct scenario analyses to better understand the magnitude of climate risks by location. However, the story here remains the same: we are aware that there are significant risks, and we have even made high-level commitments, but our path forward to mitigate that risk is unclear. 

The bottom line: To safeguard against the inevitability of increasing climate stressors and develop a competitive edge, take inventory of your portfolio now and apply the TCFD’s framework as a first step. Every building is different, but this exercise will help you build out a comprehensive mitigation plan and understand where different strategies can be scaled. 

Final Thoughts

COP26 was notable in many regards. It showed us that there is still much work to be done, but also inspired great collaboration and helped move us closer to meaningful action.  As Sir David Attenborough remarked, “We should use this opportunity to create a more equal world, and our motivation should not be fear, but hope.” 

Of course, COP26 was just the beginning. The onus is now on us to work collectively and develop clearer paths to support the transition to a low-carbon economy – so that we can stop the planet from warming further and ensure a safe, sustainable future for all. 

Learn more about how Aquicore can help you manage your portfolio’s ESG program.