As we enter the new year, it's a great time to reflect on progress made and consider how we can continue to improve. The real estate industry made significant strides with respect to climate and ESG in 2022, and with market pressures mounting, we expect the momentum to continue in 2023.
Here are 3 ESG-focused New Year's resolutions for real estate to consider adopting in 2023.
Still struggling with inaccurate or incomplete energy data across your portfolio? Make 2023 the year you solve it once and for all.
We’ve long extolled the benefits of data. Better decision-making, easier benchmarking and compliance, faster and more accurate carbon accounting, and improved energy and carbon performance are just a handful of the advantages that come with having access to high-quality energy data that can be sliced and diced to fit your needs. With regulatory requirements still on the rise, and growing pressure from investors to make progress on climate targets, real estate owners who punt on their data dilemmas do so at their own peril.
The good news: you don’t have to tackle everything at once. Refer back to our ESG gap analysis template to help assess priorities in 2023 and identify urgent information gaps. Make sure you understand the pros and cons of different energy data sources (utility bills and real-time meter data are good places to start) and how they might apply across your portfolio. Is there a particular region, fund, or asset class where you have disproportionately limited data? Start there and see how much progress you can make. When in doubt, you can always find a seasoned technology partner (like Aquicore) to help you make sense of different energy data capture approaches and build a plan to increase your portfolio coverage.
Maybe you’ve committed to a formal net zero target. Maybe you’re navigating the melange of building performance standards and local ordinances that affect your US assets. Either way, getting a handle on building decarbonization is no longer optional. This year, make it a point to codify your portfolio’s decarbonization plan – 2025 and 2030 deadlines are fast approaching and the time to act is now.
What makes decarbonization planning challenging? For starters, every portfolio (and asset) is different. The operational changes, retrofits and upgrades, and renewable energy strategies available will depend on the unique characteristics of each asset, including things like the building’s age, its retrofit history, its exterior attributes and available roof space, the age and type of equipment in place, the lease structures and their rollover dates, and more. There are also regional factors at play, such as the power mix from the local grid, the annual hours of sunlight, and the availability of state, municipal, and/or utility-provided rebates, tax credits, and other funding mechanisms that can help finance efficiency projects and shorten payback periods. Finally, there’s the scope question: as you consider your total carbon footprint, are you equipped to measure and report emissions by scope? All of these considerations must be taken into account as you chart the path to your energy and carbon targets.
We recommend starting from the top down. At a high level, make sure you understand the different decarbonization strategies in your arsenal. You can apply these to portfolio targets through a waterfall approach (see the below example) – but note that this will require bottoms-up analysis (and, per Resolution 1, access to high-quality data) to forecast and allocate the projected impact of each strategy accurately. While you won’t arrive at this output overnight, the juice will be worth the squeeze: you’re creating an evergreen resource to guide your organization, and a compelling visual to showcase with investors and the general public in your annual ESG report.
ESG risk comes in many different forms. Physical climate risk is particularly top-of-mind for real estate investors, and for good reason, but the Taskforce on Climate-Related Financial Disclosure (TCFD) has highlighted another important risk category that is equally pressing for real estate: transition risk.
Transition risk is defined by the TCFD as the business risks associated with the shift to a low-carbon economy. With respect to real estate specifically, there are many transition risks to consider – including growing regulatory pressures (and the cost of compliance), the capital costs of upgrades and deep retrofits to existing building stock, and declining tenant demand for underperforming assets. Cataloging these risks across your portfolio and starting to build a mitigation plan should be a top priority in 2023.
Where to begin? There is a lot to take into consideration, including current asset valuations and hold periods, the various compliance markets you operate in, the baseline energy and carbon performance of your portfolio and individual assets, and deeper asset-specific factors (many of which overlap with the criteria discussed above), including efficiency project history (e.g. what has already been done at a given building, and what can and should be pursued next?), occupancy rates, and equipment age and type, among other things.
On the whole, managing transition risk will require careful planning and consideration of the long-term value of assets. And to borrow an adage from the startup world, the industry is in some respects building the plane as it flies. Investors and capital markets have not yet established a definitive framework for weighing the short-term costs and long-term benefits of expensive but necessary retrofits against top- and bottom-line financial performance, nor have they provided guidance for ascribing dollar signs to ESG and carbon performance. Outstanding questions remain about when we will reach the predicted “tipping point” – where low-performing assets, undesirable to tenants and investors alike, become stranded. And compounding things further is the recessionary economic climate we face heading into 2023. All that said, the greater push to reduce and eventually eliminate emissions from the operation of buildings shows no signs of slowing, and real estate owners should continue to take the long view when it comes to charting potential risks and costs associated with the transition.