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How relevant will the Taskforce for Nature-related Financial Disclosures be to the Real Estate sector?

There is a growing understanding that biodiversity loss and climate change are interlinked crises. Climate change degrades many ecosystems and makes the species within them more vulnerable; a decline in biodiversity reduces the ability of ecosystems to act as a carbon sink and to provide resilience for human populations through ecosystem services. The second part of COP15 Biodiversity Conference, being held in China this year from the 25th of April to the 8th of May, is expected to yield a Paris-style agreement to halt and reverse biodiversity loss and make commitments a part of binding national policies for the first time.

In the UK, the soon-to-be-introduced Biodiversity Net Gain policy (part of the Environment Act 2021) will require property developers to deliver a 10% net gain in biodiversity levels either on-site or off-site through biodiversity credits. Globally, and particularly in the UK, it appears that biodiversity loss is receiving a similar level of interest that climate change was seeing 5-10 years ago and is rapidly climbing the corporate agenda.

The key risk management and disclosure framework emerging to deal with nature and biodiversity is the Taskforce for Nature-related Financial Disclosures. It is being developed by a broad spectrum of stakeholders, including many of the world’s largest financial institutions. The TNFD will provide a framework to allow organizations to report on the risks and opportunities they face from biodiversity with the aim of shifting financial flows to create a nature-positive economy. The first beta version has just been released with the final version expected in 2023.

Like the TCFD, it will use the same pillars of Governance, Strategy, Risk Management and Metrics & Targets to structure disclosures. Unlike the TCFD, the TNFD is likely to directly incorporate the concept of double materiality within the framework and require users to report their impact on nature as well as nature’s impact on them. In light of recent criticism of ESG assessments which only focus on a company’s bottom line rather than their wider impact, this is a positive step.

So how significant is this likely to be for the Real Estate sector? A report published in 2020 from the World Economic Forum found that the construction sector was highly dependent on nature, with the real estate sector being moderately dependent. This is unsurprising given the huge material inputs that the construction and maintenance of buildings require, particularly if the sector intends on moving towards the use of structural timber at a large scale.

If nature is neglected, supply chains for natural fibres and timber could become more vulnerable due to issues around soil quality, pests and the decreased climate resilience brought about by a fall in biodiversity. Once buildings are in operation, nature plays a key role in maintaining their value by protecting against flooding, providing clean water, reducing temperatures during heatwaves and, for many buildings, creating a pleasant environment. As mentioned above, the real estate development sector in the UK must now meet rules around biodiversity such as Biodiversity Net Gain and the London Plan’s Urban Greening Factor. Nature is clearly a key factor in the construction of real estate and in the preservation of its value, as well as being the focus of increasing legal requirements.

Adopting the TNFD will be a difficult task for the industry given the complexity of nature and the challenge this causes for creating useful data. Helpfully, many of the steps that the real estate sector is already taking to reduce emissions and vulnerability to climate change will also limit the harm done to nature, such as reducing material use and incorporating nature-based solutions into developments. With the experience gained from the TCFD, the financial system is in a better position to rise to the challenge.

What is EVORA Global doing as a business to tackle climate change?

Climate change is becoming an extremely popular combination of words; we can hear people talking more and getting interested in the topic, newspapers and tv releasing more information and adverts, and new sustainable start-ups rising in every sector.

Globally, we have seen an increased number of climate change manifestations and activist groups, and interactions around the keyword ‘sustainability’ grew 45.8% on Facebook and 30% on Instagram [1], proving that people are looking to connect with each over and with experts to become more knowledgeable about the topic and to act together.

In the last year, there has been a switch in many investors’ mindsets who are finally seeing climate change as the number one sustainability priority according to a poll of asset owners from more than 32 countries which came together for the Top1000funds.com online Sustainability event in March. 79% of investors said that climate is their number one ESG priority and this number is due to increase; more green funds will be provided to businesses who want to start or implement their sustainability journey.

This year, EVORA conducted an Investor Survey and one of the key findings is that a growing number of investors believe ESG will become common practice in 2022.  50% of respondents plan to include an ESG representative in their investment committee in the coming year. They said that integration of ESG in investment decision-making will mature in 2022 and more ESG focus is expected in the following investment lifecycle areas: investment mandates, deal sourcing, research and strategy, sustainable property management, internal training and governance. More than 75% of investors reported no link between ESG objectives and their remuneration, but 27% expect this to change in the coming years.

EVORA Global prides itself on being a sustainability consultancy and software business where our experts help clients by supporting them step by step during their ESG journey.

But what are we actually doing as a business to tackle climate change?

Let’s start from the beginning!

Back in 2011, Chris, Paul and Ed, EVORA Executive Directors and Co-Founders, had a big dream: to accelerate the evolution of real asset sustainability to enhance the wellbeing of the planet and its people. They thought hard about how to start helping businesses become sustainable. What could they do to gain trust? Where should they start from?

This is how our services were born. All of them are designed to bring sustainability to the forefront of real asset investment. Without even mentioning the benefits for our planet and its people!

Sustainability is still a developing journey with new and exciting innovations and opportunities for many people to make an impact; our services and support will certainly continue to evolve with it.

Recently, we have expanded into infrastructure sustainability, in addition to real estate, recognising that infrastructure assets can generate significant environmental and social impacts. Furthermore, this year we have introduced the Green Finance service as we recognised that the green finance agenda has been moved forward at a significant rate by the effects of climate change.

I am very proud to say that EVORA Global has signed up to several initiatives to advance the ESG agenda. They are a symbol of our hard work and our continued commitment towards sustainability.

The Planet Mark Business Certification is a recognised symbol of sustainability progress forcontinuous improvements; it encourages action and builds an empowered community of like-minded individuals. This is EVORA’s seventh year of business carbon footprint reporting and certification to Planet Mark. It demonstrates our achievement in reducing our carbon emissions associated with business operations by a minimum of 2.5% every year and our commitment to a continuous improvement in sustainability. Here’s to another seven years of great achievements!

In June 2020, EVORA joined nearly 100 other organisations in signing The World Green Building Council’s Advancing Net-Zero commitment. The commitment challenges businesses, organisations, cities, states and regions to reach net zero carbon in operation for all assets under their direct control by 2030, and to advocate for all buildings to be net zero carbon in operation by 2050. We are extremely proud of this commitment.

In December 2020, EVORA became a signatory to the United Nations Principles of Responsible Investment (UNPRI) underlining our commitment to advancing real asset sustainability. The UNPRI works to understand the investment implications of ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. In line with our company vision, we are committed to the Principles of Responsible Investment, and we actively support and endorse PRI among our clients.

The Sustainable Development Goals (SDGs) have been adopted by the UN General Assembly to guide global action towards a more sustainable future. Given that the real estate industry is responsible for almost half of energy and process-related emissions, we have a pivotal role to play in contributing to the achievement of these goals. We identified a number of SDGs that we can dedicate our expertise, ideas, and creativity towards achieving. We then divided them into two categories: ‘external’ SDGs that are relevant to EVORA’s service lines and ‘internal’ SDGs where EVORA can have the greatest impact through our people. Incorporating these goals into our work will strengthen our commitment and vision to accelerating the evolution and adoption of real estate sustainability to enhance the well-being of the planet and its people.

EVORA has at its heart the health and wellbeing of the team and I take this opportunity to unveil that we will soon move to a new office, how exciting! We have chosen a space that has better lighting and is visually more appealing to work in; the shape of the office space will allow a better desks configuration which will improve the social element. The building has been B EPC rated showing a very good property’s energy efficiency and fresh air is pumped in the office. 20% of the oxygen we breathe in is used by our brain to function and the amount of oxygen we have in our blood controls the release of serotonin which is the key hormone that stabilizes our mood, feelings of well-being, and happiness. Last but not least, the original building hasn’t been demolished but recently refurbished which means that less material has been used and less embodied carbon produced if compared to a new building.

At EVORA it is important for us to advance the ESG narrative around the globe. Because of this, last year we introduced the EVOLVE ESG Training Academy. These free webinars are accessible to professionals working in the real asset sector but also to whoever is curious to know more about sustainability. Yes, I have said FREE! The reason is simple, we want to make real assets more sustainable and to drive awareness of the changes needed to be made today, before it’s too late. The training webinars have reached 28 countries and more than 1300 individuals. Thanks to the support of everyone who has participated, we are motivated to keep the academy running for many years to come.

Nelson Mandela once said “Education is the most powerful weapon which you can use to change the world” and I wholeheartedly agree. Education is how people gain knowledge, critical thinking and skills to find solutions and create innovations to make this world a better place.

EVORA will continue to tackle climate change as a business, continue to expand our services and evolve our training programme; we will keep creating and promoting healthy and productive workspaces, and improving our business to retain all our ESG credentials.

I am really proud to be part of EVORA and I am delighted to work with like-minded people in such a respectful and transparent environment. There is an incredible bunch of people at EVORA who all really care – for one another, for the work they do, for their clients and for our planet.

[1] https://www.thedrum.com/industryinsights/2021/11/03/leading-sustainability

COP26: A Summary

What is a COP?

A Conference of the Parties (COP) is an annual meeting of the signatories to a UN convention – an agreement to co-operate to tackle a global challenge. In the case of climate change, there are almost 200 states who have signed the UN Framework Convention on Climate Change (UNFCCC) since its creation at the Earth Summit in Rio in 1992.

At each COP meeting the details of how to co-operate, who will act and to what end is refined. In between each annual meeting there are a series of preparatory meetings of government officials and elected representatives. The progress in those intermediate talks can provide an indication of the political significance of each COP and its perceived success.

The first agreement to act was the Kyoto Protocol signed in 1997, and this was superseded by the now famous Paris Agreement in 2015.

This global political platform follows the success of the Vienna Convention and subsequent  Montreal Protocol, signed from 1987, to reduce the production and use of ozone depleting substances which created a whole in the Ozone layer. Amended in Kigali in 2016 to tackle F-gases, which also have a significant contribution to global heating.

Other related UN conventions, which have had less success to date, include the Convention on Biological Diversity. Whose COP15 took place online in October and will continue in Kunming in 2022.

Everything you need to know about COP26

We must prepare for at least 2°C of global heating. That’s the implicit outcome of COP26. The decisions which have been agreed upon by global leaders don’t meet the aspirations of the Paris Agreement to limit the average global temperature increase to well below 2°C; ideally to 1.5°C. This inevitably means that more lives will be lost and more economic damage will be done as a result of man-made climate change.

There is an obvious gap between meaningful action and all of the Net Zero announcements and the political fanfare about climate action. A report published during COP26 by Climate Action Tracker shows that we have a 66% probability of exceeding 2°C of global heating. It highlights the ‘credibility gap’ between all of this talk, and the intended action. That’s based on their review of the Nationally Determined Contributions (NDCs) – essentially each nation’s plan to reduce their Greenhouse Gas (GHG) emissions.

It assumes that these NDCs are fully implemented. We know that the best laid plans of Governments are never fully implemented, for instance the UK’s Building Regulations to limit energy consumption and GHG emissions are not enforced. Every new building emits more in operation than the design intent.

The Climate Action Tracker report is reinforced by analysis from CarbonBrief of three similar studies, which have reached a similar conclusion about the present best-case scenario being >2°C.[1]

When we talk of adapting to 2°C of global heating, it might not seem like much of a change. In the UK, it can lead to talk of a Mediterranean climate and an increasing number of vineyards. The truth is that this average temperature increase will be unevenly distributed and it will affect us all. We will experience more frequent and more extreme weather events. Those peoples closer to the equator and in the Global South will be disproportionately affected. The locations which are more climate resilient will become much clearer over the coming years, which will be reflected in their desirability and value.

We need to think about how this could affect our buildings and infrastructure. How well protected are they from flood risks, heat stress, wildfires and storms, and who bears the costs when damage is done?

The next two COPs, in 2022 and 2023, will be in locations which are closer to the equator and with a significant exposure to a changing coastline and increasing desertification – these are COP27 in Sharm El-Sheikh in Egypt and then COP28 in the United Arab Emirates.  It is likely that the immediate effects of climate change will be closer at hand and more visible than in Glasgow.

The State of Climate in Africa Report states that ‘by 2030, it is estimated that up to 118 million extremely poor people will be exposed to drought, floods and extreme heat in Africa”. In Madagascar, according to the World Food Programme, more than 1 million people are suffering right now from the first famine caused by climate change.

However, the 5-year cycle of submitting NDCs means that we could be five COPs away, in 2027, from the national action we need. That’s in the context of the need to halve emissions by 2030 and then halve them again by 2040. We’re running out of time and that is why we need to adapt.

Next year we will see the scientists of the Intergovernmental Panel on Climate Change (IPCC) publish their sixth assessment report (AR6). It is expected to forewarn us that the time left to take climate action is reducing and could be as little as four years. The AR6 Working Group I presented to COP26 and stated that ‘climate and weather extremes and their adverse impacts on people and nature will continue to increase with every additional increment of rising temperatures’. We know that there has already been lobbying by governments to weaken the text of AR6 which describes the latest climate change science.[2]

It is not surprising that this slow action and blocking of progress is causing ‘climate anxiety’ amongst young people, mentioned by Barack Obama in his COP26 speech. Greta Thunberg summed up her frustrations on Twitter, “Unless we achieve immediate, drastic, unprecedented, annual emission cuts at the source then at means we’re failing when it comes to the climate crisis.”

When a credibility gap exists between political announcements and concrete actions on climate change, particularly when it is seen as unjust and deadly, we can expect more peaceful protests and civil unrest. Obama has recommended Kim Stanley Robinson’s novel The Ministry of the Future. This describes a bleak future where a new global Ministry is created to protect the rights of future life on Earth after a catastrophic heatwave in India. It is a well-informed novel about climate change, but it does take these protests to the extremes of terrorist activity which is not an outcome any of us wish to see.

There were many global leaders at COP26, including President Biden, Bill Gates and Greta Thunberg, however there was also notable exceptions like President Xi Jinping. A mixed message from China when there is a concerted effort from the country’s leadership to act on climate change. There are signs of collaboration between the USA and China, including a joint statement and close negotiations in the final hours of COP26 between John Kerry, a hero of the Paris and Kigali negotiations, and Xie Zhenhua, China’s Climate Envoy. Xie has described climate change as an “existential crisis”.

Reasons for hope

There are reasons for hope from COP26. It is clear that there was a lot of energy at COP26, in the Blue and Green zones as well as on the fringes. More public and private sector commitments have been made than ever before. For example, India committed to a target of Net Zero emissions by 2070. Over $130tn AUM are now Net Zero aligned via the Glasgow Financial Alliance for Net Zero (GFANZ). Over half of the FTSE100 companies, with a market cap of over £1.2tn, have committed to be Net Zero Carbon by 2050.

The Chancellor, Rishi Sunak, announced that the UK will become the ‘world’s first net zero aligned financial centre’ with plans to publish a Net Zero Transition Pathway next year. This was supported by FCA announcements on a new ESG Strategy and a Disclosures & Labels Advisory Group for sustainable investments to support the development of the Sustainable Disclosure Regulation (SDR).

As regions and countries publish regulations to increase transparency of climate risks across all asset classes, the long-expected announcement by the IFRS Foundation that the International Sustainability Standards Board (ISSB) had been formed, was welcomed. This is an important step in standardising company reporting as it joins together the Value Reporting Foundation and Climate Disclosure Standards Board (CSDB), and builds on the Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations.

For the UK, a Net Zero Whole Life Carbon Roadmap to 2050 was published by UKGBC.

Whilst there is obviously a concerted effort to mobilise private climate finance, there is still a shortfall in the $100bn (0.001% of global GDP) by 2020 commitment of finance for developing countries to enact necessary climate mitigation measures. At the same time, there continues to be $500bn of government subsidies for fossil fuels and the same amount to farming practices that damage our planet and our health.

Some small concessions were made at COP26 to increase this funding, such as the Breakthrough Agenda, MOBILIST, the Clean Green Initiative and the Climate Investment Funds’ Capital Markets Mechanism, specifically for clean technology including renewables and electric vehicles. The Urban Climate Action Programme will support cities in Africa, Asia and Latin America to transition to Net Zero by 2050. An Adaptation Fund and the Climate Action for a Resilient Asia (CARA) programme will support measures to improve climate resilience in Asia-Pacific cities.

For the UNFCCC process, the technology mechanism is led by the Technology Executive Committee (TEC) and the Climate Technology Centre and Network (CTCN). It can provide a focus for incubation and acceleration of relevant cleantech.

Over the last year, we have seen a number of initiatives to phase out coal power, including significant private divestment and China, Japan, Korea and the G20 commitments to end overseas funding of coal. At COP26, 190 countries and organisations agreed to end all investment in coal power generation. For major economies, this will be in the 2030s and in the 2040s for the rest of the world.[3]

Momentum is also building for the phase of the internal combustion engine, with a COP26 declaration to work towards 100% zero emission vehicles sales globally by 2040. This includes commitments from Ford, GM, Mercedes-Benz and Volvo, but not Toyota, VW and Nissan-Renault.

The USA, EU and UK also endorsed five principles for infrastructure development:[4]

  1. Infrastructure should be climate resilient and developed through a climate lens.
  2. Strong and inclusive partnerships between host countries, developed country support, and the private sector are critical to developing sustainable infrastructure
  3. Infrastructure should be financed, constructed, developed, operated, and maintained in accordance with high standards.
  4. A new paradigm of climate finance—spanning both public and private sources—is required to mobilize the trillions needed to meet net-zero by 2050 and keep 1.5 degrees within reach.
  5. Climate-smart infrastructure development should play an important role in boosting economic recovery and sustainable job creation.

These principles may be seen in practice in the Build Back Better World, Global Gateway and Clean Green initiatives.

Nature-based Solutions to climate change were also a big theme at COP26. This follows a clearer scientific understanding of the need to tackle both climate change and biodiversity loss at the same time, as well as growing interest in the Taskforce for Nature-related Financial Disclosure (TNFD).

The Glasgow Leaders’ Declaration on Forests and Land Use saw over 100 leaders, accounting for 86% of the world’s forests, commit to halting and reversing forest loss and land degradation by 2030. This was reinforced by an increase in the number of NDCs which include measures to reduce nature loss.[5] However, more is required for agriculture, which occupies half of the habitable land on Earth, and is still missing from many NDCs, with significant uncertainty about the related national emissions.[6]

Glasgow Climate Pact

Despite Alok Sharma’s best efforts, this compromised Pact will be seen as a political failure by many parties who do not have a vested interest in the fossil fuel-driven status quo. It is the first time a COP decision has recognised that there is an end for fossil fuels. Stopping the use of coal is considered a necessity to achieve 1.5°C – 8,500 coal plants would have to be closed by 2030 according to the IEA – and this part of the Pact was weakened.

The late intervention by India to change the wording of the agreement to ‘phasing down of unabated coal power and inefficient fossil fuel subsidies’ rather than ‘phasing out’ would not have been possible without the support of China and, in turn, the USA. It is a clear demonstration of how these politics work at the end of a very long extra day, and it provides a short extension in the support for fossil fuel power.

There has been progress since Paris. We have seen agreement of the ‘Paris Rulebook’, which is an important step in the implementation of the Paris Agreement, and this will ensure we see a ratcheting up of action.

In terms of the hope for achieving a temperature increase of well below 2°C, with a continued aspiration for 1.5°C, the Pact (article 29) does introduce a new annual ratchet mechanism – to revisit the NDCs in 2022 rather than in five years. There is a hope that they can be improved and it raises the stakes for COP27 in Egypt next year. The AR6 Working Group II will present to COP27 on adaptation.

The parties also recognise the concept of developed countries making payments to developing countries for ‘loss and damages’ for historic emissions which are causing damage now. This will be an ongoing dialogue and a reminder of the meetings which take place between each COP. There is a UN Subsidiary Body for Implementation (SBI) and it is focused on the implementation of the Paris Agreement and this Glasgow Climate Pact. SBI meetings 56-60 will take place between 2022-2024. Technical assistance will be provided via the Santiago Network.

If you want to see how fast we can progress politically keep an eye on the SBI and the other intervening UNFCCC meeting over the coming year. For future COPs we can expect the increasingly diverse involvement of women leaders, young people, indigenous people and local communities.

The collective efforts to tackle climate change, and the related challenge of biological diversity, will only ratchet-up over the next five years as we see increasing losses and damages from insufficient action. Decisions about what, how and when to invest and finance assets will have to consider this complex, dynamic landscape with a need to balance both climate adaptation as well as mitigation.


[1] https://www.carbonbrief.org/analysis-do-cop26-promises-keep-global-warming-below-2c

[2] https://www.bbc.co.uk/news/science-environment-58982445

[3] https://www.gov.uk/government/news/end-of-coal-in-sight-as-uk-secures-ambitious-commitments-at-cop26-summit

[4] https://www.gov.uk/government/news/us-president-biden-european-commission-president-von-der-leyen-and-pm-boris-johnson-announce-commitment-to-addressing-climate-crisis-through-infras

[5] https://wwf.panda.org/wwf_news/?4248391/NDCsreport

[6] https://ccafs.cgiar.org/resources/tools/agriculture-in-the-ndcs-data-maps-2021

Cities, Regions, and the Built Environment at COP26

Collaboration between real assets owners and the cities in which they operate is key to advancing on climate action

As the world gears up for COP26, attention is turning to the built environment’s responsibility to reduce GHG emissions and urgent need to adapt to the physical impacts of climate change such as flooding and heat stress. While buildings have unfortunately contributed to the problem of climate change over time through their use of fossil fuel-based energy, those of us who work in the sector now have a tremendous opportunity to help redirect capital to drive positive change.

The IPCC Sixth Assessment Report (AR6) confirms that human activity is undeniably causing changes to our climate systems and that the world must transition to Net Zero Carbon by 2050 to prevent the worst outcomes. Transforming the urban built environment is key to fighting the climate crisis.

Cities are responsible for 60% to 70% of global carbon emissions, although per capita energy consumption of urban residents tends to be lower than that of rural residents.[1] Real estate is often the main culprit. In New York City, for example, buildings generate nearly 70% of the city’s carbon emissions.[2] Urban infrastructure and services are also increasingly vulnerable to extreme weather events and chronic climate changes. The IPCC AR6 report notes that cities actually intensify human-induced warming locally (i.e. the Urban Heat Island effect) and can increase local precipitation, worsening stormwater runoff intensity.

Cities are also grappling with other major shifts, including urbanization and population growth. By the year 2050, over two-thirds (68%) of the global population are projected to be living in urban environments.1 While greater density is usually a positive thing for reducing carbon emissions, growth can also put stress on land availability and natural resources. Urban centers are also currently battling housing crises and inequality in many parts of the world and working to recover from the COVID-19 pandemic. These all involve crucial planning and policy decisions that require funding.

The COP26 Presidency Programme is made up of a series of key themes, the last of which is “Cities, Regions and The Built Environment” on November 11th. An initiative related to this theme is the #BuildingToCOP26 Coalition, a group of business and government organisations that are focused on achieving zero emissions and resilience in the built environment and cities.  The Coalition is working to support an interim target of halving the built environment’s emissions by 2030 and an ultimate target of net zero emissions by 2050.

The Coalition is urging both cities and businesses to join the “Race to Zero,” which focuses on achieving zero emissions buildings and infrastructure. The Cities Race to Zero program is in partnership with the C40 Cities initiative, a group of 97 cities around the world pursuing climate action and sustainable urban environments. 

EVORA Global are attending COP26 and will be hosting an expert panel discussion on the 11th of November titled “Real Estate Investment and Finance: Climate Risk and Opportunities.” We hope you will join us if you are attending the conference!

What are cities doing to reduce emissions and adapt to the effects of climate change, and how will owners and managers of real assets play a role?

At EVORA Global, we help managers of real assets – including real estate and infrastructure – understand their climate risks, reduce their greenhouse gas emissions, and make their portfolios more resilient. Real assets managers can play a crucial role in the cities and communities in which they operate by mitigating climate change and providing safer, healthier, and more resilient buildings for occupiers.

Of course, buildings don’t exist in a vacuum. Urban properties interact with and rely on the services and infrastructure of the city around them. A highly resilient office building in a coastal city might be back up and running the day after a hurricane, but it will still face risks to rental demand and asset value if residents in the area are dealing with frequent evacuations and homes are losing insurance coverage.

It’s becoming increasingly important for real estate investors to scrutinize cities’ adaptive capacity, just as they have traditionally examined economic and demographic data in their target investment markets. Credit rating agencies have begun incorporating climate-related factors into their government bond rating systems, which may provide insightful metrics and research. A city’s political will and financial backing may determine whether it will remain habitable over the course of the century. Tokyo, for example, faced significant physical risks long before human-induced climate change. Although it’s well-adapted today (check out the incredible underground tunnel system that protects the city from flooding), massive investments will need to be made to improve those protections as climate risks worsen over time.

Cities are also establishing their own regulations and incentives to drive the built environment toward Net Zero Carbon, particularly in the United States where there is still a lack of strong national climate policy. New York City’s Local Law 97 sets energy efficiency and greenhouse gas emission limits for buildings starting in 2024 and intensifying in 2030. Just this month, the City of Boston signed into law the Building Emissions Reduction and Disclosure Ordinance (BERDO), which sets gradually decreasing carbon targets for existing buildings. Other local policies target specific technologies, such as energy efficient lighting, sub-metering, and electric heat pumps. Real estate managers, particularly those with geographically diverse portfolios, face a big challenge in staying on top of these emerging regulations and ensuring their assets comply.

There are many elements of urban planning and management that are critical to reducing emissions, including the provision of electricity and heating, urban water systems, urban waste management, transportation systems, and protection of green spaces and biodiversity. Each element may also be vulnerable to the physical impacts of climate change, so adaptation must be a part of all urban planning decisions. Climate mitigation and adaptation are therefore two sides of the same coin.

The urban built environment can either help or hinder the journey toward climate resilience, depending on the choices we make. COP26 serves as (yet another) urgent call to action for both governments and the private sector to work together to transition to a net zero carbon world. How will you respond?


[1] Rosenzweig, C., Solecki, W., Romero-Lankao, P., Mehrotra, S., Dhakal, S., & Ali Ibrahim, S. (Eds.). (2018). Climate Change and Cities: Second Assessment Report of the Urban Climate Change Research Network. Cambridge University Press.

[2] The City of New York (2016). New York City’s Roadmap to 80 x 50. The City of New York Mayor Bill de Blasio.

What did we learn from our first EVORA Insight’s lunch on the topic of how ESG is being integrated into investment decision-making?

The gap in expectations between the leaders and the majority of investment managers is huge. Even the leaders don’t think they are doing anywhere near enough. To be honest, it’s a little disheartening.

Organisational change and capacity building is being hampered by structural changes, which cannot be solved by each firm on their own. For instance, the historically low price of gas as a common fossil fuel, compared to electricity which can be net zero carbon, presents an affordability challenge. Also, the lack of availability of standardised and simplified ESG data to inform investment decisions and to understand the underlying risks. To gather ESG data, particularly for a whole building, is still a time-intensive process requiring active engagement with tenants and other stakeholders, without regulatory support in many countries.

However, there are choices that companies can make to include ESG factors as standard practice. To include ESG representation in the IC and to decide on ESG “red lines”. More often than not, assets are being acquired with little or no considerations of ESG risks and opportunities pre-transition. For some funds, this is the only opportunity to incorporate these factors and budget accordingly, particularly when future income could be compromised. Notwithstanding the need for ESG data to be readily available at the time of the transaction, during a period in the market when there is an insufficient supply of properties to meet the demands of available capital allowing little time to consider non-financial considerations.

We ask our clients to think about ESG over the timeframe of two hold periods – to consider how ESG will be priced into the exit value. There is little room to do this effectively under present market conditions, in part due to the uncertainty of how to interpret financial impacts of climate projections, and because pricing in that risk may result in losing the deal. There is anecdotal evidence of buyers winning and losing deals with risk-adjusted pricing, which most often appears to be through the incorporation of the costs of decarbonisation/adaptation measures or an adjustment to the cap rate at exit as a proxy for perceived future risk. More observational data is needed to understand under what conditions these price adjustments are and are not resulting in winning deals.

Some companies know that the reliance on GRESB ratings and EPC data, which don’t measure actual performance, is insufficient to understand the underlying risks and opportunities. Making the right investment decisions requires technical and operational insights, when there is a shortage of these skills and to get the right experience it requires support from multiple consultancies. However, it seems inevitable that certifications and ratings will continue to be used as a short cut.

With the background of the environmental sciences telling us that we are running out of time to tackle the global issues of climate change, destruction of biodiversity, and pollution of the land, water and air. Social inequalities are generating unrest in our communities. It has left us wondering how do we change the philosophical principles on which real asset investment has been grown on over the last 50-60 years. Is the only way forward a ratcheting up of regulations to force change, which would require proactive involvement from investment managers in policy discussions for finance, sustainability and buildings to be successful?

Over the last couple of years there have been reasons for optimism that real estate investment and finance is starting to change for the better, these include market indicators like:

  • Investor pressure to explain ESG and climate risk policies is increasing and tougher questions are being asked, although how this information is used in unclear
  • More individuals throughout real estate investment firms, and outside of the traditional sustainability team, are being required to take responsibility for ESG
  • ESG and climate risk are showing up on performance objectives for more staff
  • Valuers are starting to query for data on EPC ratings to incorporate into valuations, and market analysts are using this information to review income projections. 

So, looking ahead to 2050. When people look back to this period of change happening today and see what an exciting time we have lived through, will you be one of those who can say that you joined us to push ESG integration forwards successfully or will the transition come too late given the scale of the changes we have to make?

It’s getting hot in here! Heat risk to buildings

The recent heatwave in Canada has brought into focus the real and present dangers of extreme weather conditions. Record temperatures in British Columbia, reaching as high as 49.6°C, resulted in hundreds of excess deaths and heat-related hospital visits. As early analysis shows the heatwave would have been ‘virtually impossible’ without human-caused climate change, we know to expect an increase in the frequency of such events, presenting a global challenge for the buildings in which we live and work.

In the UK, the Climate Change Committee (CCC) have recently released their third assessment of the UK’s readiness for the impacts of climate change. The Climate Change Risk Assessment (CCRA3) paints a stark picture of the widening gap between the risks posed by the UK’s changing climate and the government’s policy response. Among the highest priority areas identified by the CCC, they highlight ‘risks to human health, wellbeing and productivity from increased exposure to heat in homes and other buildings’ as requiring urgent action before the next round of national adaptation policies due in two year’s time.

What is the risk?

Average annual temperatures in the UK have already increased by 1.2°C since pre-industrial levels, and are expected to rise further. Summers as hot as 2018 (the joint hottest on record) could occur every other year by 2050, with an increasing likelihood of exceeding 40°C, according to the Met Office’s UK Climate Projections.

Without suitable adaptation measures, cities will become increasingly uncomfortable places to live – the dense concentration of buildings and paved surfaces in urban areas causes an increase in temperature relative to the surrounding countryside, known as the urban heat island effect. This will increase the number of ‘tropical nights’, hot and humid evenings that are a significant contributing factor to heat-related deaths during heatwaves.

More than 2,500 people died during heatwaves in 2020, the most of any year since records began. Continued warming, and current adaptation measures could see this figure triple in coming decades.

In the five years since the previous report (CCRA2), 570,000 homes have been constructed in the UK and under current government targets another 1.5 million will be built by the time CCRA4 is published. If buildings are not designed to cope with the increasing temperatures, there is a real risk that climate vulnerability is ‘locked in’ to our infrastructure.

What are the implications?

Of the many risks discussed in the report, the CCC singled out the risk of heat in buildings as being particularly notable for the absence of adaptation policy.

There are two years until the next round of national adaptation policies must be submitted; two years that are vital for closing the adaptation deficit. With consultations taking place in England and Wales, it is likely that policy will follow. It is therefore essential that this risk must be considered now, for both standing and development assets.

At EVORA, we can work across the entire life cycle of a project, to help deliver on better building design and operation. As well as helping to reduce the embodied carbon in the materials used in construction, improving resilience to high temperatures can be worked into the building at the design stage to reduce climate vulnerability. This could include measures such as:

  • Passive cooling measures – better shading, more reflective surfaces, and improved ventilation are often the most cost effective ways of reducing the pressures of high heat;
  • Choice of materials – through well informed decisions around the choice of materials, it is possible to create a more comfortable internal environment, whilst also reducing the embodied carbon in construction;
  • Green roofs and rooftop gardens – as well as the obvious boosts to biodiversity, green roofs reduce heat by providing shade, and through the cooling effect of evapotranspiration.

Further to this, through our partnership with Moody’s 427, we are able to incorporate physical climate risks, including those posed by increasing temperatures, into our SIERA platform. This enables our consultants to analyse physical risks on an asset-level basis. This detailed information can then form the basis of best-practice climate resilience measures across a real estate portfolio.

If you would like to know more, speak to our experts today: info@evoraglobal.com

Climate Risk Readiness White Paper

1.   Why is climate change such an important investment risk for investors in real estate & infrastructure?

A summary of the factors driving change in the real asset markets.

In early 2020, before the pandemic hit, BlackRock’s Larry Fink called out the fact that “Climate Change is Investment Risk”. Three paragraphs of his annual letter stood out, highlighting the connection between material climate risk, their impact pathways, and the drivers of asset value:

“Will cities be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?

“Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.

“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

On its own, this proclamation from the CEO of the world’s largest asset manager might have created a few ripples in the investment markets, but not create a wholesale market transformation. However, the letter sandwiched an unprecedented period in the history of mankind’s battle with climate change. At the end of 2018, the UN Intergovernmental Panel of Climate Change (IPCC) published a Special Report on the impact of global warming of 1.5°C, which provided a stark warning about the consequences of inaction on climate change. In the period between these two events, several other activities took place which reinforce the market change:

  • Public opinion about the need to act on climate change shifted significantly in favour of action, in no small part to the meteoric rise in popularity of Greta Thunberg’s ‘Fridays for Future’ school children protests and the disruption caused by other campaign groups, such as Extinction Rebellion (XR) protests, and legal class actions brought forward by student groups around the world.
  • Climate science and the quality of climate modelling continues to improve, with recent work showing that the likely outcome of global warming will be between an average global warming of 2.6°C and 3.9°C. This is well above the low-risk threshold of 2°C agreed at the 2015 Paris Climate Summit (COP 21) and the preferred target of 1.5°C.
  • Significant capital reallocation towards delivering ESG objectives happened during 2019 and continued into 2020.

These factors, combined with new and forthcoming government regulations, would suggest that climate change and broader sustainability (or Environmental, Social & Governance) issues are here to stay for investors. Their material impact on financial returns is starting to become better understood as more time and money is invested in improving our knowledge and its application in real asset investment markets. Ignorance of these issues is no longer an excuse.

The way in which climate risks are being understood is in 3 categories:

  1. Physical risk
  2. Transition risk
  3. Litigation, or Liability, risk

For physical risk, the first step is to understand which climate-related hazards present a material risk, both now and over the period of an investment, including the disposal value. For instance, the materiality of a flood hazard could increase over time as climate change creates the conditions for more frequent and/or more severe floods causing damage or disruption to an asset. The impact pathway for that hazard could be that the repair costs and frequency of the floods means that an asset becomes uninsurable. Another impact pathway could be that the flooding makes it impossible to access an asset, which in turn reduces occupancy and the related revenue that generates.

The complex nature of the changes brought about by our warming climate means that the risk hazards and impact pathways could influence the drivers of asset value in multiple ways.

Whilst some of these material risks are apparent today, there are many others which will become much more visible over the coming decade. The trends that we see which could accelerate changes to asset value include: increased environmental & social disruption; increasing government regulation; and the internalisation of these costs to mitigate climate change and to adapt to the consequences. Companies and asset managers need to be prepared to avoid the risk of litigation.

2. What are the expectations for how investors and asset managers will respond to climate risks?

There is increasing certainty about how to be prepared to action.

Climate-related financial risk is a new topic for investors. In 2015, Mark Carney, as the Governor of the Bank of England, gave a speech which warned of the threat of climate change to financial stability. He spoke of the “Tragedy of the Horizon” where inaction on climate change today imposes a cost on future generations that the current generation has no direct incentive to fix. Meaning that the time horizon for decision-making in typical business and investment cycle is not suitable for tackling the catastrophic impacts of climate change.

Earlier in the same year, the G20 asked the international Financial Stability Board (FSB) to report on how climate change risks could be accounted for in the financial sector. Both of these events were precursors to the UN Climate Summit (COP21) in Paris later that year. The international political agreement reached at COP21 was a watershed for international climate policy as governments agreed that a target of limiting global warming to 2°C is a necessity to avoid catastrophic changes and that getting well-below this figure was desirable, so 1.5°C is the stretch target. To achieve this target collectively, we need to stabilise greenhouse gas (GHG) emissions, measured in tonnes of carbon dioxide (CO2) equivalent, by 2050 – also known as getting to Net Zero Carbon or being Carbon Neutral by 2050. Failure to do this will mean that the Earth will continue to warm and the financial losses will be much greater.

This growing recognition that climate change and the related financial risks have to be considered in the financial markets led to the announcement during COP21 to establish a Task Force on Climate-related Financial Disclosures (TCFD) under the auspices of the FSB and chaired by Michael Bloomberg. The TCFD will develop voluntary, consistent climate-related financial risk disclosures for use by companies and asset managers in providing information to investors, lenders, insurers, and other stakeholders. Considering the physical, liability and transition risks associated with climate change.

One year later the TCFD published its Recommendations for consultation, which were finalised by the summer of 2017. Over the last 3 years since the Recommendations were released there has been considerable efforts made by the FSB-TCFD to build support for their adoption by actors in the financial markets. Recognising that preparing an organisation to embed a comprehensive response to climate-related risks could take 3 years.

In parallel to this promotion of TCFD over the last 3 years, GRESB has been piloting a Climate Risk Module as part of their annual disclosure and benchmarking process specifically for real estate and infrastructure. Other international Environmental, Social & Governance (ESG)/Sustainability reporting standards have also promoted more effective consideration of climate risks and preparedness.

Every year the UN published an Emissions Gap Report. In 2019, the report stated that we need to reduce global GHG emissions by 7.6% every year between 2020-2030. If we don’t start that level of reduction now, then by 2025 we will have to reduce emissions by 15.5% every year to hit the target and this will be more costly and still necessary. The later that we leave act to mitigate GHG emissions, the higher the annual cost of mitigation action and the increased likelihood of increase cost of adaptation to a changed climate. Many companies have now adopted science-based targets aligned with the UN to reduce emissions and to get to zero. Governments are following suit.

The Recommendations of the TCFD are not requirements, they provide voluntary guidance intended to help companies acting in the financial markets to better manage and disclose climate-related financial information. There are four key design features of these recommendations:

  1. They can be adopted by all organisations
  2. They are intended to be included in financial filings
  3. They are designed to solicit decision-useful, forward-looking information on financial impacts
  4. They have a strong focus on risks and opportunities related to the transition to a lower-carbon economy

As investors and asset managers consider how climate risks can be considered in their organisations, the TCFD core elements shown below provide a useful structure for getting the organisation ready to disclose the relevant financial information. The TCFD recommendations should be familiar in structure to CFOs and are reinforced by a recent opinion from IASB which recommends that IFRS reporting should include climate risk disclosure. This is almost a precursor to action on individual assets as the structure allows for a strategic approach to be systematically embedded in risk management and then embedded across all levels of the organisation, from corporate through entities / funds, investment, disposal, development and asset management processes.

EY’s ‘Global Climate Risk Disclosure Barometer’, which reviews the disclosure of 500 companies from 18 countries, shows mixed progress in 2019 in the adoption of the TCFD recommendations. Most progress has been made on ‘Metrics & Targets’ and ‘Governance’, whilst the quality of ‘Strategy’ and ‘Risk Management’ are the least developed. Their sector by sector comparison shows that the ‘Real Estate’ and ‘Asset Owners & Asset Managers’ sectors have made the least progress, in terms of coverage and quality. Suggesting that there is significant progress to be made by real estate investors and asset managers to be ready to manage and report on climate-related financial risks.

Whilst the TCFD Recommendations are voluntary, they are a precursor to mandatory disclosure in Europe resulting from the EU ‘Action Plan on Sustainable Finance’. At least for publicly listed companies and funds. Regulations which begin in 2021 will start this process of increasing disclosure.

The EU Taxonomy Regulation has set out a standard set of environmental impact categories, including Climate Mitigation and Climate Adaptation. This Regulation has established the principle of Do No Significant Harm (DNSH) and has set thresholds for what a ‘Significant’ positive impact looks like. It is expected that companies active in the EU will provide disclosure aligned to this taxonomy and it will provide investors with a common lexicon to use in global due diligence and in the scrutiny of fund performance as we experience more capital flowing into ESG funds.

3. How can a company ensure that they are prepared as an organisation to discharge their fiduciary duty?

There are clear steps that can be taken to be prepared to manage climate risks.

EVORA Global advises real estate and infrastructure investors and asset management in Europe and the USA who have global funds, with assets under management in over 30 countries. Our experience with these organisations has shown that there is a broad spectrum of Climate Risk Readiness. From the largest to the smallest they are considering how they respond to climate-related financial risks. They are having to do so now to ensure that they have access to the best capital.

To get ready, an organisation can undertake a Climate Risk Readiness Gap Analysis, which can be displayed on our EVORA Climate Risk Readiness Radar and compared to their peers. This assessment looks at the organisational readiness and is aligned with the TCFD Recommendations and upcoming regulations. It can be supplemented with fund and asset-level scoring of climate risk exposure and management readiness.

The EVORA Climate Risk Readiness Radar provides an evidence-based scoring mechanism to compare progress. Under each of the five categories – Governance; Strategy; Risk Management; Metrics & Targets; and Disclosure – there are five levels of organisational readiness, and each level has an associated set of actions. For instance, Level 1 Governance required all Board member are trained to understand their fiduciary duty regarding climate risk, including their main materials risks and disclosure responsibilities and requirements. The associated set of actions includes a risk materiality assessment of the organisation’s assets; formal training for the Board; and a declaration by the Board that all of its members have confirmed their understanding.

By understanding this gap analysis of organisational readiness, it is then possible to set out a roadmap for the coming years. This will enable the organisation to communication a clear plan to investors and other stakeholders.

Level 1 Strategy contributes to Level 1 Governance as it requires an assessment of material physical and transition risks through the use of climate scenario analysis. This should be segmented by time horizon, geography and/or sector. As this modelling is a standard requirement for getting to grips with climate risk there are several data analysis software tools now available on the market. The EVORA team has been evaluating which specialist data analysis partner to work with.

The majority of data services available today are focused on analysing physical risks, like the extreme weather impacts of heat, flooding and storms. Our approach to assessing the materiality of physical risks, and to answer the question “so what?”, is in three broad phases:

  1. A portfolio or fund screening of a range of weather hazards to prioritise a deeper investigation of the high-risk assets,
  2. An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
  3. A detailed investigation and assessment at asset-level of the specific, material hazards which impact value and are prioritised from 1 & 2 above.

These three phases provide a deeper understanding of risk than a high-level screening can provide. The intention is that this provides a detailed evidence base on which to define a credible, effective and appropriate climate risk strategy and the related processes for risk management. Both of these areas of climate risk management are presently considered weak in most company disclosures.

Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we collaborate with specialist partners to deliver a comprehensive Climate Risk Materiality Portfolio Assessment service for fund managers. EVORA usually extends this assessment to also cover Transition Risks, in particular forthcoming regulations which could affect value.

These two EVORA Assessments on Readiness and Materiality are essential building blocks in understanding the effort and exposure for an organisation’s preparedness on climate-related financial disclosure. The outputs will provide a clear roadmap for integration over the next few years.

Investor expectations of climate risk have moved on quickly over the last few years. Our expectation is that this acceleration in understanding and scrutiny will continue. Reinforced by new regulations, particularly the regulations flowing from the EU Action Plan on Financing Sustainable Growth and Paris’ climate mitigation goals, ever-improving climate models and continued emissions of greenhouse gases which are not in line with a Net Zero Carbon trajectory. Those investors who are not prepared are much more likely to acquire assets which are at risk, that is not aligned with science-based decarbonisation pathways and/or exposed to a changed climate. The need for organisational preparedness, embedded across all aspects of investment – i.e. asset management; acquisitions; developments; and disposal – is essential portfolio management. Good quality data and information is vital in delivering expected returns in a market which is transitioning to become low-carbon and adapted for a changed climate. 

EVORA is engaging with companies and relevant institutions to better prepare the real estate and infrastructure sectors for climate mitigation and adaptation disclosure. The approach outlined in this paper is difficult to fast-track in large organisations to ensure it is properly integrated. One of the biggest challenges which remains is solving the ‘Tragedy of the Horizon’ as this means that the actions required in an investment portfolio cannot always be taken within the investment lifecycle. The TCFD initiative is designed to address this challenge and, to be successful, this requires early and comprehensive adoption by real estate actors. We would recommend to our clients that early action on climate risk reduces the risk of Litigation or Liability Risk, as well as falling disposal values of asset exposed to Transition and Physical Risks. The steps outlined here will guide substantial and measurable progress.

EVORA’s Climate Resilience Service

Embodied Carbon and its Role in Achieving Net Zero Carbon

  • Embodied Carbon accounts for the total greenhouse gas emissions released to the air as a result of constructing a building
  • Commitments have been made to achieve Net Zero Carbon by 2050, Embodied Carbon must be considered and reduced to achieve this
  • Climate change poses a number of financial risks
  • Embodied Carbon studies can increase climate resilience and therefore reduce risk and increase return

What is Embodied Carbon?

Have you ever walked past a building site and wondered where all the materials have come from? Whether the timber began life as a tree in the UK or abroad? While I was on work experience on one of my Father’s building sites, I found the idea that materials from potentially all around the world have come together to make something new, fascinating. I wondered about the work and energy that went into getting them onto the building site; first the raw materials are extracted, then transported to an industrial site where they are processed into a product, then transported again to the construction site and finally put into place. At each of these stages, energy is consumed and therefore emissions of greenhouse gases are released to the air (measured as emissions of CO2 equivalent, in this article, ‘carbon’). As such, each individual building material has a certain amount of carbon associated with it – the emissions released as a result of that product’s life. These emissions are the embodied carbon of the product, and as a wise person once said, ‘One brick does not a house make’, so the total emissions from all of the products and processes that go into making a building, form the total embodied carbon of that building.

The embodied carbon during construction, along with the operational carbon during the building’s life, such as energy used for HVAC, in addition to the end of life activities such as demolition or deconstruction – depending on where the system boundary is considered – all sum to the total carbon that is released as a result of the building’s life. Accounting for and reducing total carbon emissions has never been more important as the effects of anthropologic climate change continue to devastate parts of the world.

Why is Embodied Carbon becoming more important?

Following the Paris Agreement in 2015, governments around the world agreed that climate change must be limited to ‘well below 2⁰C’, and in our industry a figure of 1.5⁰C has been widely adopted as the target maximum [1]. This can only be achieved by countries and industries achieving a balance between carbon emissions and carbon sinks, resulting in the amount of carbon released to the atmosphere totalling ‘Net Zero’, by 2050 [2]. These commitments are binding, and increasingly severe fines will be issued to those who emit excessive carbon. To be successful, is it vital that governments and companies alike create pathways to Net Zero, to plan the transition to a decarbonised future and ensure that this future aligns with a 1.5⁰C trajectory (see figure 1). It is also important to consider both the total volume of emissions and the rate at which they are released, therefore change must happen in the short term, as sudden reductions in 2040 for example, will not be as successful in limiting the impact of climate change [3].

Figure 1: Global Warming Projections [12]

In commercial real estate, 23 of the leading commercial property owners have committed to becoming Net Zero by just 2030, under the Better Building Partnership Climate Change Commitment [4]. Under this agreement, scope 3, or all other greenhouse gas emissions that occur due to its activities, but which it has no direct ownership or control over, are also included, which covers embodied carbon. With current technology, generating embodied carbon through construction is unavoidable, therefore the only options to balance embodied carbon are to reduce it as much as possible, then offset the rest.

What are some of the risks posed by climate change?

The EU Emissions Trading Scheme operates under a ‘cap and trade’ principle, meaning although offsets can be brought, they will be capped and reduced over time and eventually there is a risk that offsets will no longer be available, or the prices be too high to be economically viable [5]. Similarly, in the voluntary offsetting market, there are a finite number of projects delivering offset ‘credits’, and over time, the low hanging fruit will be depleted so that financing projects becomes ever more expensive. This could lead to the more significant risk of fines being imposed for excessive emissions, along with a carbon tax on the remaining embodied carbon. Furthermore, although industry leaders have placed more responsibility on themselves to improve climate resilience and reduce emissions, there is a transitional risk that regulation will change in the future, leaving some assets stranded. For example, regulation could restrict the use of inefficient technologies or improve carbon accounting and bring more sources of emissions into scope. Should companies refuse to act now and continue with business as usual, they risk being caught out later and be forced to make sudden adjustments to align with new regulations, which could prove extremely costly. Such regulations include the draft new London Plan policy GG6: Increasing efficiency and resilience [6], this policy requires those involved in planning and development to improve energy efficiency and support the move to a low carbon circular economy. As such, planning permission could be refused to developers who do not align to this policy.

The requirements around disclosing climate resilience and environmental performance is becoming more commonplace, the Taskforce for Climate-Related Financial Disclosure (TCFD) is increasing transparency in this area by requesting organisations disclosure their climate-related financial risk publicly [7]. While currently voluntary, emerging Sustainable Financial Disclosure Regulations mean that this is unlikely to stay this way long term. There is therefore a reputational risk that stigmatisation of poor climate resilience could grow, and negative stakeholder feedback could arise. This in turn could prove material should a company lose out on investors because of this, who will be aware of the various financial risks climate change poses and view these as investment risks.

The physical risks of climate change will also be material for any entity with physical assets, which includes real estate, property could be damaged, for example by increased rainfall or flooding, or induce additional operating costs, for example higher temperatures leading to increased use of HVAC equipment, thus requiring additional maintenance. Therefore, it is in the best interest of the industry to limit the physical effects of climate change by sticking to a 1.5⁰C trajectory, where is it widely reported that these risks will be more significant at 2⁰C and above [3].

It must be noted that there is risk in adopting new technology, as it is unknown how that technology will perform in the long term and could have unforeseen consequences, for example new HVAC equipment could cause a building to overheat in certain conditions, potentially contributing to the urban heat island effect. However, new technology and innovations will be required if climate change commitments are to be met, which is why it is important that there is collaboration across the industry to develop and trial new technology and share best practise, which is already evident in companies with robust Net Zero Carbon Pathways, such as Derwent [8]. Considering the challenge of reducing scope 3 emissions, such as during tenant fit out, since developers do not control this activity directly but are still responsible for the carbon, collaboration and stakeholder engagement will be of great importance.

Where does embodied carbon fit into the bigger picture, and how can it increase climate resilience?

Embodied carbon studies can help to increase climate resilience in a number of ways, for example, as such studies become more widespread, increased accountability for developers will help reduce redundant building and encourage developers to think critically about their projects, potentially leading to increased major refurbishment works in preference to new construction. Furthermore, embodied carbon studies can encourage leaner and lighter building, as the simplest way to reduce embodied carbon is to use fewer materials, through identifying and removing redundant building elements. Material hotspots with high carbon intensity can also be identified, and alternatives with lower embodied carbon, such as recycled and reused materials, are promoted which also helps to progress towards a circular economy as highlighted in the European Green Deal [9]. Moreover, by considering embodied carbon during the design phase, strategies can be put in place to reduce it, such as designing for deconstruction, allowing building elements to be disassembled and reused or recycled more easily at the end of life.

Best practice dictates that accounting for embodied carbon emissions falls both with the initial developer and first-time purchaser of buildings [10], because both can have an influence over the design and construction which takes place. Whilst later purchasers of that building will not assume liability for the embodied carbon, it does present an increasing transition risk to developers and purchasers of new buildings, because over time, embodied carbon will contribute an increased proportion of the overall building lifecycle carbon as operational emissions fall. As a financial value is assigned to this risk, the incentive to minimise embodied carbon in future will become ever more critical in investment decision making.

Fortunately, years of varying approaches to measuring and managing embodied carbon have now given way to increased industry consensus, through the publication of key guidance, such as the RICS Whole Life Carbon Assessment for the Built Environment [11]. Several tools now also exist to enable efficient construction of embodied carbon models and identification of best practice enhancements. EVORA utilise One Click LCA for this purpose, saving clients precious time and resource in fast moving design processes.

Embodied Carbon Studies should also be incorporated into a Net Zero Carbon Pathway, as this sends a clear market signal that the financial risks of climate change have been understood and accounted for, which in turn is likely to attract investors, improve stakeholder relations, and could even attract tenants and increase asset value as the market develops over time. However, it is important to plan out a pathway sooner rather than later, reducing the likelihood that a sudden transition is required, which in turn reduces the financial risk of climate change.


If you are interested in getting help on your Net Zero journey, you can contact our Climate Resilience team.


References

[1] Paris Agreement, United nations Framework Convention on Climate Change, 2015

https://unfccc.int/sites/default/files/english_paris_agreement.pdf

[2] World Green Building Council, 2020

https://www.worldgbc.org/advancing-net-zero/what-net-zero

[3] IPCC, Global Warming of 1.5⁰C, 2018

https://www.ipcc.ch/sr15/

[4] Better Building Partnership, Climate Change Commitment, 2019

https://www.betterbuildingspartnership.co.uk/property-owners-make-groundbreaking-climate-change-commitment

[5] European Commission, EU Emissions Trading System (EU ETS), 2020

https://ec.europa.eu/clima/policies/ets_en

[6] Mayor of London, New London Plan, 2020

https://www.london.gov.uk/what-we-do/planning/london-plan/new-london-plan

[7] TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures, 2017

https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf

[8] Derwent, Net Zero Carbon Pathway, 2020

https://www.derwentlondon.com/uploads/downloads/Responsibility/Derwent-London-Net-Zero-Carbon-Pathway-July-2020.pdf

[9] European Commission, A European Green Deal, 2020

https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en

[10] UKGBC, Guide to Scope 3 Reporting in Commercial Real Estate, 2019

https://www.ukgbc.org/wp-content/uploads/2019/07/Scope-3-guide-for-commercial-real-estate.pdf

[11] RICS, Whole life carbon assessment for the built environment, 2017

https://www.rics.org/globalassets/rics-website/media/news/whole-life-carbon-assessment-for-the–built-environment-november-2017.pdf

Image

[12] Climate Action Tracker, 2020

Physical Climate Risk Assessment

EVORA’s Climate Resilience team has been advising clients on physical, transition and litigation risks associated with climate change – and how these affect the resilience of financial investments.  To this end, the EVORA team has been evaluating which specialist data analysis partner to work with. The majority of data services available today are focused on analysing physical risks, like the extreme weather impacts of heat, flooding and storms. Over the last month it seems like a new data service has been launched each week and we’ve spoken to 10 suppliers so far.

The uptake of the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) for managing Climate Risk in financial investments has been rapid, although recent surveys suggest that the real estate sector is lagging behind. For those companies which complete the annual GRESB survey, the introduction of a Climate Resilience module shows the increasing importance of this topic and it will be interesting to see if this become a mandatory inclusion in 2021.

In our recent conversations with real estate investors and investment managers, there are varying degrees of maturity around how to identify and manage climate risk. There is clear investor demand, from Europe, Asia and North America, that these risks should be disclosed and managed, but the investment managers are still defining methodologies and in most cases this is still a top-down approach. It is revealing to see that rating agencies, like Moody’s, MSCI and S&P, have all made investments or acquisitions in data on the physical risks of climate change.

Our approach to assessing the materiality of physical risks is in three broad phases:

  1. A portfolio or fund screening of a range of weather hazards to prioritise a deeper investigation of the high-risk assets, which can now be quickly produced by a data service partner,
  2. An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
  3. A detailed investigation and assessment at asset-level of the specific, material hazards which impact value and are prioritised from 1 & 2 above.

Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we are working with partners who are ready to collaborate with EVORA to deliver the best service. The deeper analysis of understanding the value-at-risk is still emergent and fluid for investors, although there is a better understanding amongst real estate insurers based on damage costs and claims data. Our expectation is that this market for data analysis will develop significantly over the next 18 months.

Our evaluation so far has identified partners with varying levels of market-readiness, which we have grouped into the following:

  • SaaS-ready – those partners who can provide an online physical risk screening of assets and portfolios today with a standard price,
  • Specialists – bespoke or tailored analysis with a one-off price, and
  • Start-ups to watch – those who have interesting new offers, but are still being developed and priced before they move into one of the other two categories

To structure our evaluation of Physical Climate Risk Data Analysis Services we considered the following criteria:

  1. Technical –the use of appropriate science-based methods to assess climate risk and an evidence base relevant to our clients’ assets with transparent sources. Ideally, the data would have some form of 3rd-party assurance.
  2. Geo-scale and resolution – the geographic scale and data resolution appropriate to the hazard category and the nature of the engagement. Visualization of risk must be clear.
  3. Industry alignment – the partner should be able to demonstrate that their solution is consistent with industry standards, regulations, guidance and frameworks where appropriate – for instance TCFD recommendations and CDSB/GRESB requirements. The assessment must be relevant to the type of real asset, i.e. commercial office, residential, power network, road, etc.
  4. Client relevance – the partner must be able to present their data/software in a way which is commercially relevant to our clients’ business and aids clear communication, ensuring that it aligns with our four engagement models.
  5. Commercial & delivery model – the partner model must fit the way in which EVORA delivers consulting and SIERA services and provide value to our clients.

If you are interested in receiving advisory services from our Climate Resilience team to understand how to manage and disclose climate-related financial risk, we would be happy to share more of our observations.

EVORA can provide these services to get you started on your climate resilience journey:

  • Gap Analysis of Risk Readiness
  • Risk Materiality Portfolio Assessment
  • Net Zero & Climate Risk Asset Audit
  • Net Zero & Climate Risk Data Strategy
  • Training & Coaching

If you are interested in getting help from our Climate Resilience team, please contact us.

EU Taxonomy: A Law of Significance

On Friday 19th June, the European Parliament adopted the Taxonomy Regulation. This could be the most significant piece of legislation which affects the treatment of sustainability risks by the European investment community. The Taxonomy is more than a system of classification of ESG risks and opportunities – its weight could make ripples around the global investment community.

Whilst ESG has been a niche investment class for the last couple of decades, the difference now is that Climate Change is seen as a mainstream investment risk. As Larry Flint said earlier this year, “Climate Risk is Investment Risk”. The members of the UN Asset-Owners Alliance, managing $4.7tn of assets, have committed to transition their portfolios to Net Zero Carbon by 2050. The world’s largest pension funds – GPIF, CalSTRS & USS – list climate change as their biggest ESG risk. This is not a niche regulation. It is expected to directly affect 7,000 listed companies and all issued fund-managed products. 

Whilst the Taxonomy’s main focus is on environmental issues – i.e. Climate Change Mitigation; Climate Change Adaptation; Sustainable & Protection of Water & Marine Resources; Transition to a Circulate Economy; Pollution Prevention & Control; and Protection & Restoration of Biodiversity & Ecosystems – it also has minimum social safeguards. Further legislation is expected to better regulate the social impact of investments so this Taxonomy is not the end in correcting existing market distortions.

The Taxonomy is important because it intervenes in how environmental investments are classified. It also sets our screening criteria and thresholds of significance. This is influential because it describes thresholds for a variety of activities. The thresholds are markers for what a ‘Significant Contribution’ is to tackling a particular challenge, like Climate Change Mitigation. It also sets in law thresholds for Do No Significant Harm (DNSH) so if you are investing to make a Significant Contribution to tackling Climate Change Mitigation you must also DNSH to Biodiversity.

For climate change mitigation, a 50%-55% reduction in emissions by 2030 is one criteria and net-zero by 2050 obviously. The weighty Technical Appendix, which accompanies the Taxonomy guidance, is more detailed and sets significance thresholds for a range of activities, including construction and the improvement of property:

  • “Acquisition and ownership: buildings built after 2021 are eligible if they meet the criteria for the ‘Construction of new buildings’, while buildings built before 2021 are eligible if their performance is comparable to the performance of the top 15% of the national stock, in terms of calculated Primary Energy Demand during the use phase. An additional requirement is applied only to large non-residential buildings (built both before and after 2021) to ensure efficient operations through energy management.
  • “Construction of new buildings: to be eligible, the design and construction of new buildings need to ensure a net primary energy demand that is at least 20% lower than the level mandated by national regulations. This is assessed through the calculated energy performance of the building, i.e. performance forecasted on the basis of modelling building physics under typical climatic and occupancy conditions.”

These criteria and thresholds are set out now and will be reviewed on 3-year cycle. You can expect them to ratchet up every 5 years so if you have long-term holds in your fund it is important to be aware of this process. The publication of this Taxonomy now is valuable because it can be built into due diligence processes and investment appraisals, including risks to income, growth and exit value. The start of 2022 is when this disclosure requirement will come into effect, but expect the preparation to start now. 

The Taxonomy Regulation builds on the Non-Financial Reporting Directive (NFRD) and the recent Regulation on the Disclosure of Sustainability Risks in Financial Services, which sets out high-level requirements for clear communication of these investment risks from March 2021. These are all key legal components of the European Green New Deal and the related Action Plan on Sustainable Finance.

Data is key to compliance with these regulations as these are measurable criteria. By investing over the next 12 months in the right data model and software platform will provide a competitive advantage. EVORA’s advisory team and our SIERA software platform can help real asset investors navigate their way through this emerging legislation, which is a key transition risk and opportunity as we move to a greener economy. 

Coincidentally, the 19th June is also Juneteenth, which is an internationally significant day for social equality. It marks the day on which the US Emancipation Proclamation was finally enforced in Texas in 1865. This brought to the end the abhorrent practice of “investment” in slaves as “property”, which directly affected three continents and has repercussions around the world up until the present day. 

Today’s Black Lives Matter movement is a tangible reminder of why ethical and environmental investment decisions made today do matter for generations. This has been true for slavery and will be true for our environmental and social governance now and in the near future. If we don’t get it right now, future generations may well look back on us and ask why we didn’t take more responsibility.


If you would like to attend a training session on EU Legislation and Taxonomy, please email training@evoraglobal.com where we can provide you with information on dates and times.