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Generalist Advisory Vs Sector Specialism

The commercial real asset market is evolving rapidly, and it’s no secret ESG is driving this evolution as the world transitions to a net zero economy. As a result, staying on top of ESG issues and applying them effectively to real asset investment and management is critical to keep up with the pace.

The role consultancies play is becoming increasingly important as firms are relying on ESG advisory services more than ever. Yet, despite the significance of the real asset sector, real asset ESG is still a niche area in the sustainability landscape. This begs the question, how can consultancies provide adequate ESG solutions for the real asset industry?

EVORA believes generalist ESG services for example, from a multidisciplinary professional service provider, often do not go far enough in providing the industry with the sector specific solutions it demands. Net zero carbon, TCFD and SFDR are vastly different in their application to real estate vs other asset classes. As such, expert sustainability knowledge in this field is vital.

EVORA is one of the only sustainability consultancy and software providers solely focused on the real asset industry, and with close to 100 ESG professionals is also one of the largest, and growing. Offering end-to-end ESG solutions, we believe our depth and breadth of knowledge in the industry is unrivalled. What sets EVORA apart? Our ability to break down complex issues, such as regulation and climate risk into simple, practical outcomes specifically for real asset professionals. If you’re feeling overwhelmed with navigating the ever-changing landscape, a great place to start is our ESG Training Academy, EVOLVE, designed to translate the vocabulary of ESG into everyday language.

Whatever issues investment and asset managers are faced with, one topic inevitably crops up: data. Data is one of the primary causes of confusion and complexity in the industry and, as such, poses a significant risk when making ESG-informed investment decisions. This fundamental component is one that EVORA has built its foundation on over the last 10 years through our proprietary ESG data management platform for real asset professionals, SIERA. SIERA, which spans 26 countries, is built around the principles of investment grade data and simplifies vast, fragmented data sets into accurate, consolidated ESG indicators to inform decisions at the asset, product and corporate level.

Although our consultancy and software services can be delivered independently, our clients recognise the benefits of combining the two. Interpreting ESG data and being able to answer the often asked “so what?” question requires a deep understanding of not just ESG, but the relation it has to the real asset industry. We firmly believe our ability to join the dots for our clients is where we add the most value. Our outcome and action-focused approach ultimately leads to positive change, helping to deliver on our vision: To accelerate the evolution and adoption of real asset sustainability to enhance the well-being of the planet and its people.

If you want to futureproof your business, choosing a dedicated real asset consultancy and software, we believe, is by far the safest bet.

Forward-looking ESG data

To integrate climate risk and sustainability into financial decisions, we need to standardise metrics, improve data quality and ensure that it is forward-looking as well as measuring past performance. For climate risk, this is an essential part of the TCFD Recommendations for integrating climate risk as an investment risk.

Climate risk is divided into three categories:

  1. Transition risk
  2. Physical risk
  3. Litigation risk

They all have forward-looking components. In ESG data terms, we can use historic data and data models to project future implications. We can do this more easily for the E in ESG because we know that we’re operating within planetary boundaries so we know there are limits. The Stockholm Resilience Centre (2015) monitors the nine planetary boundaries shown below.

Whilst this illustration doesn’t show us overshooting the climate change planetary boundary, that is because we haven’t yet. We are on track to do so with our present rate of greenhouse gas (GHG or carbon) emissions. That is why, in 2015, the UN Paris Agreement was signed by 195 states. This Agreement set us on a course to reduce emissions to Net Zero Carbon (NZC) by 2050, which keeps global warming well below 2°C, and ideally 1.5°C, to prevent catastrophic, non-linear climate change.

Over the last two years, many real estate companies and investors have committed to a Net Zero Carbon target and some have a pathway to get there. For most fund managers, they have not yet had time to project out a NZC pathway for their fund and real assets.

A science-based NZC pathway can show a clear route to reducing emissions each year. We need to be over halfway to NZC by 2030. However, local markets will move at different speeds depending on their starting point today; the local regulations; the cost of energy and carbon emissions; and, to some degree, the local awareness of a changed climate and how this forces climate adaptation. Climate adaptation will be required to protect against extreme weather events, which have become fiercer and/or more common over the past decade increasing insurance losses and premia.

These climate risks are the reason why ESG data needs to be forward-looking.

At EVORA Global, we have developed our SIERA software to be forward-looking on climate risk. We have worked on two new modules. The first is focused on NZC and transition risks and this is already available. The second builds on our partnership with Moody’s 427 physical climate risk assessment, which is used by our consultancy team. This will enable users to see both sets of climate risk in one place, associated with each asset and fund.

The screengrab below shows the NZC module, shows a real estate portfolio and the fund’s NZC pathway. This uses asset energy data from the last 9-12 months to calculate carbon emissions for the whole building. Based on asset type and location, it then automatically projects a science-based NZC pathway out to show the required emissions reduction. The tool can then be used to run different scenarios for emissions reduction based on what is know about each asset.

There are other features within the NZC module so do get in touch if you’d like to organise a demo

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.

Why a zero carbon design is a smart investment

Zero carbon is the buzzword in the industry, with the UK becoming the first major economy in the world to pass laws requiring net zero greenhouse gas emissions by 2050. To this ambitious end, all future developments and, importantly, existing buildings will have to take significant strides towards reducing energy consumption.

Some investment managers may hear this and balk, envisioning a world where investment in zero carbon technologies at their assets is prohibitively expensive. This is far from reality. It would be a mistake to consider energy efficiency as divorced from other contributors of a high-performance, high-income yielding asset. Energy efficiency projects confer many additional benefits of interest to investment managers, including improved tenant satisfaction and health and wellbeing, and risk mitigation for the asset – all of which improve the asset’s bottom line.

As an example, consider improvements to the building fabric through high performance glazing or insulation upgrades. Such an improvement reduces energy costs and could increase the asset’s net operating income and therefore market value. A less often reported benefit is that a tighter building fabric is simply more comfortable, fostering spaces that increase tenant productivity, happiness, and health. Accordingly, these two elements – efficient operation and thermal comfort – de-risk elements of obsolescence allowing investment managers to maintain high occupancy at the asset with quality tenants that secure rental income.

Mitigate against future costs

Investment in zero carbon interventions also improve the resilience of the asset and minimise risk. Reducing an asset’s energy consumption mitigates against energy price fluctuations and futureproofs investments against regulatory and market changes, such as the plan under consultation to increase minimum UK EPC ratings from E to B by 2030.

This is therefore a call to action to invest in zero carbon interventions that prioritise enhancement of the occupant experience. Some key asset level strategies include maximising indoor air quality through adequate ventilation and filtration, improving thermal comfort with right-sized HVAC systems, creating tighter building fabrics, installing green infrastructure, and maximising natural daylight opportunities to attune light levels with occupant circadian rhythms.

In concert, these interventions not only position the asset to be zero carbon, but also contribute considerable value to the asset. It is well known that zero carbon interventions confer savings that will result in a larger return over the life of the project. Less well known is that research indicates that a zero carbon building can be constructed with no added upfront cost compared to business-as-usual construction.

“A zero carbon design with minimal upfront costs and additional savings through the asset lifecycle is simply a smart investment”

A meta-analysis completed by the US Green Building Council, Massachusetts, entitled “Zero Energy Buildings in Massachusetts: Saving Money from the Start” suggests that, with an integrated design team working towards a zero carbon goal, a cost transfer is possible where the increased cost for a higher performing building envelope is balanced by less costly, simplified mechanical systems. Such collaboration therefore results in little or no additional capital cost for whole-building zero carbon developments.

Hence, a zero carbon design with minimal upfront costs and additional savings through the asset lifecycle is simply a smart investment. Cost savings are further amplified by the price of carbon, projected to increase owing to increased demand and constrained supply of offsets. Asset business plans and investment financial models should increasingly account for the lifecycle benefits associated with projects supporting zero carbon ambitions.

Gaining competitive edge

These interventions are also crucial for getting ahead of legislative requirements that will soon make business-as-usual construction obsolete. The Carbon Risk Real Estate Monitor is a tool developed especially for the EU and UK commercial real estate sector that forecasts the carbon emission trajectory that real estate portfolios will need to follow in alignment with Paris Agreement targets (below 2°C of warming from pre-industrial levels). The CRREM model can therefore be used to quantify potential real estate investments at risk of poor carbon performance and hence obsolescence owing to failure in meeting future market expectations.

The pathway to zero carbon is an ambitious challenge, but also a wonderful opportunity that should be embraced.  Targeting an asset towards zero carbon is not just good for the planet – it is crucial for remaining competitive in the marketplace.


This article was originally published by Estate’s Gazette

EVORA become signatories to the Net Zero Carbon Buildings Commitment

We are delighted to announce that EVORA Global has joined nearly 100 other organisations in signing The World Green Building Council’s Commitment.

The World Green Building Council (WorldGBC) is a global network leading the transformation of the built environment to make it healthier and more sustainable. Their Net Zero Carbon Buildings Commitment calls for companies, cities, states and regions to reach Net Zero operating emissions in their portfolios by 2030, and to advocate for all buildings to be net zero in 2050.

The aim is to drastically reduce operating emissions from buildings, and in doing maximising the chances of limiting global warming to below 2 degrees.

Sixty-two of the 96 Commitment participants are businesses and organisations, and collectively our action alone will reduce more than 3.3 million tonnes of carbon emissions. Additionally, 28 cities and 6 states and regions have signed the Commitment, signalling a shift in political will towards net zero policy.

“Since launching EVORA in 2011, I’ve seen a monumental shift in opinion. Not just in the real estate industry, but the whole conversation of suitability, responsibility to the environment and climate change. We are excited to join and promote this important initiative. We shall continue to use our influence to challenge traditional approaches to demonstrate both the necessity and business case for ensuring climate and ESG related risks are systematically assessed throughout the investment process. ESG is here to stay and we intend to be at the forefront of tackling climate change and ensuring a sustainable future.”

Chris Bennett, EVORA Managing Director

The WorldGBC’s Commitment for zero carbon buildings places energy saving at its heart. This approach is completely aligned with EVORA’s commitment to reducing operating emissions from buildings and belief in building a more sustainable future.

A 2050 target but no time to spare!

By Lucy Curtis and Peter Willcocks

We are now in a critical period requiring rapid and urgent action to retrofit our buildings in a bid to address climate change. The Paris Agreement set a global imperative ¹ to restrict global warming to 2⁰C or below. To achieve this ambition, global greenhouse gas emissions need to reduce rapidly today with developed economies ultimately becoming Net Zero by 2050. We cannot afford to bide our time and cut emissions later.

Several policy drivers are now facilitating a step change in emissions reduction not within the next 30 years, but within the next 10 years. For example, under the European Green Deal, the EU Commission has recently furthered its ambition to reduce emissions by 50% by 2030 from 2005 levels. Also, the Energy Efficiency Directive (EED) aims to improve energy efficiency by at least 32.5% by 2030 with the Energy Performance of Buildings Directive (EPBD) setting out regulations to increase the rate and depth of building retrofit programs. Countries are also formulating long-term national strategies to achieve ‘Net Zero carbon’ targets by 2050 including mobilizing significant investment in innovation and sustainable economic activity such as renewable energy and decarbonization of the energy system.

Those leading the way in commercial real estate have signed the BBP’s Climate Change Commitment and will be disclosing plans to achieve Net Zero carbon by 2050 by the end of this year. ² It is today’s actions that will determine whether intermediate and long-term targets are achieved, but it is crucial that immediate action is coupled with longer term planning in order to minimize costs.

Risks & Opportunities

In the transition to a low-carbon economy, investment manager’s fiduciary responsibility will increasingly include assessment of how climate-related ‘transition’ risks, such as the legislative risks described above, will impact asset values. Such considerations will need to be included in future investment strategies and decision making. 

Buildings where energy and carbon performance is not improving in line with emission reduction targets may be exposed to “stranding” risks. These risks could include a reduced investor, market and tenant demand, and exposure to increasing energy costs and carbon pricing. As a result, these assets may require significant capital investment to meet stringent energy and carbon performance regulations.

The recommendations from the Taskforce for Climate Related Financial Disclosure (TCFD), that are currently progressing towards mandatory disclosure, will require investment managers to identify, assess and effectively manage these potentially material financial risks. But it’s not all about risks. TCFD will also require investment managers to identify opportunities as improving energy and carbon performance increasingly serves to enhance and preserve asset value and secure long-term income streams by minimizing associated costs.

To improve forward-looking decision making and aid financial planning, specific tools are becoming available such as the Carbon Risk Real Estate Monitor (CRREM) developed in partnership with institutional investors and industry bodies including GRESB. The CRREM tool provides country and property use emission intensity benchmarks that are aligned with global warming scenarios of 2⁰C or below. It projects current building emissions intensity, allowing for factors such as grid decarbonization, and assessment of low-carbon transition “stranding” risks where factors such as future carbon pricing can be analyzed under a number of scenarios. 

Data, data, data

Transition risks will increasingly be associated with whole building energy consumption and emissions intensity. To begin to assess risks, set targets to reduce building emissions and plan for Net Zero, the full picture of the current whole building energy consumption is needed. 

Existing assets will most likely include tenant-controlled areas, which pose challenges for data acquisition especially for those with difficult-to-reach tenants on FRI leases and long-term leases in core strategic assets. ³  In addition to leveraging green lease clauses, building good tenant relationships will be key to unlocking tenant data. The installation of AMRs and partnerships with data collection agencies, will both be crucial to circumvent the inherently inefficient process of collecting data manually from property managers.

The Future is Decided Now

With only two retrofit cycles left to 2050 ⁴, long-term initiatives must be carefully planned to ensure intermediate emission and energy reduction targets are met while aiming towards a Net Zero emissions future. 

Conducting this forward-looking assessment to meet these targets, and assessing the transition risks and opportunities at an asset level, may require changes in the process by which investment managers currently plan renovations and M&E upgrades across the asset hold period. However, by identifying the worst performing assets and implementing programs of Net Zero audits across portfolios, investment managers can begin to identify and plan the required measures to meet this ambition. It is also important to ensure sufficient depth of retrofit as opportunities arise within the retrofit cycle. Initiatives such as long-term Building Retrofit Passports, as proposed under the EPBD, will also help advance this agenda and assist in the planning process.

The usual practice of like-for-like replacements may no longer be sufficient but by making significant investments in energy efficiency and taking maximum advantage of retrofit opportunities in the short and medium-term, these costs can be minimized.

2050 may seem like a long time away, but investment managers need to act now to implement sustainability programs with the associated risks assessments and financial planning to ensure portfolios and investment strategies remain resilient as we transition to a low-carbon economy.


This article was originally published on GRESB Insights

¹ The international community convened in 2016 to sign the Paris Agreement, committing to limit global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.
² http://www.betterbuildingspartnership.co.uk/node/877

³ http://www.betterbuildingspartnership.co.uk/sites/default/files/media/attachment/bbp-low-carbon-retrofit-toolkit.pdf

⁴ https://www.jll.co.uk/en/newsroom/jll-commits-to-making-net-zero-carbon-mainstream

A sustainable Internet: What is the cost of our current use?

When people hear about sustainability, typical thoughts circle around travel, consumerism, buildings,  the physical world. Conceptually,  the web and the devices that allow us access to it, appear clean in their usage, far removed from belching power plants and noxious fumes.

But the reality is that every search performed on Google, every Netflix show watched, every Spotify song listened to, triggers servers somewhere to process and output data and then more servers to transmit it, consequently consuming electricity and burning fossil fuels.

Global electricity consumption by the internet is considerable, accounting for 1% of all emissions from burning fossil fuels (aviation accounts for 2.4%) the irony isn’t lost that the man who gave this stat is the brother of the “inventor” of the Web.

The industry is taking steps to reduce CO2 emissions. New movements encourage designers to consider sustainability in the web site design phase. Internet behemoths such as Google, Facebook and Amazon have made promises to go net-zero. Some have found novel ways to consume less by submerging data centres or building data centres in cold environments (a lot of electricity is consumed by just cooling the servers)

But there are actions we can take as users that will also help reduce those emissions:

  1. Drop the quality. Video streaming accounts for the biggest volumes of data sent over the internet. Watching something in HD makes everything super-realistic but consider the impact. Go for the SD version and you can still enjoy the content, but drastically reduce the data streamed.
  2. Do you need to search? When you know the web address to go to, open your browser and type it in. Or save it as a bookmark. Entering a keyword into the browser’s address bar (such as “BBC”)  will provoke a search. Each search consumes some electricity. Cumulatively, those searches have a massive impact.
  3. Download rather than stream. Is something on heavy rotation on Spotify? Then download it. This will also save your data.
  4. Unfortunately, emails harm the environment, accounting for a huge carbon footprint. Consider not sending that email. Could you just phone? If you need to send it, just take a moment to think does everyone cc’d need to read this?
  5. Change to a more sustainable search. There is a greener alternative to Google. Ecosia.org plant trees from the money they make through you using their search and claim 100% renewable energy usage. And they appear to be true to their word.  
  6. Switch off. The ultimate sustainable method!

Of course, the Internet has brought huge benefits to a more sustainable world. Online meetings have reduced the need to travel. The consumption of the written word has moved more online, reducing the number of books and newspapers printed.  But it’s just a conscious move for everyone to recognise that their Internet use still consumes fossil fuels. And as Berners-Lee says,

“When we take a small action to cut carbon, it’s a message to yourself that you care about the climate emergency.”

Five sustainability trends for the 2020s: what’s in store for real estate?

Upon entering the 2020s, which some dub ‘a decade for delivery’ to improve sustainability across the board, it is perhaps wise to consider the breakout trends that will carry forward. After all, a new year always inspires new endeavours.  It provides a clean slate to readjust and redeliver, as well as a fresh opportunity to realign and build upon past achievements.

The 2020s may have a lot in store for everyone across the real estate space; so what should we be looking out for?


Net zero heroes

This commitment has been on the lips of government officials and real estate investors alike, marking a significant promise to achieve net zero carbon across the UK by 2050.

In September 2019, 23 of the UK’s leading commercial property owners have signed a commitment launched by the Better Buildings Partnership (BBP) to tackle the growing risks of climate change, pledging to decarbonise. Covering over 11,000 properties, this type of agreement is likely to inspire more companies throughout the next decade to also commit time and resource in the fight against climate change.

It is therefore expected that the dynamics behind climate strategy will shift in tow, with awareness of a pressing deadline introducing the need for a new radical mentality for rapid decarbonisation across a vast sector. The path to complete overhaul will not be simple, nor one that can be touched lightly, it will require serious engagement and in effect be one of the most major driving forces for change across the industry. Certainly, one to watch intently and something EVORA is already leading clients through the challenges and opportunities of.


New alignments and disclosure

Recent interest in broader ranging initiatives within the real estate space have been gaining traction in the past several years. These alternative policies are likely to continue to influence the direction of how companies tackle sustainability issues, standing apart from the more prominent examples such as GRESB, LEED and a host of others.

The 2015 United Nations Sustainable Development Goals (SDGs) is one such example, acting originally as a framework for nations to engage in improving global sustainability across areas such as environment and energy, equality, health and wellbeing, alongside peace and justice. Five years since their inception, it is the real estate sector which is taking command of the targets put in place, using them to guide investment and strategy for an all-around approach to sustainability. Aligning with the SDGs is rising in popularity, and it is likely that a more open approach could inspire newer players to also play their part, committing time and resource to key targets.

Another key shift beginning to happen in 2020 focuses on the effective disclosure of climate resilience and risk to businesses through alignment with the Taskforce on Climate-related Financial Disclosure (TCFD). TCFD is a global voluntary disclosure framework launched in 2017 to allow organisations to identify climate risks and opportunities, and ultimately to disclose the financial impact of these in their annual reports. Awareness and mitigation of these risks is necessary to avoid any sudden losses in asset value and the associated impact on the wider investor market. Businesses engaging with this voluntary scheme provide greater transparency for stakeholders, but also gain an advantage when addressing wider strategies by actively moulding the methodologies behind TCFD, as well as gaining a footing ahead of competition for improving capital value. TCFD – based reporting is to become mandatory for PRI signatories from 2020.


Renewables reinvigoration 

Off the back of net zero and related policies put in place by nations across the globe, renewables investment is a key piece of the puzzle to deliver ambitious targets by 2050.

It is no secret that renewables investment has been growing substantially over the previous decade, with total stock of the most widespread small-scale variant in the UK in terms of number and generating capacity (up to 5MW) – solar photovoltaic (PV) – growing from a total supply of just 88 MW in November 2010 to a staggering 13,305 MW in November 2019 according to the Department for Business, Energy & Industrial Strategy (BEIS).

This trend is set to continue, and not just for solar, as it is speculated that across the piece the total capacity of non-hydro renewable sources is set to expand by 91% on current values, reaching 80.3 GW by 2030 [1] as shown below in Figure 1.

Figure 1 – Installed capacity of non-hydro renewables through time, alongside forecast capacity out to 2030. Source: GlobalData, Power Database
Figure 1 – Installed capacity of non-hydro renewables through time, alongside forecast capacity out to 2030. Source: GlobalData, Power Database

Policy has been a major driver of this initiative in the UK; however, it should not be forgotten that globally the price of renewables has fallen drastically, reaching the lowest point to date making it ripe for investment.

Cost reductions for solar and wind power technologies are set to continue to 2020 and beyond. Current auction and power purchase agreement (PPA) data suggests that by 2020, onshore wind and solar PV will consistently offer less expensive electricity than the least-cost fossil fuel alternative worldwide, according to IRENA [2]. And for the UK as shown in Figure 2, the current expected trajectory for wind technologies is to dip below the cost of gas, closely followed by solar which is expected to reach the same level in the late 2020s if not sooner.

Figure 2 – UK costs (£ per kWh) for various technologies. Source: Carbon Brief, 2019
Figure 2 – UK costs (£ per kWh) for various technologies. Source: Carbon Brief, 2019

With costs expected to fall, the integration of renewables will become easier and the investment more worthwhile as payoff times also decrease. This is despite the removal of the Feed-in Tariff (FiT) scheme in March 2019, however commercial contracted energy still proves to pull in promising numbers for those willing to invest in generation. Furthermore, the Smart Export Guarantee (SEG), a partial replacement for the FiT, came into force on the 1st January 2020 setting an obligation for licensed electricity suppliers to offer a tariff and make payment to small-scale low-carbon generators for electricity exported to the National Grid.

This could provide a valuable route to market for businesses wishing to put money aside for renewables, serving to cut electricity costs due to self-generation, but also providing the opportunity to export and earn money by supplying back to the grid.

Furthermore, the benefits for businesses from Corporate Power Purchase Agreements (CPPAs), specialised agreements for the supply of energy to specific sites or assets from a generator, have also grown in recent years. This differs from the standard green tariff opportunities presented by utilities, as energy is directly sourced from a known generation site which in turn spurs the delivery of greater grid investment into private energy sources as significant hurdles for generators are bypassed. Engaging in this market has proved to be a reliable means of utilising renewable energy over short term (6 month) to as long as 15-year contracts relatively inexpensively, alongside proving a positive look for companies to boot.

Who knows, perhaps this could grow into something larger? The prospect of peer-to-peer trading of energy or smart grids to efficiently serve grouped assets could also take off from greater private investment; effectively lighting the fuse for a more sustainable real estate sector, and aiding the push of ambitious policies to grow the market.


Grand designs

Changing up building management and design is also a crucial factor to consider, in order to provide more efficient, healthier and happier buildings for tenants to grow their businesses in.

One example of how legislation is progressing this scene is the recent Minimum Energy Efficient Standards (MEES) for non-domestic commercial buildings strategy, published on the 15th October 2019 by BEIS, which we reported on last year.

Under the consultation, the government propose a new plan to raise the minimum EPC rating from ‘E’ to ‘B’ by 2030. In order to achieve this, a great deal of investment will be necessary, as an estimated 85% of non-commercial buildings will require improvements to meet these standards.

Improving new build design is a clear route to achieving this across portfolios, by integrating more passive design choices, smart technologies and more controllable systems for fundamentals like HVAC systems and lighting. These include such changes as tighter building fabrics to help reduce heat loss in the building, double glazed windows as well as greater exploitation of sunlight with Passivhaus like architecture. Not only will this reduce energy usage and as a result improve the returns from markets such as the SEG for renewables, it will also result in a more comfortable space for tenants to work in, improving wellbeing from the get-go. Furthermore, buildings can also engage in improving other factors such as the integration of biodiversity into building design with green walls and roof gardens alongside open planted plazas that not only serve as refuges for wildlife but for pleasant places for employees to enjoy for increased social value.

However, this is easier said than done, as the vast majority of buildings which will be used in the commercial space have already been built. Therefore, a great deal of effort will need to be focused on deep retrofitting to bring buildings up to scratch, allowing them to stay competitive and sustainable for years to come.


Big data for bigger change

At the heart of spurring the aforementioned changes is our understanding of the ongoing trends, causes and solutions to issues at hand; and how is that really possible without proper evidence?

As the world mobilises towards an ever more data-centric model to drive cost analyses, environmental modelling and of course the progress of sustainability, appropriate levels of data access are necessary to implement effective and lasting change. Therefore, a growing need for data coverage and reporting will likely manifest throughout the 2020s, improving the understanding of where and when energy is being consumed across a portfolio to identify, implement and track improvements.

The key to engaging here is being proactive about monitoring how businesses run and how properties are managed. An example includes the continued smart meter rollout which showed promise earlier in the 2010s, however, it has fallen short of what is required as the original deadline of 2020 is pushed back to 2024. Therefore, big data companies and real estate investors may begin to invest more heavily in their own solutions to provide better coverage of how assets perform. Furthermore, by partnering more closely this could prove to be more productive than just face value cost reductions.

By engaging with tenants directly to shape their ‘energy behaviour’ from a top-down policy and technologically driven view, visible and accessible evidence of energy usage can itself inspire change from the bottom up, with tenants altering how they perceive energy usage and the impacts of their day to day. Attacking from both ends in this way may prove an effective weapon.

Big data also stretches to the social issues that real estate faces on an ongoing basis, after all, people drive business. More widespread and granular coverage of social value, health and well being among other strategies could help change the perception of how usually qualitative analyses is treated, providing quantitative means to expand the efficiency of implementing changes into businesses.

EVORA will, of course, examine the growth of these trends (as well as many more) throughout the year, as we expect a great deal of exciting activity is upcoming. So, watch this space!


Data Sources:

[1]  https://www.power-technology.com/comment/uk-renewable-outlook/

[2] https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2019/May/IRENA_Renewable-Power-Generations-Costs-in-2018.pdf

Getting to (Net) Zero

In June of 2019, the UK became the first major economy in the world to pass laws requiring net zero greenhouse gas emissions by 2050.

‘Zero carbon’ is an ambitious challenge and one that we at EVORA Global is well-poised at untangling.  

So what do we mean by ‘zero carbon’?

Though there are two important contributors of carbon emissions in a building – embodied carbon and operational carbon – the focus of this article is on operational carbon. An operational zero carbon building is one that generates or purchases enough renewable energy to offset emissions from all energy consumption in the building over a year.


Does your project have a zero carbon goal in mind but is stymied with uncertainty of where to begin? Consider the following strategies:

Go all-electric

Going all-electric is a key to unlock zero carbon buildings – it enables the installation or purchase of renewable energy to offset the building’s total energy use.But what are the common barriers inhibiting this paradigm shift from conventional gas-fired heating to electric heat pumps?  The legacy of gas-fired heating has, in part, been enabled due to historically low natural gas prices compared to electricity.  Further, many facility management teams have inherited training to maintain conventional gas heating systems.  As a result, it has been a challenging transition for facility managers to learn to maintain newer electric heat pump systems.  

Yet times are changing.  In contrast to trends seen in previous decades, the World Bank forecasts that natural gas prices from 2020 to 2030 will steadily increase [1].  Moreover, the UK government predicts wholesale electricity prices flattening in the next decade, likely due to the concurrent greening of the electricity grid and the falling levelised cost of renewable energy [2]. Hence, an all-electric building does not solely unlock the potential for achieving zero carbon – it also minimises financial risks by reducing reliance on ever fluctuating fossil fuel commodities. 

Furthermore, legislative drivers like the UK gas heating ban for new homes by 2025 are further facilitating maturity of the electric heat pump market and improving contractor familiarity with electric heating technologies.

Deep retrofits and passive design strategies

Zero carbon buildings will require retrofits deeper than “simple lightbulb savings” and operational quick wins.

The deep retrofits required will ultimately need to include improvements to the building fabric, defined as everything that separates the interior from the exterior of the building.  To meet operational zero carbon goals, it will be necessary to consider high performance window glazing and installation of external or internal insulation to reduce heat loss through the building fabric.  A tighter building fabric will not only help reduce heat loss in the building – the overall size (capacity) of the required HVAC systems will also be smaller, garnering additional energy savings and carbon reductions. For tenants, a tighter building fabric also results in a more thermally comfortable space to work in.

As mentioned previously, HVAC systems with gas-fired heating should be retrofitted with efficient electric heat pump systems. One replacement option is a variable refrigerant flow (VRF) system that can provide heating and cooling. A VRF system is highly efficient and, with proper controls installed, can even provide simultaneous heating and cooling to different spaces. For example, if a perimeter space (say, an office receiving solar gain from the windows) requires cooling and an interior space (say, desk cubicles where the sun does not reach) requires heating, it is possible for a VRF system to capture and redirect the heat from the perimeter space to the interior space.

Additionally, lighting retrofits should extend beyond installing energy efficient LED lighting. It is recommended that spaces maximise natural daylighting opportunities by installing controls to dim or shut off artificial lighting where there is enough natural light in the space. Studies have shown that providing indoor access to daylight can improve tenant satisfaction and productivity, while also conferring health and wellbeing benefits by aligning occupant circadian rhythms with the natural day and night schedule.

Clean, renewable energy

With a highly energy efficient building in hand, the remaining carbon emissions associated with operations should be offset by carbon-free renewable energy.

Although achieving zero carbon can be achieved using either on-site or off-site renewables, it is encouraged to prioritise on-site renewable generation. 

On-site generation brings many benefits. In addition to alleviating pressure on the national grid, on-site generation also benefits tenants by providing resilience against power cuts to ensure business operations continue to run as usual.

If on-site renewable generation is not possible at the building, or is insufficient to offset the building’s operational carbon emissions, then purchasing off-site renewable energy should be considered. Power Purchase Agreements (PPAs) allow for the purchase of electricity directly from a renewable energy generator. For landlords, this provides a path to zero carbon without incurring large capital expenditures.

Zero carbon is set to be the gold standard for sustainable real estate. The EVORA Global team of experts are ready to discuss strategies to get your project on the path to zero!


[1] http://pubdocs.worldbank.org/en/598821555973008624/CMO-April-2019-Forecasts.pdf

[2] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/802478/Annex-m-price-growth-assumption_16-May-2019.ods