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A Summary Guide to The CRREM and SBTi Update

The Carbon Risk Real Estate Monitor (CRREM) & Science Based Target initiatives (SBTi) have recently published updates to the decarbonisation pathways. The recently released version is 1.5⁰C aligned and affects the tool’s underlying data in three important areas: carbon intensity, energy intensity, and SBTi-alignment. The new version addresses updated global emission budgets as well as CRREM-SBTi aligned decarbonization pathways at property level.  CRREM- SBTi pathways cover the residential and commercial real estate sector across North America, Asia-Pacific, and Europe. To help understand how the pathways have been updated and the potential impact, EVORA’s Net Zero Carbon team has developed a CRREM Update Summary Guide. The following guide focuses on where the changes are most significant, what high level information is relevant and what is the impact of the changes.

Introduction

In January 2022, SBTi and CRREM announced that they would join forces to provide fully aligned 1.5°C decarbonization pathways for the real estate sector. This partnership combines previous work by both organizations and creates a global standard for operational decarbonization of buildings, providing companies in this sector with the clarity and confidence that their decarbonization plans are aligned with climate science.

The pathways are now called “CRREM SBTi pathways” for existing buildings. CRREM-SBTi pathways cover residential and commercial real estate sectors across North America, Asia-Pacific, and Europe.

Key Updates Summary

Decarbonisation Pathways

  • The baseline year of the CRREM operational decarbonization pathways was updated from 2018 to 2020.
  • Due to exceedance of existing carbon budgets between CRREM v1 and v2, the baseline for most v2 pathways is lower than previous version (for e.g. German office target v1 value for 2020 was 86 kgCO2/m2 and v2 value is 54 kgCO2/m2). There are a few countries (mainly non-EU) with higher 2020 baselines, but all these pathways continue to show a steeper reduction in the pathways.

Energy targets now plateau after 2035 once a predetermined percentage reduction from the 2020 starting point is achieved (ref. figure on the right), rather than continuing to decrease as in the previous version, since most energy sources will be fully decarbonized in 2050 the allocation of available renewable energy will define the limitation of energy use per sqm.

Methodology and new functionality

  • The CRREM Energy Use Intensity (EUI) pathways now refer to a building’s energy consumption (gross), which includes all direct combustion, electricity consumed from the grid, district heat purchased, as well as renewable energy produced and consumed on-site (also known as ‘site-energy’), rather than the net energy demand from v2, which excluded energy produced on site. The gross energy consumption of a building approach is to promote efficiency-first strategies. Note that energy generated and consumed on site is still reducing CO2 intensity of an asset as the on-site renewable energy has an emissions factor of zero.
  • To differentiate between carbon (CO₂ /m2) and Greenhouse Gas (GHG) (CO₂e/m2) targets, a new pathway has been added that incorporates fluorinated gases emissions (F-gases) – human made gases used in industrial activity.
  • A new pathway for “Industrial Distribution Warehouse Cooled” has been published to account for increased electricity consumption from refrigeration and space cooling.
  • New sub-regional pathways covering the 15 largest cities in the United States and the six climate zones in Australia have been published.

Drivers and Considerations Behind the Changes

  1. The remaining global anthropogenic budget slightly reduced: On a global scale, we do not see significant changes regarding the remaining carbon budget compared to CRREM’s first version (468 vs. 519 GtCO₂ – only). This 10% decrease regarding the remaining budget from 2020 onwards until 2050 causes the decarbonization curves to be steeper (stricter) as seen in the image below. Leaving all other aspects unchanged this will of course imply lower intensities per m² floorspace in the future.
  • Sector overshoot: At this time, almost every sector in the world is performing below the level required for achieving the 1.5c pathway. The result is updated budgets with more severe pathways and earlier stranding risk dates than those predicted by the previous model. The pathways have become stricter (steeper) because the real estate sector has shown more consumption than projected from the baseline year (since 2018). The overall remaining budget from 2020 onwards is reduced due to this aspect, and energy/carbon intensities are currently on average higher than projected based on the first CRREM pathway release.
  • Building stock growth rate with largely unchanged projection: Global floorspace projections did not change significantly. New figures show an overall increase of 1.6% compared to the previous data from 2020 to 2050. This implies a slightly lower intensity per m² floorspace.
  • More ambitious grid decarbonization: The decarbonization of the electric grid has gained momentum in recent years and emission factors (EF) for electricity have decreased dramatically. This, in turn, reduces carbon intensities for the same energy consumption level. At the same time this implies lower intensities per m² floorspace since future projections for the energy sector show on average more ambitious grid decarbonization until 2050.
  • Changing energy-mix / electrification: Besides a move towards more renewables, we note that generally the electrification of the real estate sector is also gaining momentum. In countries with a lower emission factor for electricity compared to the remaining energy mix, this is decreasing the weighted EF already today. In some countries, a current relatively higher EF of the electric grid compared to the remaining energy mix is leading to increased carbon intensities of the sector. Regarding projections, we note that electrification combined with the decarbonization of an electric grid plays a major (indirect) role for the real estate sector to achieve climate targets.
  • Alterations of the applied methodology: Due to the alignment with the SBTi, CRREM has now applied the EF (for electricity) excluding transmission & distribution losses. In the first version of the CRREM pathways, the EF were including T&D-losses. The lower EFs are now reducing carbon intensities accordingly (within pathways but also when using the tool with updated and lower EF).

CRREM Pathways and The Impact of Changes

CRREM pathways have already influenced how decisions around decarbonisation are taken. As climate action accelerates and investors and asset owners begin to implement net zero strategies the revisions to targets will require a re-evaluation of previous findings and modifications of strategic approaches to assets in portfolios and potential acquisitions. The potential major impacts include:

  • Carbon and energy intensity targets have become stringent in many countries including USA, France, and Germany. Significant change is seen for France, where a steep trajectory down to the 2036 energy target is seen as compared to previous target.
  • The changes to the baseline for most pathways emphasise the need for short term carbon reductions to reduce the risk of asset stranding. This emphasis will require more immediate financial mobilisation may prove challenging in an uncertain economic environment.
  • Energy efficiency and demand reduction would be the most critical action to be taken in the short term for countries (e.g., the United States) where grid decarbonisation has declined while carbon and GHG reduction targets have become more rigorous.
  • Due to the fact that now – in contrast to the first CRREM version – some energy sources are actually completely decarbonized by 2050 according to forecasts, the existing method of deriving the energy paths was expanded. For this purpose, the concept of energy target values was introduced. With these target values, it should be noted that target achievement is only achieved if
  • The EUI corresponds to the stated energy-intensity figure, AND
  • The asset also meets the CO2-target for the respective year (which means in 2050 it must be completely decarbonized, renewable energy).
  • It is important to note that the baseline year of the operational (‘in use’) decarbonization pathways for CRREM has been changed from 2018 to 2020. This is because the real estate sector has demonstrated higher overall consumption since 2018 than what was anticipated in CRREM V1.

What next for CRE?

  • As the results of CRREM have influenced many CRE companies’ investment plans, the revisions to the targets will require you to re-evaluate your previous findings and modify your strategic approaches to assets in your portfolios and potential acquisitions.
  • Energy efficiency measures must be implemented quickly over the course of next eight years, and the impact (energy demand reduction) from the measures must be tracked and analysed on a regular basis.
  • Decarbonisation programmes that fail to meet their goals do so because they are not properly programmed and planned for. Net zero needs to move from strategy to implementation quickly – retrofitting high-emissions assets, making procurement decisions and proactive tenant engagement.
  • The emphasis on short term carbon reductions to reduce the risk of asset stranding will require more immediate financial mobilisation.
  • The consumption based EUI view stipulates that energy consumption reduction through efficiency strategies rather than addressing the entire energy demand with renewables produced on-site, as in the previous version, should be tackled first. Energy efficient buildings are therefore not just net-energy-efficient but rather low-energy-consumption properties – which in turn can contribute to an overall cleaner grid by producing more renewable energy on-site than they need to cover their own demand.
  • For assets with late lease expiration dates and RFI assets, tenant engagement is more important than ever.

The full new CRREM tool for EU is expected to be published later this month. Look out for further updates from EVORA.

EVORA can support clients by reassessing and adjusting their strategic approaches to existing assets in their portfolios and future acquisitions.

Get in touch with our expert Net Zero Carbon team to find out how they can help you.

Being Green Never Looked So Good

Sustainability is a huge part of who we are at EVORA Global. It’s important in our work and in our day-to-day activities, so it’s no wonder that we’ve achieved Planet Mark certification for the 9th year running. We wanted to show some of the other ways we’ve made the London office more sustainable and eco-friendly since we moved to Birrane House in 2022.

Green Office

We are already off to a great start, as our office in London Bridge ticked many of the sustainable boxes when we moved in. It’s close to excellent public transport links and there is bicycle parking directly outside the office, as well as a private secure parking facility nearby. The office lights are already automatically turning off when they don’t detect motion and all the windows are double glazed, with excellent insulation throughout the office. We also monitor the air quality, looking at the carbon dioxide levels in the office and keeping them as low as possible. In an office survey in 2022, 83% of our London office rated the air quality at four or five out of five!

After moving in, we were excited to make changes for our office to be as sustainable as possible. We’re working with Recorra for our recycling and waste and have been able to up our recycling impact. As well as compostable food waste, paper and cardboard recycling, we have also recycled our coffee cups, batteries, and glass bottles. Even our coffee pods are compostable and go in our food waste bin. Recorra also does electrical waste recycling, so old laptops and monitors were picked up, wiped, and recycled, as well as broken office furniture. In January 2023, Recorra awarded us Gold Status in recycling for recycling 80% of our office waste, an achievement we are very proud of.

Our London office also changed cleaning company in 2022. After meeting Bespoke Cleaning at a networking event, we found their company values aligned with ours, especially with the training they give their staff. Bespoke allows customers to choose the products they use, so we swapped to eco-friendly cleaning chemicals that use 70% less packaging, reduce single-use plastic, and are plant-based and environmentally friendly.

Green EVORAians

We love organising events where we can make a difference and can increase staff wellbeing. We’ve done this through events that include litter picking at a beach to raising money for charities that help their communities, such as Fortalice for abused women and the Fellrunner village bus for the elderly.

We have regular events for the team and love making these as green as possible. One of the favourites last year was the seed bomb workshop, organized with the Wilder Mile. This encouraged staff to make seed bombs to give as gifts or to use in their neighbourhood, spreading wildflowers in their area.

We also had a Plant Power Month in 2022, which was so successful that we are currently doing it again! Last year volunteers were sent eco-friendly seed kits to grow their own vegetables, herbs, or flowers and posted regular photo updates on our Health and Wellness channel on Teams. We also created a series of videos on how you can take cuttings of vegetables to grow your own from scraps, cutting down food waste, plastic usage and transportation costs of food.

We also had two walking challenges in 2022, raising money for charities in the process. Many people continued walking to work after the events ended. This year, we were delighted to have 48 people sign up to participate in Race the Thames in January, where each team member had to run or walk 6km a day over one week. It was great to see so many people join in and have EVORians continue walking or cycling to work after the event ended.

The EVORA Library was created in 2022 in the London office, where people can donate books they no longer read for others to check out. This gives the books a new lease of life. We are also currently collecting used children’s books in three of our UK offices to donate to charity in aid of International Book Day.

We are very proud that we can have a positive impact on the environment while being closely aligned with the company values, making our space of the world greener and more sustainable.

SIERA Fund View streamlines the sustainability performance of investment funds

Fund View is a powerful sustainability software tool that helps you manage reputational risk and engage with stakeholders. A single platform for visualising and enriching all asset data on fund-level dashboards, Fund View prioritises actions to optimise CapEx and OpEx for sustainable real estate.

Who benefits from Fund View, and how does it support sustainability?

EVORA Global purpose-built its SIERA sustainability software to deliver a seamless user experience for property, asset, fund, and ESG managers. Our new Fund View software feature provides a comprehensive view of your entire fund portfolio for effective teamwork on one secure, accessible sustainability platform.

Fund View tracks and compares sustainability data for all your funds against set targets, helps you assess the sustainability ranking of each fund, identifies potential issues and opportunities for improvement, and recommends actions to optimise the operational performance of each fund.

Together with SIERA’s single login, Fund View streamlines your fund management activities to make your workday easier and simpler. Rather than juggling multiple logins for separate sources and systems, your property, asset, and investment teams can now collaborate to make fast data-driven decisions and construct strong business cases for resilient sustainable real estate portfolios. So, how does Fund View work in practice?

How does Fund View drive sustainable real estate?

Our user needs drive Fund View. By listening to the challenges faced by our existing SIERA users, we’ve developed new features to support financial decision-making for stronger sustainability performance. Your customised Fund List ‘home page’ summarises key facts about each fund you manage. From here, you can easily navigate to individual Fund Dashboards to check your sustainability outlook on visual cue cards.

Fund View helps you track and manage the sustainability performance of your real estate funds by improving asset Performance, pinpointing low Data Quality, setting targeted Action Plans, and facilitating regulatory compliance, with alerts for Energy Performance Certificates set to expire within 12 months. Combined, these capabilities enable your team to take charge of sustainability risk factors and unlock emerging opportunities to avoid value erosion. Stay vigilant!

Our forthcoming Net Zero Carbon feature is coming to Fund View soon, so you can track progress against net-zero commitments at fund and asset level and lead the way in sustainable real estate investments.

How does Fund View allow you to explore the data?

Although thesehandy Information Cards present accessible visual summaries, the real benefit comes from taking a deeper dive into each topic. You can select any card of choice to discover more detailed data insight on your fund’s personalised Data Quality, Action Plan, and Performance dashboards. This reduces information overload, simplifies your user experience, and enables you to focus on the most business-critical objectives for each individual asset to benefit your entire fund. Here’s how.

How does the Data Quality dashboard benefit your fund?

Data Quality presents a detailed overview of the quality of energy consumption data for each asset in your fund. This helps you easily spot any missing or weak points in the data for your fund, so you can take steps to enhance your asset data collection to maximise its effectiveness. Collecting consistent high-quality energy consumption data across all your assets not only supports your financial decision-making and enhances the sustainability performance of your fund, but transparent sustainability data is also key for credibility and compliance, while ensuring more effective communication with stakeholders.

Fund View clearly signposts any missing data or instances where an asset’s floor area has no data coverage to alert you to prioritise action. You can also easily identify which utility and/or floor space generates the most significant data quality issues to help target your data management actions. Your most ‘problematic asset’ sits front and centre at the top of your Data Quality list, because improving data quality for this asset will generate the greatest result for your entire fund. It’s the one to watch.

How does the Action Plan dashboard benefit your fund?

To implement a successful sustainability strategy, reduce any potential risk factors, and be able to report on how these risks are being managed, you need to put in place Action Plans for each asset.

Targeted actions to improve the sustainability performance of your fund need to be set and routinely adjusted. Keeping track of improvements, financial costs and target due dates are must-haves for your energy consumption, waste generation and recycling, and carbon emissions.

Fund View’s Action Cards help you monitor which activities are in progress, whether there’s any inactivity threatening to stall your progress, and present clear reminders to secure approvals or conduct viability assessments before taking further action. Action Plans also display relevant financial costs and can be updated to reflect new decisions and priorities impacting on the investing plans for each fund.

It’s important to note that Action Plans correspond to a broad range of categories potentially affecting your fund performance: biodiversity, building performance, community engagement, energy, governance recommendations, health and wellbeing, social value, tenant engagement, waste, recycling, and water. Nothing is left to chance.

How does the Performance dashboard benefit your fund?

Your Performance dashboard reveals three key data insights that shine a light on the accuracy of your Data Quality – and how near you are to achieving targets set in your Action Plan.

  1. Actual and supplier-estimated consumption data
  2. Automated calculations for carbon emissions data (covering your fund’s total carbon footprint: Scopes 1 to 3)
  3. Any missing data gap-filled from comparable indicative data

Although less accurate, estimated data is better than no data when it comes to measuring your Performance against set target reductions in your Action Plan, or for a specific timeframe in the current year compared with the same timeframe in the previous year.

By tracking progress towards set sustainability targets, such as energy and water consumption reductions, you can improve the sustainability Performance of your assets over time, identify where cost savings can be made, and increase the overall value of your real estate portfolio to attract more and more ESG-conscious investors.

How are funds ranked for Net Zero Carbon performance?

Ambitious net zero goals add credibility to your business if you deliver on your pledges. That’s why we’re developing Fund View to track your carbon emissions data and help measure the Net Zero Carbon performance of your fund. Visualisations will chart your data every month or quarter to periodically illustrate whether your carbon emissions are above or below set targets for each asset and, ultimately, your complete fund.

What’s next in store for Fund View?

Fund View keeps you updated on your energy and water consumption, sustainability Performance, Energy Performance Certificates, Action Plans, and Data Quality for all your funds. Next in store, SIERA’s Net Zero Carbon module will add even more valuable insight to support your investment funds. And take EVORA Global one step closer to achieving its vision of accelerating the evolution and adoption of real estate sustainability to enhance the wellbeing of the planet and its people.

Join our community to read about SIERA’s forthcoming Net Zero Carbon sustainability software release, plus insightful EVORA Global news and views.

Singapore – The gateway to Sustainable Real Estate Investment in Asia

In the week before last, I was in the iconic European city of Amsterdam. Cobbled streets of merchants’ homes and old warehouses built around the old port and canals. A place where you can’t walk along the street on your mobile phone or risk getting run down by a bicycle or two. In October, apples were in season for the famous appeltaart, delicious with whipped cream.

What a contrast to the next week – in Singapore for the Fintech Festival. A city of extraordinary architecture with many ships anchored offshore from this modern port. Much of my week was spent in taxis and in lifts in Singapore, rather than on foot or on a bike in the Netherlands. 

This is a symbolic Asian city where many people walk around with hooked-over heads lit up by the glow of their phones. At our hotel, the majority of guests live-streamed the breakfast buffet; talking to their phones rather than their friends around the table. 

Citrus fruits were in season in the hot humidity of this gateway city. The very affordable and UNESCO protected hawker food markets were buzzing with delicious, freshly cooked fish and veg. Both cities share a love of deep-fried snacks and both have a warm, respectful openness. 

Our business there was with the many global investment managers and local REITs which use Singapore as a gateway for investments in the rest of Asia. With the city’s close relations with other major financial centres, like London and Tokyo, it is an obvious choice.

The city is home to sustainable real estate leaders, like CapitaLand. With iconic assets, including CapitaSpring and the Jewel, the company has become a touchstone for other real estate companies. Backed by a Sovereign Wealth Fund they are encouraged to support, and lead, the government’s drive towards sustainability and the management of climate risk.

We were part of a Great Britain trade mission, warmly hosted by the British High Commissioner, Kara Owen, and her team. The Singapore Fintech Festival provided us with a focus on “green” fintech as the city looks to establish itself as a centre of green finance.

Having spoken with our partners, MSCI and Paia, and many clients, including another global leader Hines, it was clear that the sustainability and climate agenda has moved on significantly over the last year. Looking to challenge Europe’s leadership and arguably more advanced than the USA. We were in listening mode last week and it was an inspiring community to visit.

Real estate investment in Singapore and the nearby major Asian markets of India, Japan, HK and Korea are on the front line of climate change. Whilst also grappling with air pollution, the destruction of natural biodiversity and a range of social and governance issues. Against this background, you could expect that these markets could lead the way with new innovations in the near future. That could be why new green products, including credit, is on the rise.

European LPs, including the Dutch pension funds, are one driver of this market, alongside new Government rules on disclosure. We’ll be watching how the Asian LPs pick up this agenda, particularly the Japanese pension funds and Australian Supers.

Like every other market, ESG data quality is a problem. The Government’s Project Greenpoint is attempting to solve this problem and backing an ESG data utility. Smart thinking to ensure that both risks and opportunities can be made transparent.

What an exciting market to explore as EVORA thinks about how and where we grow following our recent investment round. Thank you Singapore for being such a great host.

CSRD: Is your organisation ready for the new ESG reporting requirements in Europe?

Further signs this week that the EU is seeking to strengthen environmental and social reporting requirements; Tuesday saw MEPs and EU national governments strike a provisional deal which would require major corporates to report on how their businesses impact on both people and the environment.

The Corporate Sustainability Reporting Directive (CSRD) will require that major businesses – defined as organisations with over 250 employees and a €40 million turnover – report their social and environmental impact against common standards. Tuesday’s move is an amendment to 2014’s Non-Financial Reporting Directive (NFRD) which set out its aim to encourage: “investors, civil society organisations, consumers, policymakers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business”. The CSRD, if it can find agreement in the European Council and Parliament, will bolster the need for reporting on key social and environmental activities. These include requirements for:

  • The audit (assurance) of reported information
  • Detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards
  • Digital ‘tagging’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

In his overview of the drivers behind the CSRD, Pascal Durand, who led negotiations was clear:

“The European extra-financial audit market will be standardised, much more rigorous and transparent. Parliament succeeded in securing an opening of the audit market by member states in order to make room for new certified players to become major players and not just leave it in the hands of the financial auditors, notably the big four”.

The agreement, which if enacted will apply equally to public and private companies meeting the Accounting Directive size threshold, will be required to report on environmental, human rights, social standards and work ethics issues. Likewise, major non-EU businesses will be subject to the same provisions. In a nod to the difficulties comprehensive reporting can represent to smaller businesses, the agreement lays out a provision to less rigorous reporting for qualifying SME businesses and subcontractors.

The drive towards common standards is a welcome one, although details on those standards is not yet available. However, this year’s launch of the Social Taxonomy consultation gives an early indicator of the EU’s planned direction.  

If you would like to discuss the above with our ESG experts, you can get in touch with them today.

EVORA Global partners with Fitwel to drive wellness in the built environment

Over recent years the focus on people-centric places within the built environment has gathered pace, with investors and tenants alike looking for ways to quantify and recognise the impact of buildings on their occupants as well as the wellbeing credentials of these spaces. This has been driven by a variety of factors, not least the growing evidence linking the quality of a building to occupant’s health and increased understanding of how the wider built environment impacts our daily lives.

With this in mind, EVORA launched its new Social Wellbeing service line in June, offering a holistic approach to Social Value and Health & Wellbeing. Having wanted to combine these two people-focused services for some time, EVORA’s new service line will provide best-in-class social value and health and wellbeing services backed by a robust methodology.

EVORA recognises the importance of healthy buildings and the positive impact they can have on their occupants and is therefore excited to announce it has become an official Fitwel Partner. Fitwel is one of the world’s leading certification systems which assess the impact of the buildings in which we live and work on our daily lives and long-term health. It describes itself as “a data driven certification system which aims to optimise buildings to support occupant health and well-being”.

Bringing together well-established best practice in built environment wellbeing and a blend of quantitative and qualitative social value frameworks, such as Fitwel, EVORA will be well positioned in an increasingly sophisticated market which will demand meaningful social and health engagement.

Philippa Gill, Executive Director, said of the partnership:

“We have worked with Fitwel for many years now and we are delighted to be formalising this relationship now.  Fitwel’s approach to data and evidence-based strategies aligns well with EVORA’s approach to impact through information and we look forward to the next stage in our impact-driven evolution together.”

Joanna Frank, President and CEO of CfAD, operator of Fitwel, said of the partnership:

“Our new Fitwel Provider and Fitwel Partner programs are helping further raise awareness of healthy building strategies that ensure increased occupant and tenant satisfaction. By aligning with and promoting Fitwel’s mission, we are thrilled to have such a great partner in EVORA, which is putting health and well-being at the forefront of its commitment to a people-centric approach through the built environment.”

See EVORA’s recent Fitwel work: PATRIZIA achieves Fitwel certification with the support of EVORA | EVORA Global

Why Social Wellbeing?

EVORA Global is delighted to launch its newest Service Line this month: Social Wellbeing.

After months of preparation, we are now able to offer Social Wellbeing services to our clients as we continue to move towards delivering truly comprehensive E, S and G support to the industry.

Social disruption from climate change, inequality and public health are some of the defining issues of our times and the real estate industry plays a crucial role in addressing these challenges by harnessing strategies which protect and enhance all property, people and the planet.

There is a rapidly growing demand for safer, healthier, more equitable, more comfortable, more productive spaces. In turn, assets which deliver social value and enhance local community adaptive capacity, inherently create more resilient investments. EVORA now advises on the integration of social issues into investment strategies, as well as the collection and reporting of social metrics aligned with best practice and or regulatory frameworks.

For some, the language might well raise some eyebrows – what is Social Wellbeing after all?

What is Social Wellbeing?

Social Wellbeing draws on the principles of social impact and health and wellbeing: these factors and increasingly better understand within the market and are emerging as a global awareness and industry leadership seek to make the most impact within their funds around the world. Forward-looking real estate investors now incorporate environmental, social and governance (ESG) considerations into business operations. While human health and wellbeing is an implicit component of ESG, it is now becoming an intentional and increasingly institutionalized focus across the entire real estate industry.

What is Social Impact?

Social impact is broadly defined as the effect of projects or programmes of work on local community stakeholders. This means that social impact is strongly linked to issues of economic outcomes: spending with local businesses and small and medium enterprises (SMEs), employing local people and supporting those that have difficulties accessing the labour market. Social impact is interested in seeing the positive benefits from living and working in a community that comes into contact with the client’s assets. We focus on delivering locally appropriate outcomes for our clients and the communities that we work in.

What is Health and Wellbeing?

Physical health can be affected directly through toxic exposures and indirectly by the impact of real estate development on human behaviours, such as physical activity and healthy eating. Mental health is also directly influenced by access to daylight, green space, biophilic design, and indirectly by the impact that urban and building design have on wider social interaction and connectivity. The real asset industry also has far-reaching effects across social health through its hiring practices, approach to procurement, site selection and community engagement.

Market leaders are already prioritising occupant experience in their investments and in some cases, health promotion is being incorporated (particularly post pandemic) as part of wider value drivers. More mainstream market participants are aware of these opportunities and are looking for points of entry and engagement.

Uniting Social Impact and Health and Wellbeing

The market is changing rapidly. There was a time when an environmental strategy was a “nice to have” but those days are long gone. Market expectations now mean that businesses can no longer present an ESG Strategy without a comprehensive analysis of the communities that they impact and an understanding of how they can do more to maximise the benefits that their assets deliver. Clearly, there is a considerable degree of overlap between the disciplines of social impact and health and wellbeing.

In short, the Social Wellbeing service line offers our clients support in developing and managing assets that serve the people that work, live and interact with them.

If you would like to speak to one of EVORA’s Social Wellbeing experts, please get in touch to see how we can help.

Plant Power Month

We celebrated Plant Power Month in April, inspired by National Gardening Week (27th April to 5th May). We spent the month taking cuttings of plants, growing vegetables, making seed bombs, and taking pictures of our plants.

Plant Power Month was a great success. We loved seeing EVORians posting their green babies on the Wellbeing channel on Teams and sharing how their plant projects at home were doing.

As well as providing oxygen, plants can also lower stress and anxiety, reduce fatigue, and improve your mood. Plus it’s loads of fun watching them grow! No matter the space you have, there is always an opportunity to get green-fingered. From vegetable cuttings to windowsill plants, you can get your daily dose of vitamin green, which has a huge impact on your mental health, wellbeing and on your step counter.

See below for what we did in the office!

Eco-Grow Set

We kicked off the month by sending out eco-grow kits to ten volunteers. These included ‘a taste of Italy’, ‘vibrant vegetables’ and ‘herb a’licious’. The seeds take some time to get going, so we won’t know for a while yet who has grown the best vegetable or herbs from the kits. We loved that the kits were eco-friendly too.

Vegetables in the office

We decided to show everyone how easy it is to ‘recycle’ the vegetables and fruit stones that we would normally not think twice about composting. It was great seeing how these scraps could get a second lease of life and it felt amazing doing it.

Our office garden included spring onions, garlic, basil, mint, celery, chilli seeds, and avocado seeds. After 5 weeks, our garlic has shot up to 55cm and our chilli seeds a much smaller inch of growth.

We are super impressed by the growth of all the vegetables and herbs, and delighted with how far they’ve come in such a small amount of time.

After posting about our avocado seeds, we found out that one of our team has been growing avocado plants for over ten years, which look amazing and so big! Definitely worth the wait and the patience that goes into growing them.

Seed Bomb Workshop

A huge thank you to the ladies of Wilder for leading a Seed Bomb Workshop in our London office. We had 12 staff come along to learn how to make seed bombs and spend the hour creating and wrapping them.

Seed bombs, or ‘earth dumplings’ were used in guerrilla gardening in the 1970’s, but go back hundreds of years in Japanese agriculture. They are a great way of spreading seeds in a large area that are protected from birds by the clay outer shell. Once it rains, the clay dissolves and the seeds, which by this point has already germinated, are safe from birds and well on their way to growing up.

As well as helping with wellbeing, the seed bomb workshop felt like a great team bonding experience. Everyone was getting their hands dirty and talking shop. With the busy season ahead for a lot of us, it was great that everyone could come together and switch off.

Plant Cuttings

To end the month, we planted everything that we had grown or taken cuttings from. We felt like proud mamas when our little seeds and cuttings that we had tended to the whole month were big enough to be potted and sent home with new mamas and papas. We couldn’t believe how many pots we could fill with cuttings!

We’ve really enjoyed getting our hands dirty for Plant Power Month and would highly recommend others to get out in nature and see what they can grow at home. We’ve proved you don’t need a lot of space and that with enough patience you can surprise yourself with what you can grow.

Roundtable: the “gap” between real asset valuations and investment value

In March, EVORA Insights’ fourth roundtable focused on integrating climate risk into real estate asset valuation and assessing investment value. The discussion was more diverse than just technical adjustments to acquisition models and IC memos.

Our clients’ focus on achieving actual net mitigation and adaptation, rather than simply de-risking an investment or portfolio, was striking.

In all, it seems that many firms are incorporating climate risks and opportunities into their investment process, but with little consistency in how it’s actually quantified or whether it’s formally embedded into valuation models.

Value vs. Price

A distinction was made between traditional valuation methods that the valuation/appraisal community use, and pricing in the context of transactions.

In the former case, few if any valuers are incorporating climate risk into property valuations. Aside from perhaps EPC ratings where relevant policy is in place; little to none when it comes to other forward-looking climate risks.  

In the case of transactions, some actors are adjusting their pricing. An ongoing challenge is whether those climate risk-adjusted prices actually win deals, when there are still willing buyers who do not account for climate risk. This was noted as especially challenging in hot sectors and markets (i.e. industrial).

Integrating future risk into acquisition models

There is anecdotal evidence of investment managers making adjustments to various inputs and assumptions in acquisition models to price in climate risk.

One method is to budget for additional CapEx for decarbonisation or adaptation measures, depending how much is needed by the asset and how ambitious a fund’s goals are.

Other methods noted include adjusting Cap Rates (particularly on exit) as a proxy for risk, or establishing specific investment criteria (i.e. red lines).

Data and transparency

These are key tools to pricing climate risk, but are cited as an common challenge. The specific data concerns vary across physical vs. transition risks, as well as geographies.

When it comes to estimating physical risks, many of the leading third-party tools and methodologies focus exclusively on direct damage to buildings, often captured in insurance claim data. But this can exclude potentially material impacts to utility expenses from more extreme temperatures, rising insurance premiums, disrupted access to buildings or tenant discomfort, and all of the broader market-level impacts of increasing climate hazards in a given city or region.

On the transition risk side, data concerns centered around how incomplete the carbon performance story is for most buildings. In Europe, Scope 3 emissions data is unsurprisingly a major thorn, and EPC ratings do not paint a picture of an asset’s actual performance. New regulations in France do appear to be making energy and carbon data from buildings more transparent.

Interestingly, the U.S. seems to be ahead in terms of accessing tenant data and historical carbon performance of many assets, largely due to landlords paying for the main meters and recharging tenants plus the mandatory energy benchmarking regulations established by most major cities and counties.

The ubiquity of the ENERGY STAR Portfolio Manager tool’s usage in the commercial real estate space was cited as an advantage – buyers can often request a download of the building’s actual energy, carbon, and water performance from the seller, avoiding the need to guestimate its performance.

The notion of a digital ESG passport that sticks with an asset throughout its life-cycle and captures much of what an ENERGY STAR download would include (plus embodied carbon information, in an ideal world) could be a key to appropriate valuation.

Another risk category was cited as critical to consider at the fund and house level: reputational risk. Even if climate risk-adjusted pricing hasn’t reached a tipping point in the markets yet, firms and funds are considering the consequences of continuing business-as-usual investment strategies. Greenwashing is considered a material risk now, particularly in light of the SFDR and new climate disclosure rules from the FCA and SEC.

Policy gaps

The gap between the policy / market realities and the science-based targets was brought up, indicating that markets are not yet reflecting the risks to a timely and orderly transition. Some expressed a belief that legislation was the only way to drive that change by levelling the playing field between competitors as well as opening up access to tenant data. Otherwise, how will pricing adjustments for transition-readiness take hold?

Frameworks such as the TCFD recommendations are encouraging development of the financial quantifications of climate risks, but provide little practical guidance on how to do so by sector.

However, this type of industry collaboration was seen as a positive example of how this agenda could be progressed effectively. As long as it doesn’t duplicate existing initiatives from industry bodies like the BBP and INREV.

Investment strategy and time matters

There remains some hope that, even without strong legislation, institutional investors will be seeking Core assets that are already well on the path to Net Zero, and will be willing to pay more for lower carbon buildings. This can help justify Value-add investments in decarbonisation measures by current owners in anticipation of the sale and potentially adjusted pricing in the future.  In contrast, tenants were not seen to be moving the needle via demand for greener buildings, despite hopes that they would and corporate occupiers’ climate commitments to the contrary. This presents a challenge to underwriting investment in these properties today.

When thinking about longer term risks, a fund with an average holding period of five or six years may coast by just fine without adjusting their approach. However, there is recognition that climate risk awareness and data quality is increasing, and buyers in just a few years’ time may have new demands that could result in depreciation and reduced liquidity.

If the role of Value-Add funds today is to prepare assets for acquisition by Core investors in the future, climate risk (particularly Net Zero readiness) will need to be considered in the investment plan. Many of these considerations — achieving NZC, establishing an internal carbon price, adapting to hotter temperatures, etc. – may be different for REITs than for fund managers of third party assets.

What is a “green asset,” anyway? 

Standards overkill was cited as a distraction from getting real decarbonisation work done. Divergence in definitions of a “green” asset across dozens of certification schemes results in inconsistencies among owners, and muddies the ability to answer this question for standards such as SFDR.

Often these standards obscure the actual performance of a building and the related risks.

In summary

  • Work is being done to integrate climate risk into pricing and investment decision making, with varying degrees of sophistication.
  • The most common levers for integration include CapEx, Cap Rates, and investment boundaries.
  • While investment teams are beginning to upskill on the subject, actual methods of integrating into acquisition models differ significantly. Hesitation persists when it comes to “putting your money where your mouth is,” for fear of reducing competitiveness.
  • More complete data and projections on climate risk are needed to establish consistency in pricing.
  • Legislation may be key in driving this forward. However, the number of standards, frameworks, and reporting requirements are already burdensome.
  • Investment strategies, market cycles, and other structural trends make a difference.

It’s clear there is a great deal of work left to do. It was heartening, though, that almost every strand of this discussion came back to actual impact and progress toward Net Zero Carbon goals. At least for this group of peers (which admittedly has some selection bias), double materiality is top of mind.

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.

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