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A brief history of materiality and ESG at the SEC

It is interesting reading the comments [1] to the proposed ruling by the US Securities and Exchange Commission (SEC) on The Enhancement and Standardization of Climate-Related Disclosures for Investors [2]. Points raised are diverse, but broadly fall within one of two camps; those vehemently opposed to the ruling, and those in support (often calling for more ambitious requirements over and above the proposal from the SEC). This binary grouping is neither surprising nor unexpected for the SEC, given the organization’s four-decade history of contests concerning environmental proposals. [3]

And now in 2022, the SEC is proposing extensive new disclosure requirements for publicly listed firms starting in the fiscal year 2023 (for filing in 2024) for the largest filers – those with a public float greater than $700m – with phased introduction for firms with smaller public floats.  The first compliance date will impact around 2,000 businesses and eventually impact approximately 7,000 in total. The requirements require registrants to include certain climate-related information in registration statements and periodic reports, such as on Form 10-K, including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook
  • Climate-related risks and relevant risk management processes
  • Greenhouse gas (“GHG”) emissions
  • Climate-related financial statement metrics
  • Climate-related targets and goals, and transition plan, if any.

The disclosure requirements are centered around the recommendations from the Taskforce on Climate Related Disclosures (TCFD). The SEC joins eight jurisdictions that have TCFD-aligned official reporting requirements, (Brazil, European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom). Additionally, the International Financial Reporting Standards (IFRS) Foundation announced a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

What is TCFD?

As a high-level summary, the TCFD recommendations provide a framework for businesses to identify, evaluate, manage and monitor climate related risks and opportunities. They are centered around four themes, with a total of 11 recommended disclosures.

  • Governance – what role do people play in managing and overseeing climate related issues?
  • Strategy – how will organizations change to manage future climate-risk?
  • Risk Management – what processes are in place to identify, manage and assess risk?
  • Metrics and Targets – how do you measure progress against climate-related goals?

Globally, there are over 3,400 TCFD supporters, although not all of these have disclosed in full yet. The TCFD 2021 Status Report [4] provides a breakdown of public reporting against each of the recommended disclosures; the Materials and Buildings sector captures commercial real estate, although the 404 firms reporting will not be exclusive to the buildings sector. 

The results suggest that:

  • Most firms are disclosing qualitative risks and opportunities – per Recommendation: Strategy a)
  • Materials and Buildings have highest level of Metrics and Targets disclosure
  • Scenario analysis is disclosed by only a small percentage of firms  – per Recommendation Strategy c)
  • Governance, including Board and Management oversight of climate risks and opportunities, is the next least well disclosed theme after scenario analysis – per Recommendation: Governance a) and b)

On the latter point, gaining Board buy-in and a commitment to climate-related topics is essential for strategies and risk management processes to be truly integrated. Without this, firms will be disclosing under the TCFD framework for compliance reasons only – a missed opportunity.

Disclosure rates against the 11 recommendations differ by region, with Europe leading over the period from 2018 to 2020.  Double digit increases over two years were seen across all regions, with the exception of North America, which also has the fewest percentage of firms disclosing against the 11 recommendations. The takeaway from these numbers is that the SEC is leap-frogging the comfort zone for many North American firms.

GHG data and data quality

The proposed SEC ruling requires registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) to be disclosed in absolute terms (by Scope) and as an intensity metric. Scope 3 emissions – of which there are 15 categories covering indirect upstream (i.e. related to goods or serviced purchased) and downstream (i.e. related to goods or service sold) – are, receiving a lot of attention due to the fact that Scope 3 emissions are out of direct control of landlords and data quality and coverage is often poor. Aside from small reporting companies, Scope 3 needs to be reported from FY 2024 (filing in 2025), if material.

Defining materiality is not an exact science and the lack of guidance from the SEC may result in reporting opt-outs where Boards deem the organization’s emissions to be immaterial to investor decision making. However, the quantity of emissions (tons CO2) is one method of determining materiality; the Science Based Targets Initiative (SBTi) sets a threshold for materiality as 40% of Scope 3 in relation to Scopes 1 and 2. Other factors influencing materiality need to be considered, such as:

  • Risk – considering relevant climate-related legislative and reputational risks
  • Influence – the registrant’s influence over emissions generation and reductions e.g. percentage ownership and / or a board representation within investee companies
  • Financial – emissions associated with a high level of spend or those generating a high level of revenue.

Many of these factors will need to be considered on a case by case basis, particularly legislative risks, which will need to be considered country by country and at the city level in many instances. For large-accelerated and accelerated registrants there are additional requirements, which will have ramifications for the entire real estate industry, for limited assurance (phased introduction from 2024 for filings in 2025) and the more stringent reasonable assurance (phased introduction from 2026 for filings in 2027).  While public REITs [5] are clearly in the SEC’s crosshairs, so too are others in the real estate value chain. For example, lenders (of both debt and equity investments) will need to report their share of Scope 3 financed emissions – most likely following PCAF [6] guidance.  Similarly, corporate tenants will want to understand their upstream GHG impacts where energy is provided as part of a service e.g. where a landlord procures energy in a building and recharges costs to tenants. The proposed rules will surely impact both contractual lending and leasing agreements on data provision and, importantly, the underlying quality of that data.

Transition plans

Scope 3 emissions also need to be disclosed in a filing if a registrant has made a transition plan (decarbonization target) public that includes Scope 3. For real estate, it is common to see leaders in ESG set net zero carbon targets that include Scope 3, but this is often ringfenced as tenant energy use. As the table below indicates, there are other Scope 3 emissions that may be materially relevant beyond tenant energy use, including embodied carbon of new construction and refurbishments. How the industry responds to this requirement will be interesting to watch. REITs that understand their full Scope 3 position will be able to retain existing climate goals. Those who do not will need to get to grips with Scope 3 accounting, or be forced to take down public goals, or walk back their scope accordingly – neither action is likely to be viewed as favorable to investors that see climate risk as an investment risk.  

Source: Adapted from UKGBC: Guide to Scope 3 Reporting in Commercial Real Estate [7]

A transition plan is used to lay out actions and targets that demonstrate an entity’s pathway toward a low-carbon economy, through reducing its absolute and / or intensity-based GHG emissions or concerning exposure. There are many frameworks that set out characteristics of an effective transition plan. This includes broad industry frameworks such as UN Asset Owners Alliance, through to more sector specific guidance used by signatories of the Net Zero Asset Managers Initiative issued by the IIGCC, and more besides. 

Unlike the frameworks named above, the SEC proposed rule does not provide sufficient guidance on the characteristics of an effective transition plan. For example, this may include disclosure of:

  • Base year, target end year and importantly, interim target year(s)
  • Climate scenario considered (e.g. 1.5C, 2C, 3C)
  • Type of target (e.g. absolute or intensity based)
  • Coverage and scope of the target, including narrative on any carve-outs
  • Alignment with recognized and suitable frameworks

Without specific disclosure requirements, there is a risk that transition plans may not be comparable nor decision-useful for investors – a concern raised by many commentators.

Lastly, but certainly not least, a new Article 14 to Regulation S-X would require a registrant to disclose climate-related financial metrics relating to severe weather events and other natural conditions and / or transition activities.

These financial metrics must be presented on an aggregated line-by-line basis for all negative impacts, and separately, all positive impacts where the impact is greater than 1% of the line item. If collecting Scope 3 data appears challenging, collating these financial metrics will present a gargantuan task for many registrants. Once the data is held, registrants will then face the effort of contextualizing the metrics so they don’t unduly scare investors.

Final thoughts

Overall, the SEC has moved from zero to one hundred in some incredibly far reaching, and challenging, requirements. The proposed rules lack clarity in a number of areas and will surely be revised before final issue. However, I do expect the rules to be materially similar when the final form is issued, with my prediction being year end.

Once introduced, the challenge for registrants is to view the rules “beyond compliance” and embrace the TCFD framework as a pragmatic methodology for climate change preparedness and resiliency. This mindset is essential if the US (and the world) are to achieve a just and orderly transition to a net zero economy. 


[1] https://www.sec.gov/comments/s7-10-22/s71022.htm

[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[3] The Commission first addressed disclosure of material costs and other effects on business resulting from compliance with environmental law in a 1971 Interpretive Release.

  • The 1971 position took two years to codify and reached the final and current form in 1982, after a decade of evaluation.
  • In 1975, the Commission also concluded that it would require disclosure relating to social and environmental performance “when the information in question is material to inform investment”.
  • In 2010 SEC guidance specifically emphasized that climate change disclosure might, depending on the circumstances, be required in a company’s Description of Business, Risk Factors, Legal Proceedings, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
  • In 2016, the SEC issued a Concept Release regarding the modernization of regulation S-K including on climate change, noting the growing interest in ESG disclosure among investors and also the often inconsistent and incomplete discourse due to the voluntary nature of corporate sustainability reporting.
  • Finally in 2021, input was sought by the SEC on whether current disclosures adequately inform investors. This was made at the same time the federal Financial Stability Oversight Council (FSOC) listed climate change as an emerging threat to the financial stability of the US.

[4] https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf

[5] https://www.reit.com/what-reit#:~:text=REITs%2C%20or%20real%20estate%20investment,number%20of%20benefits%20to%20investors

[6] https://carbonaccountingfinancials.com/

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

Will TCFD prepare organisations for the climate crisis?

Yanna Badet, Meghan Johnson, Phil Fieldhouse, Karolina Krzystek-De Ranter and Lisa Tassis

Climate Change is hard to ignore this summer:  Europe is battling heatwaves and wildfires, over 60% is in drought conditions while other parts of the world are experiencing several  1000-year floods within months. We are in a climate crisis, and we are feeling it. It is affecting all sectors, including real estate investments, as more stringent regulations are being put in place by governments to reduce emission contributions, and shareholders are demanding carbon neutrality and proof of resilient assets. And then there is the actual physical risk to contend with that can affect the value of the real assets. “TCFD” is one of the acronyms you have probably heard in this context.

So what is “TCFD” exactly and can it truly help the real estate sector prepare for the climate crisis?

TCFD is short for the Taskforce for Climate related Financial Disclosures, a group established by the Financial Stability Board in 2016. It developed recommendations for the industry on how to integrate and address climate risks to prevent climate-induced financial disaster. The premise is simple; to encourage the world’s largest companies to disclose information about how their business is affected by–and deals with–climate change. Since its inception, the recommendations have become a guideline for more than 89 countries and nearly all sectors of the economy, with a combined market capitalization of over $25.1 trillion. Governments are increasingly making the framework mandatory, for example as of this summer (July 2022 – just extended until end of August 2022), TCFD aligned disclosure is required by the UK Government for the largest investment companies, with smaller companies following in the coming years. The EU Taxonomy has similar guidelines and the U.S. Securities and Exchange Commission (the SEC) is also aligning its climate risk disclosure rules with it. So from a regulatory standpoint it can make much sense to start thinking about it now. Depending on your perspective, aligning with TCFD has additional benefits:

Primarily, investors will get access to climate-related information that enables them to compare the performance of their investments in relation to climate resilience. In theory, lower climate-related risk means better risk-adjusted investment performance, which simultaneously encourages investment into more resilient assets.

Secondly, the disclosing companies will be the ones to identify, manage, and monitor the risk of climate change on their business. This provides the strategic oversight required for risks to be managed and helps companies to proactively address the climate-related issues they face.

Thus, the TCFD process can lead to proactive climate risk management, more investment into futureproof, decarbonized and climate resilient assets versus the contrary, and increased capacity within the industry to make more climate-conscious and therefore lower risk investment decisions. All of which is already being demanded by many shareholders and will only continue to pay off, as climate risks increase.

There is of course a balance to be struck for real estate investors and managers: invest the “right” amount so that risks are averted, while keeping investments rewarding.

To respond to and reduce the impacts of climate impacts on the real estate and other sectors, two main things have to be addressed :

  1. Mitigation – by drastically reducing greenhouse gas emissions to avoid further contributing to climate change – and become independent from fossil fuels; and
  2. Adaptation – to increase the resilient capacity of assets to climate impacts. This concerns  both physical, and the less tangible ‘systemic’ (i.e. social or economic), aspects.

One of the challenges is certainly a remaining level of uncertainty when it comes to climate change. At the same time, catastrophic climate impacts are already happening now, even effects that were forecasted to happen in the distant future only a few years ago, are materializing now. Thus the element of time is important to consider. There is none to be wasted. We believe that the more information investors and asset managers have, the better informed these decisions can be made. The TCFD, with its framework to define, capture, and disclose anyclimate-related information that relates to investment risk, financial position & performance, business planning and strategic decision-making, at a minimum provides a good starting point to ensure opportunities and threats are not missed and risk reduction can be acted on. In its latest Guidance update, the TCFD also published Guidance on Metrics, Targets, and Transition Plans to further support financial statement preparers in disclosing decision-useful information and linking those disclosures with estimates of financial impacts. Such information will help users better assess their investment, lending, and underwriting risks – and inform paths and progress toward net zero. This makes TCFD a useful and timely mechanism for companies and organisations to begin to understand and manage these risks, helping them to more prepared for the unfolding and increasingly irreversible climate crisis.

The full 2021 Status Report, updated Annex, and guidance document are available on the TCFD website. TCFD will deliver its next status report to the FSB in September 2022.

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.

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

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

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