Posts

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

Portfolio Items