As a global real estate investor, I’m motivated by the speed at which climate and carbon reduction strategies have taken hold across the world. But I’m noticing a blind spot in today’s market: the pricing of carbon. The built environment, responsible for 38% of global carbon emissions, is a major producer of carbon. Although some areas and companies have made significant progress with carbon reduction strategies, we must urgently address how buildings use and impact our global environment and price them accordingly. The fact that market pressure to do so isn’t yet explicit doesn’t mean it won’t come. Investors are now requesting carbon data on assets before purchases, and those savvy investors will be ahead of the curve.
Carbon—shorthand for greenhouse gases like carbon dioxide, nitrous oxide, and methane—is emitted from material production and transportation while a building is being built (embodied carbon), or from things like lights, air conditioning, and elevators while it’s being operated (operational carbon). There’s a growing understanding of the differences in carbon footprints of different building types. Data centers and life sciences buildings, for example, contribute a lot of carbon to the environment, and warm the earth faster because they consume lots of energy. Office and apartment buildings, on the other hand, create less carbon.
We’ve reached an inflection point regarding the number of market players making commitments toward a carbonless economy. Many in our industry, especially in Europe, have made public declarations to achieve net zero carbon—that is, a balance between the emission of carbon and the absorption of carbon in the atmosphere—by some date in the future. The pathway laid out by the science and the Paris Climate Accord of reaching net zero by 2050 to keep temperature rises below 1.5 degrees Celsius is essential to reach.
We’ve experienced inflection points like this before. When electricity, the telephone, and VHS arrived, there were debates on what standards would define the new technology (AC versus DC, or Beta versus VHS). In each instance, the winner defined the future. While not everyone is entirely on board with working toward a carbonless economy, or exactly how it can be done, the inflection point is here.
Most real estate investors aren’t accurately pricing the carbon footprint of the assets they’re buying, selling, developing, or repositioning, and are only starting to define the standards by which they do so. Why is this? Many simply don’t know where to start or they shy away from making the investments in required skills and technology.
At some point, investors will realize that buying another data center “as is” will only make their portfolio of investments more carbon-intense. Some form of capital expense will be required to reduce carbon intensity, and these costs will need to be underwritten, thereby impacting returns and market pricing. I firmly believe pricing assets based on carbon emissions will accelerate ESG adoption across the industry and force us to build and operate more sustainable buildings.
When things are inevitable, smart investors don’t wait until the future is forced upon them. So, what can real estate industry leaders do?
1. It’s important to “name it to tame it.” We must acknowledge that we’re not pricing carbon accurately into our assets, but that we need to.
2. We need to reframe the problem into an opportunity. The people and companies that create solutions for the challenge of pricing carbon will win simply by being ahead of the curve.
3. We need to innovate and problem solve. The data, skills, and infrastructure to price carbon are here, but they are far from being utilized widely enough. As the premium for net zero or “green” assets has become clearer, we need to invest more quickly to adopt wide-ranging and sophisticated carbon risk and reduction criteria into investment decisions.
Consider Salesforce Tower in downtown Chicago. As the first building in the area to require and quantify embodied carbon emissions of steel, concrete, and other materials, the construction process led to the use of 27% less concrete and 9% less steel. The result was a 19% overall reduction in carbon emissions, compared to the industry average. This equates to roughly 800,000 gallons of gasoline or more than 1,500 cars off the road annually.
Creating a net-zero economy is one of the biggest business opportunities of the next 20 to 30 years. Although many people share this perspective, not enough people are investing accordingly. The public perception of carbon neutrality needs to shift from something we have to do to something we get to do.
The race is on. Are you running yet?
David Steinbach – Global Chief Investment Officer and Co-Head of Investment Management at Hines