Buildings are responsible for approximately 40% of global energy-related carbon emissions. According to the International Panel on Climate Change (IPCC), without tackling real estate no attempt to hit the IPCC target – which would require carbon emissions to peak in 2025 – is realistic. The built environment must almost completely decarbonise by 2050. This paper sets out how investors can quantify the carbon footprint of real estate and reduce its impact.
Defining net zero carbon boundaries
We use the UK’s Better Buildings Partnership (BBP) net zero carbon definition, having been an inaugural signatory of the BBP Climate Commitment in 2019. Schroders Capital (SC) real estate takes a holistic approach to tackle “…the carbon emissions emitted as a result of all activities associated with the development, ownership and servicing of a building”. We are looking to devise decarbonization pathways across our portfolios to ensure emissions are reduced to zero or negative.
Understanding what is needed to achieve net zero carbon
The first step is to determine the scope of carbon reduction efforts, which includes addressing both operational (landlord and tenant) and embodied carbon (ADD) across the real estate investment life cycle. An energy use intensity reduction approach is employed, focusing on energy-hungry operations and optimising energy demand.
This is followed by tackling greenhouse gas emissions intensity through on-site and/or offsite renewable energy supply.
Net zero carbon achievement involves eliminating emissions:
Scope 1, emissions from fuel combustion and refrigerant use in real estate assets;
Scope 2, indirect emissions from purchased electricity, steam, heat, and cooling consumed within landlord-controlled spaces; and
Scope 3, all other indirect emissions related to water, deliveries, commuting, business travel, waste, food, construction materials, and tenant energy consumption.
Once the pathway and scope for decarbonization are established, the implementation step involves a hierarchy of actions based on an "asset first" analysis, with performance benchmarks to compare progress globally.
Baseline emissions are determined using combined landlord and tenant energy consumption data, which is updated to account for grid decarbonisation and portfolio changes.
Energy demand reduction potential is assessed as a priority, and refurbishment opportunities are considered to adjust carbon/energy intensity projections.
Carbon offsetting through onsite or offsite renewable energy generation will also considered as part of our current analysis. As a last resort carbon offsetting will also be considered to tackle any residual greenhouse gas emissions.
To ensure effective decarbonization within the given time constraints, benchmarking is crucial.
We utilise the Carbon Risk Real Estate Monitor to assess the operational energy and carbon performance of assets and portfolios against relevant CRREM sector and region pathways, such as UK office or French retail high street. This helps identify areas for improvement and mitigate risks associated with the transition to net zero carbon. The Carbon Risk Real Estate Monitor tool provides transparent, science-based decarbonization pathways aligned with the Paris Climate Goals, with a focus on limiting global temperature rise to 1.5°C. It requires data on a building's energy consumption and associated greenhouse gas emissions for both landlord and tenant spaces.
“Asset stranding” risk, and why benchmarking helps
One of the key concerns in implementing net zero carbon pathways is the risk of asset stranding.
The Carbon Risk Real Estate Monitor sector pathways provide guidance on the desired carbon and energy intensity of assets in each year. If an asset exceeds the pathway, it is at risk of becoming “stranded”, potentially becoming inoperative due to failure to meet regulatory requirements.
The impact of energy efficiency improvements can be modelled to analyse the effect on stranding year and carbon performance at both asset and portfolio levels. Our team utilises "portfolio value at risk" diagrams to illustrate the percentage of assets deemed "stranded" in each year, based on their projected carbon intensity compared to the decarbonization pathway.
This helps assess the cumulative floor area or Gross Asset Value (GAV) of assets at risk of stranding over time.
Building future success
Our approach is rigorous and effective. Even so, we're always looking to improve. We strive to increase the accuracy of our analysis using actual data from the buildings we own, manage, and operate where possible and seek to analyse whole building (both landlord and tenant) data.
We seek to improve tenant engagement to grow tenant collaboration, aligning our ambitions, and collect data across our real estate portfolio. As always, technology and digital transformation can help drive portfolio management and assist decarbonisation.
Our multi-step net zero carbon process includes auditing our performance and revisit targets.
We also seek to measure, monitor, and improve our performance against whole life-cycle net zero carbon targets to also include wider-scope net zero carbon, beyond just operational energy and carbon.
To read the full report click on the link here.