Q&A: How global cities could benefit from green dividends

One of the biggest challenges facing the real estate sector is how to cut its greenhouse gas (GHG) emissions and become more sustainable and energy efficient. The sector has one of the highest carbon footprints of any sector. It currently accounts for 30% of global annual GHG emissions and consumes around 40% of the world’s energy, according to the UN Environmental Programme.

The problem is further compounded by the fact that many older buildings are so inefficient and require significant capital expenditure to bring them up to the required environmental standard.  This capital outlay is likely to result in a negative return for many landlords and therefore, ‘dirty’ assets are likely to be with us for longer than anyone wants. Property investment expert Tom Walker thinks that one way of solving this conundrum is through a so-called green dividend.

What is a green dividend?

Tom Walker said: “Green dividends are a way of allowing investors to give a part of the dividend back to the company to be invested in sustainability projects. This allows a company to invest in a project that contributes to its environmental objectives, but which ordinarily would not meet its required financial returns. In the case of a real estate company, it would allow it to spend money on an older building to upgrade its energy system or install new windows, for example.

“Green dividends are a relatively new idea, the concept was developed by Alstria, a German office landlord. I think it’s a really interesting way of solving the problem of bringing older property assets back into use and increasing their efficiency.”

Is it not more environmentally friendly to just construct a new building?

Tom Walker said: “At present, the real estate industry’s focus is on operational carbon, which comes from the daily usage of a building, such as heating, lighting and cooling. This is different from embodied carbon, which refers to the emissions created in the process of manufacturing materials (such as concrete and steel) used to construct the building. By focusing on operational energy consumption, the owners of many buildings ignore the fact that new construction is contributing to the climate crisis rather than helping reduce its impact.

“By investing in an old building and making it more energy efficient you are not only cutting GHG emissions, but also helping to prevent even higher emissions because a new building is not being constructed to replace it. The payment of green dividends can help this accelerate this retro fitting process.”

Why would investors want to take their dividends in this way?

Tom Walker said: “It does assume a certain level of altruism, but we believe that many investors want their investments to make an impact, particularly in the area of climate change. The days when investors wanted to maximise their profits at any cost are thankfully behind us.

"By accepting a green dividend, investors are still able to make a strong return on their investment but at the same time take positive steps to cut emissions. The company is able to carry out projects that would otherwise be ignored and reduce the chance of any ‘stranded’ assets, whereby the cost of retrofitting the asset is greater than the value of the building.”

How do green dividends work in practice?

Tom Walker said: “For each dividend payment the company will elect a certain percentage that will be the ‘green dividend’.  The investor can then elect whether they would like to receive the full amount or are willing to ‘return’ the green dividend to the company which will then invest the money into a specific project which will improve the sustainability of the portfolio.”

What impact could green dividends have on global cities?

Tom Walker said: “There is a growing concern that the number of stranded assets is increasing as legislation requires landlords to make larger steps towards zero GHG emissions. For many landlords, the cost to comply with legislation may be too great. A green dividend will enable a faster transition to net zero carbon and result in higher quality assets that are not harmful to the environment.”

How many companies are likely to offer green dividends in the future?

Tom Walker said: “At this stage the only company we are aware of that offers the green dividend is Alstria.  However, we believe this innovative policy should be adopted by other players in the real estate market.  We will lobby the companies we speak to and hope to see a broader adoption in the future.”