The real estate industry plays a key role in the fight against climate change. Responsible for over a third of global carbon emissions, the sector is under increasing pressure to decarbonize.
Decarbonizing the real estate sector is a real opportunity. Reducing greenhouse gas emissions and operating expenses can help increase property values, capture tax incentives and open pathways to sustainable investment capital — all undeniable benefits. Research by JLL also shows that tenants would pay more for premium accommodations, which can include buildings certified as carbon neutral.
However, navigating the net zero journey is a major challenge for most companies in the sector.
This brief guide delves into the role of carbon offsets in supporting that journey.
The urgent need for decarbonization
Current research paints a concerning picture of the real estate sector’s environmental impact. The United Nations estimates that buildings are responsible for 37% of global carbon emissions.
Industry research, however, reveals a troubling gap: only 15% of global real estate assets are aligned with the 1.5°C target set by the Paris Agreement. This highlights an urgent need to increase ambition and comprehensively decarbonize the entire sector.
A crucial first step is understanding the complex landscape of regulatory and disclosure requirements.Understanding and adhering to these varied requirements is crucial for the global real estate industry’s march towards net zero.
The table below is just a snapshot of the patchwork of different jurisdictions and frameworks that are applicable.
|EU Taxonomy for Sustainable Activities:
|The EU Taxonomy for Sustainable Activities provides a classification system for environmentally sustainable economic activities, impacting investment and development decisions in the real estate sector.
|Energy Performance Certificates (EPCs)
|In the UK and Europe, EPCs are mandatory, rating the energy efficiency of buildings and impacting their market value and compliance status.
|LEED Certification in the United States
|The Leadership in Energy and Environmental Design (LEED) program sets standards for environmentally responsible and energy-efficient buildings.
|Australia’s NABERS Program
|The National Australian Built Environment Rating System (NABERS) measures and rates the environmental performance of Australian buildings.
|Green Building Standards in Asia
|Countries like Singapore and China are implementing their green building standards, influencing real estate development and operations.
Disclosure and compliance
A second step is navigating the various disclosure and compliance regimes. Here, engagement in sustainability regimes such as CDP, TCFD, and GRI is no longer optional but a critical component of maintaining investor confidence and regulatory compliance.
Indices and benchmarks for the real estate industry such as Global Real Estate Sustainability Benchmark (GRESB) and European Public Real Estate Association (ERPA) highlight the growing significance of robust and transparent sustainability reporting in the real estate industry.
And then comes the hard part. After understanding the ‘rules of the game’ (i.e regulation, disclosure, and compliance), companies have to develop strategies, set targets, and actually do the tough work of decarbonizing. Often this is done with the support of an in-house sustainability team or external consultants.
CBRE, an industry-leader, provides a helpful blueprint here:
- Phase 1: Establish your decarbonization strategy
- Phase 2: Continuously improve energy efficiency
- Phase 3: Electrify real estate and transportation
- Phase 4: Transition to renewable energy and carbon-free fuels
- Phase 5: Decarbonize supply chains
- Phase 6: Off-setting your carbon balance
Books can be written about the intricacies of each of these steps. The rest of this blog will however focus on the last step: off-setting your carbon balance.
The role of carbon offsetting in real estate
No matter how much effort companies make to reduce their emissions, there will still be a proportion that cannot be reduced. That’s where carbon off-setting comes into play as a powerful tool in the real estate industry’s transition to net zero.
An important caveat here is that offsetting must always be the last step. This is a position supported by industry standard-setters, such as the UK Green Building Council.
In the real estate industry, the hardest-to-abate emissions typically refers to ‘embodied carbon’: the emissions associated with manufacturing, transportation, and construction of building materials, as well as building disposal. Embodied accounts for 11% of total greenhouse gas emissions (see ULI’s report for more information). That leaves ample room for off-setting.
If you’re new to the offsetting world and want to upskill, please refer to Thallo’s Offsetting and the Voluntary Carbon Market. All of the principles and steps described there apply to the real estate sector.
There are however three steps that we recommend to our real estate clients:
- Build portfolios. Portfolios allow your organization to balance risk across projects, maximize impact, and balance out costs across project types.
- Find offset projects that align with your ESG strategy. From projects that create net-zero cement to bio-based construction materials, there are hundreds of project types linked to the built environment that can maximize your sustainability story.
- Transition from avoidance to removals over time. Given the nature of real-estate’s effect on the environment, it is especially important to invest in high-durability carbon removals. Doing so over time can balance out long-term costs and ensure offsetting remains affordable.
The real estate industry carries a collective responsibility of the real estate sector in the global effort to combat climate change. Decarbonizing represents a huge challenge – but also an opportunity.
Carbon offsetting can play an important role in climate strategies for real estate companies. But it has to be done right. Reach out now if you want to raise the ambition and jump-start the net zero trajectory of you or your clients.