While property investors are not yet considering the carbon in their investments, buyers will increasingly take carbon into account when underwriting assets in future, members heard at the PERE Network's Decarbonisation Forum in London.
Klaus Mathiesen, co-CEO and partner at NREP-backed investment firm Urban Partners, told a panel of asset managers that his firm had not yet seen buyer preference for low-carbon assets because it had been very difficult for real estate investors to measure carbon emissions in a relatively “disjointed and fragmented” database.
But as industry awareness around decarbonization continues to grow, some investors expect carbon emissions to become increasingly factored into investment decision-making.
“I don't see a green premium for embodied carbon. I see a green premium or brown discount for operational carbon and energy efficiency,” said Annachiara Turciano, head of ESG and communications at Swedish real estate investment firm Slättö, who spoke on the asset manager panel. With that in mind, Turciano believes investors should start thinking about embodied carbon, as a green premium for assets with lower embodied carbon levels will be introduced in the future.
Data Challenge
A big challenge with carbon emissions is the lack of available data. “It’s hard to have a good database on existing buildings that are in the operational phase, and from my perspective, it’s even harder to get data on carbon emissions,” said Diana Lewis, head of ESG integration for alternative assets at German real estate company MEAG. Like Mathiesen, she noted that the company doesn’t yet factor carbon emissions into its investment decisions because of the difficulty of measuring this type of carbon emissions.
Speaking on the event's innovation panel, Rebecca Pearce, co-founder and director of real estate consultancy Territorio, explained that different methodologies, tools and approaches to disclosing information for individual products make standardising carbon emissions data extremely difficult.
According to Eric Landry, GRESB's director of climate change, without a standardized system, it's very difficult to interpret results from the many different studies that have been published over the years. “They're talking about different life cycle stages, they're talking about different building floors, and depending on the combination of the two, they could be talking about something completely different,” Landry explained.
In addition to the complexities of standardizing and interpreting the data, data collection on embodied carbon is also very limited, according to Nagadarsan Suresh, project manager at the Carbon Accounting and Finance Partnership, an industry group focused on greenhouse gas emissions.
For example, just eight countries participated in the guidance the organization published in September 2023 on how to measure carbon emissions at different stages of a building's life cycle. All eight countries that contributed to the guidance were European: the UK, the Netherlands, Belgium, Germany, Austria, Switzerland, Denmark and Sweden.
“Similarly, there are significant regional variations,” Suresh added.
Change is underway
But Mathiesen said regulation will be the main driver, and reforms are already underway to make carbon emissions a bigger focus for the industry. “We see the regulatory environment changing,” he said. In Copenhagen, Denmark, for example, local building codes will require properties to have lower carbon emissions in the coming years.
According to Pierce, embodied carbon may also weigh on real estate investment financing in the future. “Who knows when banks will start to look and ask questions about what the embodied carbon is in the buildings they're going to build or the assets they're going to buy and improve,” he said. As banks increasingly incorporate ESG credentials into their lending activities, Pierce believes real estate investors should get ahead of the curve by considering embodied carbon in their investments.
But property owners can take relatively simple steps to reduce the amount of carbon contained in their properties, according to Thomas Stanczak, director of sustainability at real estate investment firm Stoneweg US.
For example, investors can focus on “thoughtful, effective and durable use” of steel and concrete, which Stanczak says can reduce emissions by up to 30 percent. Additionally, investors can do carbon accounting research by looking at whether a building uses recycled steel and low-carbon concrete.
“That's pretty low compared to the overall cost of the development and basically a fair check on the cost of materials,” Stanczak said.
Torciano also agreed that many of the measures aimed at reducing carbon emissions are costless: “It's about building efficiently and choosing the best technologies and materials currently available. There's often no price difference, but there is a difference in CO2 emissions,” she said.