Progress towards meeting net-zero targets is advancing, with market leading listed property companies demonstrating robust reporting standards, and a general consensus that doing nothing is no longer an option.
But there is still a need for a coordinated effort to bring the real estate sector in line with the Paris Agreement.
However, there is not yet a standardised methodology for the sector to measure its full scope of emissions from embodied carbon associated with modernisation programmes.
Although some listed property companies demonstrate advanced carbon reporting standards in their annual sustainability reports, there is a lack of critical carbon disclosures in part of the sector.
Why are embodied carbon disclosures important?
Embodied carbon disclosures will be crucial in highlighting the emissions that have previously been too hard to report.
Currently, the building sector sends 13% of materials delivered to a construction site straight to landfills without ever being used, the World GBC highlights.
More advanced reporting standards will help rid the industry of such inefficiencies as we continue to build for the future.
A large proportion of the operational emissions of an asset are derived from heating and cooling systems that, in many countries, generate power from fossil fuels.
To counteract operational emissions, many companies are investing in more efficient plant and equipment and, where the energy is controlled, are looking to procure the required mega-wattage from renewable sources.
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The International Energy Agency estimates that direct building CO2 emissions would need to decrease by 50% and indirect building sector emissions decline through a reduction of 60% in power generation emissions by 2030 to meet 2050 targets.
Building sector emissions would need to fall by around 6% per year from 2020 to 2030. For comparison, the global energy sector CO2 emissions decreased by 7% during the pandemic.
While much attention is focused on new, state-of-the-art buildings that achieve the highest sustainability certifications, 70% of buildings stock today will still be here in 2050, according to property services company Jones Lang LaSalle.
This projected glut of building stock highlights the need to repurpose spaces, retrofit older buildings and refurbish in line with World GBC guidelines.
Combined with this, the embodied carbon from building modernisation needs to be measured, target reductions put in place and all resulting emissions fully offset.
Is there an investment opportunity?
ESG alignment, particularly in net-zero efforts, will actually improve long-term shareholder returns.
The World GBC's recent Beyond the Business Case report found that leasing activity for new grade-A office buildings in central London, with a BREEAM rating of "very good" or higher, achieved on average 10% higher rents than those without a rating.
So called leasing "velocity" also improved, with lower vacancy rates of 7% - compared to 20% - for those rated "very good" 24 months after completion.
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It is becoming increasingly clear that with the rapid expansion of sustainability in real estate investment, the value of your asset - no matter where it is or what type - will be affected by increased obsolescence or stranding of properties that do not meet occupational, investor and legislative sustainability standards.
Buildings with better efficiency ratings will continue to attract higher rents, will typically have lower running costs and will be more appealing to tenants.
This should continue to drive performance over the long term.
Stephen Hayes is head of global property securities at First Sentier Investors