(Image courtesy: Triovest)

Turn the clock back to 2018, and the commercial real estate (CRE) industry in Canada had not yet systematically started to use Environmental, Social, and Governance (ESG) investment approaches and include climate risk assessments in their due diligence practices.

Today, ESG factors have moved to the forefront of our decision-making processes and are driving visible transformation across all industries – CRE included. It is now widely accepted that ESG investment significantly decreases downside risk. ESG has become an important indicator of how an asset performs in worst-case scenarios, because of asset resiliency to the impact of climate change and to political, regulatory, and reputation risks.

The need to manage ESG risks and opportunities is playing a significant role throughout the investment lifecycle of CRE assets from development and acquisition, to operation and maintenance, and redevelopment or disposition. There are some powerful drivers accelerating growth of ESG investing, such as a greater focus on net zero carbon operation and climate resiliency in a post-COVID-19 market. Simply maintaining the status quo is no longer sufficient. The market is shifting from traditional ways of doing business to a more sustainable approach that considers an investment’s impact on corporate ESG performance and achieving greenhouse gas (GHG) emissions reduction targets.

Although climate change is a global issue, the policies, regulations, and best practices that influence corporate ESG practices can be vastly different depending on the country and region. In particular, there is a fast-moving regulatory landscape shaping mandatory decarbonization in Canada. The recently published 2030 Emissions Reduction Plan aims to provide an achievable roadmap that outlines a sector-by-sector path for Canada to reach its emissions reduction target of 40 percent below 2005 levels by 2030 and net zero emissions by 2050.

Recent activity in the United States is another indicator of changes on the horizon. The U.S. government has proposed new rules that would require mandatory reporting on scope 1, 2, and possibly the more complex scope 3 emissions, as well as disclosure of climate-related financial information in line with the four overarching pillars of the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. The rule would broadly impact companies traded on U.S. stock exchanges, but it will be eventually applicable to privately owned organizations as well. The bottom line is that there is a more pressing need for the CRE industry to establish a clear and integrated corporate approach to climate change that seamlessly connects strategy, risk, and governance.

Net Zero: Navigating transition planning

Despite the rapidly changing regulatory landscape in Canada, and globally, there are still some big questions that need to be answered. What are the strategies and best practices needed to achieve decarbonization targets and satisfy regulatory requirements? Affordability is the most overlooked component of sustainable development. To what extent can the cost of a deep retrofit be absorbed by the tenants, and how might landlords need to change their business models and investment strategies? Achieving net zero also will require electrification of building heating systems. What regulatory changes are required to accelerate electrification where continued economic and population growth will drive consumption higher, while the energy industry is going through transition? How can energy efficiency improvements and on-site renewable generation be targeted for specific asset classes to improve cost-effectiveness? How can buildings utilize energy efficiency as a resource combined with smart technologies to deliver greater affordability and higher performance to our future homes and commercial buildings?

These are all difficult questions, and the CRE industry is working towards solutions. Achieving net zero by 2050 requires technological innovation to reduce the costs of energy systems transformation, and this transformation is going to take time and investment. It is not going to happen overnight. The energy transition requires a substantial investment, and if it is not planned and implemented orderly, against a background of relative economic and social stability, tenants and ratepayers will face an affordability crisis exacerbated by energy inflation.

The most reasonable approach in achieving Canada’s decarbonization targets is to understand that managing costs and return on investment is a balancing act that requires customizing solutions for individual clients and assets. It requires innovative ideas and new ways of thinking. Asset managers need to be equipped with technology solutions that enable them to measure, manage, and monitor their ESG performance to help them make informed investment decisions. Triovest firmly believes digitization is an enabling medium to advance decarbonization, and more broadly, that technological innovation is an important factor in driving a more equitable, sustainable, and accessible economy. We also need to put a price on resiliency and consider negative impacts on property values, insurance premiums, and fines for non-compliance, not to mention leasing challenges and the risk of holding obsolete, stranded assets.

The publication “Five Steps to Net Zero Energy” by National Grid and the New Buildings Institute outlines what can be accomplished for asset managers looking to get their buildings to net zero energy:

1. Set a baseline for buildings: Start by analyzing energy and carbon performance and compare data against benchmarks to find out how much energy/carbon is typical for buildings of your type and use.

2. Set performance goals: With the assessment information, you can determine what energy and carbon reduction goals to set and how to reach them.

3. Scope the retrofit by looking at similar projects and buildings.

4. Implement the retrofit: You may consider timing and realities of the building, ownership, tenants, mandates, and market conditions when implementing.

5. Continuous commissioning: A net zero energy building needs to be operated as such, which begins with design. Include tenants, operators, and contractors when working with designers on how the building and its spaces are used and continue to include automated recommissioning going forward.

The Bottom Line

There is no such thing as one size fits all. The path to net zero carbon operation will not be the same for every asset or every jurisdiction. It requires tailored solutions. Deep retrofit can be a costly process upfront, but upon completion, building owners will start to see immediate operational savings and increased asset valuation. There are costs associated with decarbonization, but the cost of not taking an action is far greater.

Identifying decarbonization solutions requires commitment, collaboration, and engagement with owners, investors, and building occupants. Government should significantly increase their spending on green research and development to ensure the CRE industry achieves technological advancement that makes energy transition as smooth and cost effective as possible. Cost and reputational implications for an organization that is not doing business sustainably and mitigating future risks are significant. Staying ahead of the curve in today’s fast-moving ESG market requires working with strong partners who can embrace innovation, accept change, and challenge the status quo.