The United Nations reports that the global property sector accounts for nearly 40% of all carbon dioxide emissions and therefore, has a critical contribution to meeting global Net Zero commitments. The Real Estate sector faces real transition risk as economies seek to de-carbonise. This implies taking a pro-active stance of developing and communicating credible transition plans. The publication of a draft disclosure framework and implementation guidance for consultation by the Transition Plan Taskforce established by the UK Government is a call to action for the sector.
The effects of climate change are increasingly being felt around the world and increasing effort is being put into mitigating the physical impacts of natural hazards such as flooding, windstorm and wildfires. Significant efforts are also being put into how to construct lesson energy and resource intensive buildings. However, there remains a very significant ‘transition risk’ with which the sector is faced. Transition risks arise from changes in government policy and regulation, technological disruptions as well as, market effects and reputational exposures.
Reducing emissions and achieving Net Zero is crucial to limit global warming to 1.5°C above pre-industrial levels and avoid the most catastrophic impacts of climate change. An increasing number of organisations have now realised the strategic role that Net Zero plays in addressing climate change, and are working to align their business plans and activities with a Net Zero path.
To achieve the UK Government’s climate objectives and reach Net Zero by 2050, the sector will require to eliminate all its carbon emissions by the same year. This implies the need to move beyond target setting, into action.
The sector does not operate in a vacuum, and as tenants grapple with their own Net Zero plans, landlords are being increasingly asked to provide data on energy efficiency and greenhouse gas emissions. Having set their baseline performance, these tenant organisations will be working on their transition plans and will be looking for partnership from real estate providers. Large institutional investors in real estate such as, financial institutions will also be caught by commitments they have made to initiatives such as the United Nations Principles for Responsible Investment. Without a plan to improve the performance of existing property portfolios, organisations run the risk of tenants forcing the issue by relocating to higher standard facilities and creating a bank of potentially stranded assets that can no longer be let on economic terms.
There is a business case for responding now. Real estate providers who help organisations meet their emission reduction targets will realise that tenants will make greater investments in climate-ready assets because of the long-term savings from mitigating climate issues as well as associated regulatory and reputational risks. There should also be operational savings in the longer term from reducing maintenance, utility and insurance costs from greater physical resilience.
An increasing number of organisations are acting to achieve a more sustainable business model.
For a successful transition to Net Zero, organisations need to coordinate a series of activities that can be summarised in the following building blocks.
Climate responsiveness may be a means of property providers differentiating themselves, especially if they provide reporting systems to support tenants, lenders and investors in meeting their own disclosure requirements.
The reality is that the majority of buildings that will exist in 2050 have already been built. Despite efforts to move to renewable sources of electricity, the energy efficiency of buildings will need to be tackled, hence retrofitting and upgrading existing buildings has to be significant part of the answer for the industry as a whole.
The good news is that the UK Transition Plan Taskforce has laid out a route map for action, translating Net Zero ambitions into implementation strategies built on measurement of progress against key metrics, supported by strong governance and engagement plans.
It is important to note that the Taskforce is taking a broad view of how this should be implemented and reporting on, and not just focusing on the climate impact metrics themselves. There is an expectation that organisations ensure that the Board is involved in oversight and governance, and clear accountabilities are established across the organisation, linked to incentives and remuneration. The guidance recognises the importance of education and creating the right culture to ensure these changes are embraced and delivered over the long-term. Engagement within the sector and the extended value chain is recognised as important, given that no single organisation can act alone in this regard.
The Taskforce has recommended that stand-alone transition plan reports are published by organisations every three years, with annual progress updates being integrated into mainstream reporting, in the form of TCFD disclosures within annual reports or a stand-alone sustainability report. Inevitably with time these additional reports will be scrutinised by stakeholders and pressure will increase for independent verification or assurance over the veracity of disclosures.
Our experience to date of working with clients is that many organisations are starting to think about the implications of establishing transition plans and looking to rehearse the process internally before these new requirements come into force more formally. Property organisations are likely therefore to be approached by their tenants and investors, who are clearly on the same journey.
Taking a proactive stance to Net Zero planning and communicating a credible transition plan can provide competitive advantage. Over time, failing to grapple with this issue may significantly impact on the viability of property portfolios. Pressure from tenants and investors will only increase with time as they are required to report on their own transition plans.
We are currently helping clients to assess their approach to climate transition and helping them develop and communicate credible transition plans. Please get in touch with Alex Hindson or your usual Crowe contact for more information.