Trillion-dollar shift needed to combat stranded asset risks

Huge amounts of capital combined with bold corporate leadership are crucial if the world is to reach its climate change targets and ward off a potentially disastrous storm for real estate assets, experts agreed at a panel discussion organised by Redevco.

The world is way off track on reaching its climate change greenhouse gas emissions reduction targets and implementing the UN’s sustainable development goals (SDGs), according to Marga Hoek, author of the book The Trillion Dollar Shift. 

Around 70% of so-called sustainable investment funds do not comply with the Paris Climate Accords, including 50% of funds specifically focused on the decarbonisation transition, added Hoek.

Investors should be frontrunners, embracing the move to a zero-carbon economy sooner rather than later. Investors have fiduciary duty to put their weight behind the carbon transition to reach zero-carbon emissions earlier than in 2050, as outlined by the Paris Accords, she said.

“There’s a lot of talk about the huge and staggering growth of ESG investments, which is going to be one third of all assets managed in the world by 2025,” Hoek said. “We also need to make sure that capital has a real impact in the real world to solve the real problems. We need three to four trillion dollars annually – equal to the GDP of Germany or Japan – to get the carbon transition done. That means investing the GDP of those countries year after year after year for almost 30 years.”

The good news for the frontrunners is that they will win in the end, she predicted: “The business case for the world and the business case for companies are moving much closer together. It’s been proven that sustainable investment and sustainable companies outperform unsustainable ones. Sustainable brands, for instance, grow 1.6 times faster. Many companies buy only sustainable brands, not only for moral reasons, but because it makes clear business sense. And the same is true of investments.”

Dutch portfolios at risk

Meanwhile, the panel heard that more than a third of Dutch real estate portfolios risk becoming stranded by 2030.

“Institutional investor clients are extremely concerned about being left with stranded investment assets in their portfolios stemming from climate change,” said Willemijn Verdegaal, co-head, climate and ESG solutions, of Ortec Finance.

‘We need three to four trillion dollars annually – equal to the GDP of Germany or Japan – to get the carbon transition done.’

Marga Hoek, author

“The Dutch central bank just came out with a report last month saying they expect between 35% to 45% of Dutch real estate portfolios are going to be stranded before 2030. The central bank also said from a physical risk perspective they’re worried that if a building is no longer resilient to physical risk it cannot get insurance, which may also cause an asset to be stranded,” she added.

Another key issue is when the market is going to price in these risks, Verdeegaal said. “I do think that some of the decarbonisation mitigation risk is priced in a little bit, but not enough. And physical risk is hardly priced in at all. So, there are these strong forces that will maybe lead to some investors taking their commitments and their risk management seriously.”

Ortec Finance undertakes scenario modelling to support investors in their investment decisions. “Typically, we work with institutional investors who invest across a broad range of different asset classes, one of them – and an important one – being real estate. When they look at their assets in the context of sustainability and climate, they mainly concentrate on the risk point of view and the question of how can I ensure that I maintain my returns even in the context of climate change? Thankfully most of our clients are signing up to net-zero carbon emission goals by 2050.”

Verdegaal added that the real estate investment industry should be well placed to benefit from the massive investments underway in decarbonisation and renewable energy technologies, because private markets in property, infrastructure, forestry, and agriculture are now widely seen as the areas where the greatest impact can be made compared with listed equities and fixed income.

‘10% of global emissions relates to what we call embodied upfront carbon – all the stuff that’s in materials… even before your tenant gets into a new build.’

James Drinkwater, Laudes Foundation

“Real estate, together with other physical infrastructure, is the biggest remaining asset class where action can be taken,” she pointed out. “So there’s going to be a huge demand for green infrastructure or green real estate because, frankly, where are asset owners going to go, especially in the current high-inflation environment?

“They’re looking for that kind of protection as well. So, if you are a real estate manager who can say, look, I’m really going net zero and I’m really dealing with locked-in physical risks and I’m able to bring you the data to show that I’m doing it so that you can convince the regulator, then you are solving your client’s headaches.”

Wood an accelerator

Building with wood could also accelerate the decarbonisation process within the real estate industry, said James Drinkwater, head of built environment at Laudes Foundation. “We develop about 180 million square metres of residential properties a year in Europe. If 80% of that was done in wood, it could sequester, because of the forests it comes from, around 55 million tonnes of CO2 per year from the atmosphere,” he said.

That is equivalent to half the annual emissions produced by Europe’s cement industry. “This is where quite a lot of these emissions are coming from. So, we have opportunities to choose low-carbon materials to start to address these wider climate impacts and start to look beyond to where the climate science says we need to go. There are ways for the real estate industry to actively contribute to removing a lot of this stuff from the atmosphere.”

Laudes is a philanthropic foundation that works with large industry coalitions, investors, developers and others in the built environment to set out very clear pathways to implementing the Paris Agreement through frameworks that look across the whole lifespan of a building.

Its Whole Life Carbon Roadmap that it co-financed, a common vision and agreed actions for achieving net-zero carbon in the construction, operation and demolition of buildings and infrastructure, has recently been adopted by the World Green Building Council.

‘Real estate, together with other physical infrastructure, is the biggest remaining asset class where action can be taken.’

Willemijn Verdegaal, Ortec Finance

Laudes also works with investors on tools to align their portfolio with the Paris Accord standards and it is looking at the social side of things as well. “This transition is going to be about climate, but also about taking society with us and really understanding what that means,” said Drinkwater.

The energy crisis sparked by the war in Ukraine is also leading to a more intensive focus on the energy performance of buildings and the carbon that’s emitted through energy use in our buildings, he pointed out. “We mustn’t forget that 28% of the world’s emissions relate to the way we operate our buildings. 10% of global emissions relates to what we call embodied upfront carbon – all the stuff that’s in materials… even before your tenant gets into a new build.”

Europe has a very clear global role to play in defining the taxonomy and rules while a market tool like CRREM has created a target to apply to a legal framework, Drinkwater said.  “These are the kind of tools we need to be promoting internationally. CRREM started off in Europe being used by the European Union and it is now starting to be used in Asia and increasingly by some players in the US.”

There is a real sense of urgency about climate change now, said Clemens Brenninkmeijer, head of sustainable business operations at Redevco. “We are aiming for net-zero carbon by 2040 because we felt the World Building Council target of 2050 was too far away – the urgency must be higher. So, in the past year, we’ve established a science-based target to reduce emissions by 50% by 2030 en route to our net-zero target by 2040.”

The task facing real estate is huge, but “we must all do our bit, we must take responsibility. And every little bit that we can do does count,” said Brenninkmeijer. “Over the past 15 years we’ve already been working on futureproofing and improving the energy performance of our assets using BREEAM as a methodology to guide us on our way.”

Investors waking up to sustainability

Getting investor clients on board is an important consideration, he added. “Of course, we must ensure that all our investors are happy with what we’re doing on their behalf. But we’re also convinced that ultimately, if we don’t do it, five or 10 years down the line the entire investment community is ultimately going to wake up and say, this really isn’t sustainable.”

‘We’ve established a science-based target to reduce emissions by 50% by 2030 en route to our net-zero target by 2040.’

Clemens Brenninkmeijer, Redevco

Climate change is now embedded in Redevco’s strategic objectives, asset management and asset development activities. “We want to make deliberate choices every day at every intervention moment with our tenants, with our supply chain, to drive down not just the operational emissions, but also to make deliberate choices around materials and so on, to drive down the embodied carbon upfront emissions,” said Brenninkmeijer. “It’s a learning journey. We can’t do this immediately, everywhere, and with all assets at the same time.

Wider impacts

Redevco is also looking to have an impact beyond the level of an individual asset to the broader community, he said. “We see a huge opportunity for helping cities to transition to a more sustainable and a more equitable environment where people want to live, work, play, shop and enjoy life.
We cannot do it alone, so we must find partners and fellow stakeholders to work
on things together,” added Brenninkmeijer. “And I think we are starting to see that – the asset management and investment management community do get it. They see that there is value in working on projects together to look at regeneration and optimisation of neighbourhoods.”

Redevco already has a couple of great projects in the pipeline, for example in the UK, he added. “We’re taking an old shopping centre and transforming it into a bit of a district with residential and some food and beverage, some leisure to optimise the retail offer and maybe even some other services to create an area that people will adopt as their new community.

“You can make one asset in a street perfectly climate resilient, but it’s also about the rest of the buildings in the neighbourhood. If the community around it is derelict, then that asset is not going to sustain its value. It’s not easy, but you just must do it.”