EPRA CEO Dominique Moerenhout explains how the listed real estate sector is combatting climate change.
Over the course of the last few years, countries all around Europe have set ambitious net zero targets to tackle the climate crisis. However, these efforts will be wasted if we do not focus on how to create a more sustainable real estate sector, which currently contributes to 40% of energy consumption and 36% of all carbon emissions in the EU.
Fortunately, the industry is already making bold strides towards reducing its climate impact and much of this is backed by the listed real estate sector. Listed real estate companies have raised over €40 billion through green bonds and are using this investment to finance a more sustainable built environment.
The FTSE Nareit Developed Europe Index, which covers 108 companies with a combined market cap of over €240 billion, was responsible for 76% of this sum, over 50% of which was raised between 2021-2022, with the number set to grow by the end of the year.
Such investments are evidence of the ESG objectives which sit at the heart of much of the listed sector’s strategies and governance to help ensure the impact of investments are scrutinised against rigorous environmental criteria.
These businesses play a huge role in the construction of new real estate across the continent – and are working to ensure that new buildings meet the highest environmental standards as they continue to find their voice on green issues and push for net zero and decarbonisation.
A whole-life approach
However, when looking at a whole-life carbon approach to help buildings meet the EU’s net zero target by 2050, efficient building only has a 25% carbon reduction potential. Conversely, retrofitting existing buildings has an 80% carbon reduction potential. As such, investors are beginning to look at renovating assets as one of the most effective ways for the real estate sector to become more environmentally friendly. Nonetheless, there needs to be a significant increase in the pace of development as currently, it is estimated that whilst around 85% of existing buildings will still be around in 2050, only 1% undergo environmental renovation annually.
Moreover, in order to both build and retrofit stock, it is vital to have access to the most up-to-date and efficient materials and technology available. Many of the most innovative solutions to improving the sustainability of the built environment, come from young, agile businesses which often lack the funding to scale and push boundaries. Investment from REITs, however, can help bring these ideas to fruition.
For example, recent years have seen a significant rise in investment in PropTech, ventures and technologies which are working to transform the real estate industry based on the rapidly evolving digital landscape. Many of these companies are sustainability focused, running the gamut from environmentally friendly construction to updating building management systems using AI technology to map energy usage and improve those metrics. Whilst the PropTech sector is still in its relative infancy, it is growing quickly and will play an important role in helping the real estate sector meet its goal of cutting carbon emissions by 55% by 2030.
Regulating and incentivising best practice
Regulation is also an essential part of achieving net zero targets. Currently, the European Union’s Energy Performance of Buildings Directive (EPBD) supports the incorporation of long-term building renovation strategies working towards the decarbonisation of buildings by 2050. However, the proposed revision of the EPBD (which will be voted on in December this year) suggests the establishment of minimum energy performance standards (MEPS), requiring the worst energy performant (non-residential) buildings to reach at least class F by 2030 and class E by 2033. Following the outbreak of the war in Ukraine, the European Commission issued additional proposals, such as obliging new buildings to be solar ready and to install solar energy installations on buildings.
Incentivisation must also come in hand in hand with regulation if we are to drive real progress, which is why many European governments offer subsidised grants to make energy-saving updates to buildings. The recently introduced EU Taxonomy scheme also makes it possible for investors to gain a greater understanding of which investments contribute towards environmental objectives and reorient their capital towards more sustainable technologies and businesses. However, at present the renovation of existing stock is not equally incentivised to attract green capital as the development of new buildings and we must work to incorporate renovation and a whole life carbon approach into the EU Taxonomy’s DNA if we are to align with European climate objectives.
Taking bold action
Of course, none of this will be possible if asset owners do not take decisive action to invest in REITs with a green portfolio. Thanks to the EU Taxonomy, REITs can accurately assess their green credentials and if asset owners wish to make a positive impact, they must invest their money in REITs that are working towards sustainable targets.
Whilst there is a moral imperative to become more sustainable, it is also becoming increasingly financially beneficial. We are currently witnessing the rise of the ‘green premium’, a result of landlords and tenants being prepared to pay more for higher environmental standards, leading to greater yields and the subsequent loss in value of buildings failing to meet the mark. Making green updates to buildings also insures them against future disruption. The move away from fossil fuels and the rising cost of energy are trends which are here to stay, and buildings that rely on renewable energy and smart energy reduction methods will be more sustainable both financially and environmentally in the long run.
It remains to be seen whether the real estate industry will be able to meet its carbon targets over the next decade. However, if the current appetite for sustainability continues, we are bound to see significant and exciting progress in the sector, with forward-thinking initiatives and positive funding helping us all build for a better tomorrow.
EPRA CEO Dominique Moerenhout explains how the listed real estate sector is combatting climate change.
Over the course of the last few years, countries all around Europe have set ambitious net zero targets to tackle the climate crisis. However, these efforts will be wasted if we do not focus on how to create a more sustainable real estate sector, which currently contributes to 40% of energy consumption and 36% of all carbon emissions in the EU.
Fortunately, the industry is already making bold strides towards reducing its climate impact and much of this is backed by the listed real estate sector. Listed real estate companies have raised over €40 billion through green bonds and are using this investment to finance a more sustainable built environment.
The FTSE Nareit Developed Europe Index, which covers 108 companies with a combined market cap of over €240 billion, was responsible for 76% of this sum, over 50% of which was raised between 2021-2022, with the number set to grow by the end of the year.
Such investments are evidence of the ESG objectives which sit at the heart of much of the listed sector’s strategies and governance to help ensure the impact of investments are scrutinised against rigorous environmental criteria.
These businesses play a huge role in the construction of new real estate across the continent – and are working to ensure that new buildings meet the highest environmental standards as they continue to find their voice on green issues and push for net zero and decarbonisation.
A whole-life approach
However, when looking at a whole-life carbon approach to help buildings meet the EU’s net zero target by 2050, efficient building only has a 25% carbon reduction potential. Conversely, retrofitting existing buildings has an 80% carbon reduction potential. As such, investors are beginning to look at renovating assets as one of the most effective ways for the real estate sector to become more environmentally friendly. Nonetheless, there needs to be a significant increase in the pace of development as currently, it is estimated that whilst around 85% of existing buildings will still be around in 2050, only 1% undergo environmental renovation annually.
Moreover, in order to both build and retrofit stock, it is vital to have access to the most up-to-date and efficient materials and technology available. Many of the most innovative solutions to improving the sustainability of the built environment, come from young, agile businesses which often lack the funding to scale and push boundaries. Investment from REITs, however, can help bring these ideas to fruition.
For example, recent years have seen a significant rise in investment in PropTech, ventures and technologies which are working to transform the real estate industry based on the rapidly evolving digital landscape. Many of these companies are sustainability focused, running the gamut from environmentally friendly construction to updating building management systems using AI technology to map energy usage and improve those metrics. Whilst the PropTech sector is still in its relative infancy, it is growing quickly and will play an important role in helping the real estate sector meet its goal of cutting carbon emissions by 55% by 2030.
Regulating and incentivising best practice
Regulation is also an essential part of achieving net zero targets. Currently, the European Union’s Energy Performance of Buildings Directive (EPBD) supports the incorporation of long-term building renovation strategies working towards the decarbonisation of buildings by 2050. However, the proposed revision of the EPBD (which will be voted on in December this year) suggests the establishment of minimum energy performance standards (MEPS), requiring the worst energy performant (non-residential) buildings to reach at least class F by 2030 and class E by 2033. Following the outbreak of the war in Ukraine, the European Commission issued additional proposals, such as obliging new buildings to be solar ready and to install solar energy installations on buildings.
Incentivisation must also come in hand in hand with regulation if we are to drive real progress, which is why many European governments offer subsidised grants to make energy-saving updates to buildings. The recently introduced EU Taxonomy scheme also makes it possible for investors to gain a greater understanding of which investments contribute towards environmental objectives and reorient their capital towards more sustainable technologies and businesses. However, at present the renovation of existing stock is not equally incentivised to attract green capital as the development of new buildings and we must work to incorporate renovation and a whole life carbon approach into the EU Taxonomy’s DNA if we are to align with European climate objectives.
Taking bold action
Of course, none of this will be possible if asset owners do not take decisive action to invest in REITs with a green portfolio. Thanks to the EU Taxonomy, REITs can accurately assess their green credentials and if asset owners wish to make a positive impact, they must invest their money in REITs that are working towards sustainable targets.
Whilst there is a moral imperative to become more sustainable, it is also becoming increasingly financially beneficial. We are currently witnessing the rise of the ‘green premium’, a result of landlords and tenants being prepared to pay more for higher environmental standards, leading to greater yields and the subsequent loss in value of buildings failing to meet the mark. Making green updates to buildings also insures them against future disruption. The move away from fossil fuels and the rising cost of energy are trends which are here to stay, and buildings that rely on renewable energy and smart energy reduction methods will be more sustainable both financially and environmentally in the long run.
It remains to be seen whether the real estate industry will be able to meet its carbon targets over the next decade. However, if the current appetite for sustainability continues, we are bound to see significant and exciting progress in the sector, with forward-thinking initiatives and positive funding helping us all build for a better tomorrow.
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