Murray Birt, Lead ESG Strategist at DWS, explains that energy efficiency is an underrepresented but vital component in meeting climate and energy security goals.
Research by the International Energy Agency (IEA) shows that a major push on energy efficiency could save the equivalent of China’s annual energy usage, as well as 33% of the total additional net zero emission reductions required by 2030.
“Without energy efficiency we will not be able to meet climate goals and will have much higher risks for our energy security,” Murray Birt, Lead ESG Strategist at DWS tells ESG Investor. In order to avoid gas shortages next winter, the IEA also said a major focus on energy efficiency is required in addition to investment in renewables.
Despite the importance of energy efficiency, Birt says that it is an area that is often taken for granted and is still underrepresented, particularly in asset classes such as infrastructure and real estate.
This is due, in part, to renovations of commercial and residential property often being relatively small in terms of project size, as well as involving multiple measures which can take time and delay returns on investment, he says.
But rising energy prices, driven by the ongoing war in Ukraine, is seeing policymakers and investors’ concerns around energy efficiency in infrastructure and real estate beginning to rise up the agenda.
Net zero guidance
Birt co-led the Institutional Investors Group on Climate Change’s (IIGCC) work to develop net zero guidance for real estate.
At the heart of that guidance is a tool called the Carbon Risk Real Estate Monitor (CCREM) which has been funded by the EU and a number of major institutional investors, including the Dutch pension funds APG, PGGM and Norges Bank Investment Management.
CCREM is a science-based emission reduction and energy intensity tool that provides the real estate industry with transparent decarbonisation pathways aligned with the Paris Agreement’s goal of limiting global temperature rise to 2°C, with ambition towards 1.5°C.
The objective is to down-scale climate science and national climate plans by sector, company and property level for more transparency, explains Birt.
“It offers stakeholders a clear goal for a building, project or portfolio, which can then be assessed to see whether it is above or below its target, as well as the costs necessary to get it back on track.”
CRREM also facilitates analysis of stranded asset risk and makes decarbonisation in the commercial real estate sector measurable, he says.
“CRREM is perhaps one of the most successful EU funded research projects for energy efficiency due to the rapid take up by real estate investors and integration into net zero guidance reports.
“However, [Sustainable Finance Disclosure Regulation] SFDR and the EU Taxonomy definition of retrofit is based on energy performance certificates which are not science based, comparable and not always up to date or available.”
Birt therefore believes CRREM should become better integrated in EU policy, as policies will be more successful if they use science-based metrics used by investors.
“There should be an effort [from the EU] to come up with a new net zero performance certificate for buildings – but that will take time.”
Right now, the Energy Performance in Buildings Directive (EPBD) is being debated in the European Parliament and includes proposals for Minimum Energy Performance Standards on buildings – similar to the UK’s requirement that inefficient buildings are not allowed to be sold unless their efficiency is improved, explains Birt.
Prior to the debate, the IIGCC wrote to Members of the European Parliament (MEPs), emphasising its support for an “ambitious” outcome.
“Rapidly improving the energy performance of the EU’s building stock is vital to achieve the EU’s climate goals and energy security objectives,” the IIGCC said. “In addition to cutting emissions, retrofitting will reduce reliance on energy imports and the cost of energy price guarantees. It is also a positive stimulator of growth.”
One without the other
But buildings represent just one aspect of the infrastructure change required on the path to net zero. According to the IEA, to achieve net zero emissions by 2050, annual investments in energy sector infrastructure and technologies will need to increase from today’s level of more than US$1 trillion to US$4 trillion by 2030.
DWS is the fund manager for the EU Commission’s public sector focused European Energy Efficiency Fund (EEEF) that has €200 million in assets aimed at a promoting a sustainable energy environment and fostering climate protection by enabling projects in European cities, regions and communities to build resilient infrastructure.
Most recently, the EEEF supported Lithuania’s Kaunas District Municipality in the preparation and implementation of street lighting upgrade, covering feasibility studies, energy audits, evaluation of economic and financial viability of investments and structuring the tender documents through public-private partnership and energy service company (ESCO) models.
To achieve the energy efficiency and savings goals in buildings it is necessary to adopt new ESCO models, these include energy performance contract (EPC), energy supply contract (ESC), integrated energy contracts (IEC) and build-own-operate-transfer (BOOT). These models enable analysis of a building’s energy usage, as well as identifying potential energy efficient improvements. The ESCO can then procure financing to make the necessary improvements to the building with the building owner making recurring payments to the ESCO based on the forecasted energy savings outlined in the contract.
As part of the Kaunas district street lighting system modernisation project, it is planned to install around 9,000 LED luminaries with automatic dimming modules, illuminate about 50 street crossings, install new and upgrade the existing management, control and monitoring equipment. These measures are expected to reduce energy consumption by more than 70%.
“Energy efficiency projects in infrastructure such as these take time, as they require working “hand-in-hand” with cities and municipalities,” says Birt.
In terms priortising energy efficiency in real estate, Birt believes that solid progress is being made, driven by the EU’s ‘energy efficiency first principle’, which is intended to ensure secure, sustainable, competitive and affordable energy supply in the EU. However, he admits that there is still a lot more work to be done with regards to prioritising energy efficiency in infrastructure, largely due to the sheer diversity of assets within infrastructure-related funds.
“You can deploy capital now into dedicated energy efficiency funds, real estate funds and sustainable infrastructure funds that have a partial focus on energy efficiency, but also renewables and other energy transition technologies,” says Birt. “But I think it needs to be much higher on the agenda of investors.”
Asset owners and managers need to use their voice to call on governments in Europe, and in the UK, to support the acceleration of transition finance flows into infrastructure and real estate because they’re lagging in terms of strengthening energy efficiency and net zero policies across the board, he says.
“This has just been a hugely difficult winter for millions of people,” says Birt. “If we improve energy efficiency, we reduce energy demand, and will reduce the chance of energy prices spiking as much as they have in the future, which helps reduce inflation and improves living standards – it’s a real win-win.
“But to achieve this, we must focus on energy efficiency and move it higher up the agenda than where we have to date.”