New US sustainable real estate strategy looks to transform “historically slow” adoption of energy transition technologies.
Climate-focused global investment firm Galvanize Climate Solutions’ newly launched sustainable real estate strategy aims to address one of the “most consequential thematic issues” for all asset classes through the decarbonisation of existing property assets.
The Galvanize Real Estate (GRE) strategy aims to invest in and decarbonise real estate, with it looking to scale significantly in the US market through the acquisition of existing assets.
Joseph Sumberg, Managing Partner and Head of Real Estate at Galvanize Climate Solutions told ESG Investor, that it intends to leverage a proprietary sustainability framework based on decades of experience in real estate, risk management and sustainable practices in the built environment.
“We have something that I think is quite differentiated within the real estate space which is a team of science, technologists and policymakers who support and act as the connective tissue between the different verticals, including early-stage venture capital and public equities,” he added.
Reducing energy usage
Sumberg said the GRE strategy aims to target existing properties across multifamily, industrial, student housing and self-storage, with an “eye towards adding value in traditional real estate capacities and decarbonisation”. It will also target assets in the US market that it believes will “enable the climate transition”.
“The prime geographies for us are going to be the ones that have extreme weather events, both in cold and heat, and those areas are going to be where you might have historic use of fossil fuels for energy usage,” he said.
The strategy will tie a portion of long-term incentives and compensation to the successful accomplishment of pre-defined, quantifiable sustainability goals. Those sustainability goals will be spread across five core categories: energy and carbon emissions, potable water usage, climate risk and resilience, social community impact and diversity, equity and inclusion. A majority of the weighting will be related to direct (Scope 1) and indirect (Scope 2) emissions due to GRE’s focus on decarbonisation.
“The reason we chose those five factors is because we know those drive value,” Sumberg said. “The real estate market generally has had historically slow adoption to new technologies and the energy transition is certainly not excluded from that.
“I think there’s a lot of confusion in real estate and sustainability because there isn’t a lot of transparency. Our goal is to simplify, identify, track and provide transparency on these five metrics and tie our long-term incentives directly to them.”
Reducing energy usage is the “first step” in decarbonising real estate, according to Sumberg. The GRE strategy will attempt to reduce energy usage at properties through solar panel utilisation and batteries, electric vehicle chargers, reducing potable water usage across the properties through zeroscaping measures, leakage detection, rainwater harvesting, water reclamation, and waste diversion.
“The Infrastructure Investment and Jobs Act (IIJA) and the US Inflation Reduction Act (IRA) are providing incredible tailwinds for a lot of solutions that are able to reduce energy usage in commercial real estate,” he added.
The IRA is set to launch a programme on 31 May offering approximately US$10 billion in tax incentives for small businesses to invest in onsite sustainable energy sources, such as solar panels, wind turbines, or geothermal energy, while the IIJA included US$550 billion in new spending through 2026, a majority of which will impact commercial real estate and sustainable infrastructure.
Carbon complications
The built environment generates 40% of annual global CO2 emissions, with building operations accounting for at least half of that, and in the US 30% of the energy used in commercial buildings is wasted.
“Estimates suggest that 90% of the existing building stock is still going to be around in 2050 when we need to be at net zero,” Sumberg said. “Building commercial real estate creates a significant amount of embodied carbon with 60-70% of the total carbon footprint of an investment created by building it.”
According to Sumberg, if existing building stock in the US was replaced with new, greener buildings it would drive carbon emissions higher than decarbonising it.
Sumberg noted that decarbonising the real estate sector hasn’t been a priority in the US for asset managers due to how the complex nature of the market.
A joint report by the Urban Land Institute (ULI), The European Association for Investors in Non-Listed Real Estate Vehicles (INREV), and the Principles for Responsible Investment (PRI) said that the real estate industry started to develop its own frameworks, standards and certifications due to the absence of regulation and uniform definitions. These were soon followed by the introduction of ESG benchmarks such as the Global Real Estate Sustainability Benchmark (GRESB) and industry standards such as European Public Real Estate Association (EPRA) and INREV.
Due to this it has become “increasingly difficult to navigate the various mandatory regulations and voluntary standards”, according to the report. It also said that greater clarity is required to ensure there is decision useful information for investors to ensure real estate capital markets can operate effectively and sustainably to mitigate climate change.
