Executing an effective carbon reduction plan will be a critical component to maintaining value for institutional landlords going forward, delegates attending a commercial real estate panel at the 2021 UN Climate Change Conference heard yesterday.
Neil Slater, global head of real assets at manager Aberdeen Standard Investments, warned how inaction would lead to the erosion of value and, ultimately, not living up to fiduciary duties. “We’re all about performance,” he said. “First, we’re about fiduciary performance for clients. If we sit here and say we’ll do nothing about decarbonisation, that will destroy value.”
He warned how buildings not offering sustainable functions would be rejected by occupiers which, in turn, would hinder a building’s profitability. “Bring it back to financial basics. The IRR model starts to look very different if we don’t start to take this seriously.”
His session – which also included Shuen Chan, insurer platform Legal & General Investment Management’s head of ESG, Real Assets, Caroline Hill, managing director, Europe and head of real estate ESG at mega-manager Blackstone and Michael Neal, European chief investment officer at manager Nuveen Real Estate, among others – discussed areas around the role the commercial real estate sector plays in addressing climate change.
Chan said while institutional landlords play an integral role in meeting climate change challenges, the built environment requires a collaboration between other cohorts, as well. She said: “There is a whole range of stakeholders in the value chain. We need to bring them all along on the pathway to net zero.” By her reckoning, state agencies must provide greater levels of financial contributions and agree universal pricing mechanisms, the energy system needs overhauling to make a quicker and deeper contribution and “radical collaboration” is needed across the sector.
Integral to the collaborative solution discussed on stage are contributions made by commercial real estate occupiers, with panellists agreeing that embodied carbon emissions are lower in comparison to operational carbon emissions – essentially, the energy use of tenants. Nuveen’s Neal said this was relatively easier to manage for offices than other forms of real estate, especially retail, which currently was hardest to recapitalise at a time the sector needed capital expenditure most. “Strong occupation there is patchy in areas,” he said.
Meanwhile, Paul Dunne, managing director, group operations at logistics REIT Segro, said the London-based business had more than 1,400 occupiers across Europe, of which it had visibility of the carbon emissions of about 60 percent. “Some countries mandate by law a business’s energy use. Others don’t. Until you know your use, you can’t tackle it.”
Dunne called for data transparency to accelerate the sector’s journey to achieving net-zero emission targets. But he said many landlords and occupiers did now have policies in place. “Most customers have a net-zero commitment of their own which they are trying to hit. We are not having to drag them along.”
The panel also pointed toward the proliferation of green-targeted leases and finance instruments like green bonds as adding further weight in the sector’s fight to decarbonise, though Slater said their existence was demonstrative of how far there is still to go. “We’re far away from achieving [targets],” he said. “The ultimate destination, whether it’s 10 years or 20 years, is no green financing – [so] it’s embedded… it’s just financing. Today’s industry is starting that journey, though, and in a very sensible way.”
Read highlights of yesterday’s finance focused day here.