In UN Climate Change Executive Secretary Simon Stiell’s opening speech at the COP27 climate change conference in Sharm el-Sheikh this week, he highlighted how the world’s decarbonising efforts have entered an era of implementation “where outcomes from the formal and informal process truly begin to come together to drive greater climate progress – and accountability for that progress”.
His speech was aimed at governments and carried an overarching aim of turning discussions into actions. He would be impressed with the latest efforts by Copenhagen-based manager NREP, which chose the working day before the conference started to formally introduce a self-imposed carbon tax on its real estate activities.
Calling the move an “urgent action”, NREP has elected to financially tax itself on carbon emissions from the assets of its latest value-add fund, NREP Nordic Strategic Fund V, both embedded and operational. The move is a deliberate attempt to demonstrate a workable link between greater sustainable practices and stronger financial performance.
By monetising the production of carbon, NREP is rebasing how it calculates the value of an investment proposition. In an interview with affiliate title PERE this week, chief executive Claus Mathisen said including this carbon emission calculation in its underwriting criteria would see certain deals previously executed be rejected. He spoke about a minority of properties that would switch status: in a simulation exercise from the firm’s €18 billion of assets under management including 348 properties, the carbon emissions of between 10 and 20 assets would have been problematic to abate and so might not have been acquired.
But more important than its use as a deterrent in transacting, NREP is using the tax to illustrate how it is a more productive method of reaching net carbon goals than using carbon offsets, which it famously declared would play no role in its ambitious 2028 target, set at the start of the year. It is hard to argue with the logic here. Offsets offer a passive avenue to buy assets which remove carbon elsewhere; they do nothing to improve a business’ own sustainability practices.
So the concept is winning, but the devil is in the detail when it comes to the efficacy of an unregulated carbon tax, one investor told PERE this week. Given its financial orientation, pricing carbon will be the trickiest part. NREP is hoping the EU Trading System’s current level of €90 per ton makes sense, Mathisen telling PERE he has seen prices elsewhere range as low as €10 to as high as €2,000 when considering various social and timescale factors.
Bemoaning a lack of standardisation is familiar territory, and the discussion should move on. If private real estate wants to meet the array of ambitious decarbonisation targets its constituents set for themselves, they also need to pre-emptively set benchmarks with which to meet these targets. With its notably near-term 2028 date, NREP has little choice but to implement measures to provoke greater adaptation within its ranks. Of course it is an “urgent action”.
When pushed for an estimated first year tax bill, Mathisen suggested NREP Nordic Strategic Fund V might pay as much as €20 million over the life of the fund. That is not pocket change. But it is pittance when contrasted with the €3 billion or more it expects to corral when fundraising for the vehicle comes to an end and the 15 percent-plus IRR returns it hopes to make for those investors supplying it with equity. And if it has normalised dramatic energy reduction processes from the initiative, that cost will be well worth the upside.
Demonstrable monetisation is what the UN’s Stiell is calling for governments to impose in order for the Paris Agreement’s targets to be realised. NREP intends to be among the private enterprises showing how that imposition can look and its carbon tax is surely a tactic worth trying.