EDITOR’S NOTE: This is part one in an investigative series that examines one of Earth’s largest greenhouse gas emitters: the commercial real estate sector. You can read part two here and part three here.
Almost half of the world’s largest real estate investors, which between them own or control more than £1T ($1.2T) of property, have no target to reduce the carbon emissions from their portfolios.
Real estate is responsible for 40% of global greenhouse gas emissions, but a Bisnow analysis of real estate’s 75 largest institutional investors, listed companies and investment managers found that 32 have no overall plan to reduce the amount of carbon they put into the atmosphere.
It is vital that a sector responsible for such a large proportion of emissions cuts back on its carbon output, the United Nations has said, to ensure the world limits global warming to 1.5 degrees Celsius or less by 2050 and avoids the worst impacts of climate change. To do that, climate experts say real estate needs strong decarbonization targets, and the biggest owners and managers in the sector are instrumental in leading that process.
If temperatures rise even half a degree higher than the 1.5-degree target, they will bring devastating storms, lethal plant and animal extinctions, and sea level rise causing mass migration. The effects could lead to conflicts over resources and create millions of refugees and human deaths due to smog, heat and infectious disease outbreaks, climate scientists warn.
A report from the United Nations' Intergovernmental Panel on Climate Change last month showed that the worst effects of climate change can be avoided, but only if action is taken right now. It specifically cited real estate, as a major contributor to emissions, as one of the sectors where urgent action is most needed.
Global emissions needed to be cut by 60% by 2035 compared to 2019 levels in order to hit that 1.5-degree target, the report said — and the current strategies in place from companies and governments mean that target will be missed.
For almost half of real estate’s biggest organizations to have not set a target by the end of 2022 shows that while the rhetoric around sustainability in the sector has increased, not enough is being done, industry leaders say, especially by the companies with the biggest resources to lead the charge and change the industry.
The real estate sector’s global emissions are getting worse, not better. After dropping in 2020 as a result of the pandemic, emissions from buildings and construction reached an all-time high in 2021, the U.N. said, 2% higher than in 2019. While buildings were becoming more energy-efficient, the growth in the overall size of the sector was more damaging than the improvements their owners made.
Action needs to be taken now, but Bisnow’s analysis also showed that even where real estate firms do have net-zero emissions targets, in most cases those targets don’t include the largest sources of carbon emissions created by property companies.
“You need to create the future you believe in, not just sit back and wait for it to happen,” UK Green Building Council CEO Julie Hirigoyen said. “We’re at a stage where we rapidly need the late adopters, the laggards, to get on the same journey that some are already taking. The sector needs to reduce its emissions by 90% by 2050, and that means radical change. But we’re not seeing that radical change yet.”
The Holes In Real Estate’s Climate Targets
Even among the investors that do have a target for decarbonizing their portfolio, the vast majority don’t measure — and have no plan to reduce — their emissions from the construction of buildings they develop or finance and don’t track or have a plan to reduce emissions from their tenants.
The investigation also revealed that only a handful of the companies that do have a target for reducing emissions are planning to hit net-zero faster than they are legally obliged to do so, raising questions about how fast companies are decarbonizing and whether regulators are doing enough to ensure that businesses meet their obligation to help combat the climate crisis.
Furthermore, fewer than half of the organizations reviewed were able to confirm that their decarbonization plan doesn't involve the use of carbon offsets or that they would only use offsets when the vast majority of emissions had been reduced. Sustainability leaders described carbon offsets to Bisnow as a Band-Aid solution as society waits for green energy to reach a point where it can replace the fossil fuels that currently power a huge proportion of buildings globally.
These are just some of the central findings of a Bisnow series that investigates real estate’s outsized role in the global battle to stave off the worst effects of the planet’s climate crisis.
Bisnow’s interactive data visualization tool (see below) analyzes which organizations do and do not have decarbonization targets; which of those targets omit big chunks of emissions; how fast companies are looking to decarbonize; and who is and isn’t using offsets to hit targets. The data can be sorted via the size, type or geography of the organizations reviewed. You can click on each dot to find notes on each company indicating if their target includes interim goals, which experts indicate is key to ensuring longer-term targets are hit.
This series is one of the most in-depth analyses yet of how the largest companies in real estate are actually going about the process of reducing their carbon emissions.
The organizations were identified using PERE data on the institutional investors with the largest directly owned real estate portfolios globally and the investment managers that have raised the largest amount of capital for real estate deals over the past five years. The sample also includes the 25 publicly traded real estate companies with the largest market capitalization, using public market data.
The data highlights how there are complexities and challenges in real estate’s push to decarbonize, particularly around reducing the emissions from construction and working with tenants to figure out how to cut carbon from parts of buildings that owners don’t control. But the analysis also shows that these issues can be overcome if companies are willing to bring about changes that are radical, but not impossible.
The solutions highlighted by the organizations surveyed that are reducing emissions most quickly and by the experts interviewed by Bisnow echo those put forward by the IPCC about how the real estate industry can do more to decarbonize, and do it faster.
Clearer and more stringent regulation from country and city governments, a commitment to reusing existing buildings, more research into the carbon emissions created by development, more engagement with tenants on cutting energy use, and better dialogue between investors and fund managers are some of the key weapons the sector can utilize to help limit global warming, the investigation shows.
“Once enough of these bigger firms or organizations have shifted and moved the financial industry towards this, it becomes standard,” HOK Global Sustainable Design Director Anica Landreneau said. “To some extent, as these larger firms move, it normalizes these practices to the extent where there is no other way to do business.”
“I’ve seen more change in the past two years than the previous 20,” Hirigoyen said. “I’m not surprised that more than a third of these big companies still don’t have a target, but that’s a lot better than it would have been a few years ago.”
Holding Big Real Estate To Account
Sustainability has risen up the agenda for businesses generally, and real estate owners specifically, over the past decade, but the results of Bisnow’s investigation show that the sector is still far behind when it comes to embracing the kind of decarbonization targets and strategies needed to limit global warming. It is not too late, but big real estate owners need to act now.
“People are saying they are applying targets, but in my experience they don’t understand what it will actually take,” Alstria CEO Olivier Elamine said. Alstria is a German office owner that was bought by Brookfield for $4.3B last year.
“I’ve been at a number of industry roundtables on this topic, and usually I’m the only board member there. That’s nothing against the sustainability person, but you need someone who’s able to move the needle.”
Bisnow defined a decarbonization target as having a publicly stated goal of reducing carbon emissions across an entire real estate portfolio by a certain amount by a set future date. This didn't have to be a net-zero emissions target, but for the vast majority of organizations that did have a specific goal, net-zero was the aspiration.
The funds and investors Bisnow analyzed span from California to Sydney via London, Amsterdam, Abu Dhabi, Beijing and Hong Kong. They invest hundreds of billions of dollars into the sector each year, and they own some of the world’s most famous buildings, like Canary Wharf in London and Rockefeller Center in New York, as well as billions of square feet of warehouses, multifamily buildings and shopping malls.
Those that did not have an overall decarbonization target own or manage assets with a combined value of $1.2T. For comparison's sake, New York City’s commercial and residential real estate was valued at around $1.4T in 2022.
Some of the companies without a decarbonization target are investing in buildings with green certifications or working with asset managers to reduce emissions in specific portfolios. But they have no overarching strategy to cut emissions from the giant portfolios they either own directly or, in the case of investment managers, manage.
“To be on the trajectory to hit a net-zero target of 2050, you have to have set interim targets along the way,” LGIM Real Assets Head of ESG Shuen Chan said. “For us that is to reduce emissions by 55% by 2030 across all scopes — one, two and three.”
LGIM is one of the UK’s largest real estate investors, with around £22B of real estate assets under management.
When it comes to decarbonization and cutting emissions to the degree needed to combat the climate crisis, it is important to have a target, rather than going about the process of cutting emissions in an ad hoc way. Making those targets public is a way of these companies holding themselves to account and allowing public scrutiny of whether they are succeeding or need to do more.
“Some people are comfortable putting their flag in the sand and publicly setting ambitious targets,” Hirigoyen said. “They might not know how they are going to get there, but they are going to work it out and pull every lever they can. Others are not comfortable doing that.”
Who Has A Target For Decarbonization — And Who Doesn’t?
The list of companies not to have set a decarbonization target includes some of the world’s largest pension funds and sovereign wealth funds. These institutional investors in particular, as the source of the vast majority of capital in commercial real estate, are vital in forcing the industry to change.
Of the 25 analyzed, nine did not have a decarbonization target: the Abu Dhabi Investment Authority, Singapore’s GIC, the China Investment Corp., the Qatar Investment Authority, the National Pension Service of Korea, the Teacher Retirement System of Texas, the Washington State Investment Board, Dutch pension fund manager MN and Cathay Life Insurance. Those organizations alone directly own more than $300B of real estate, PERE data showed.
Of the 25 largest REITs, seven didn’t have a decarbonization target: Public Storage, Realty Income, SBA Communications, Mid-America Apartment Communities, National Retail Properties, Starwood Property Trust, Sweden’s Sagax and Apartment Income REIT. A further four had bespoke targets that are not in line with the U.S. ambition of being net-zero by 2050: Crown Castle, Equinix, Public Storage REIT and Digital Realty.
Among investment managers, 15 didn’t have a decarbonization target: Starwood Capital, ESR, GLP, Cerberus Capital, Ares Management, Gaw Capital, Rockpoint, Bridge Investment Group, Pretium Partners, KKR, Angelo Gordon, Apollo Global Management, Bain Capital, Oak Street and TPG.
Setting a decarbonization target can be more difficult for a fund manager than a listed company or pension fund investor.
“For a fund manager, you can’t just go ahead and set a net-zero target. You have a fiduciary duty when you manage other people’s money, you have to engage with investors, make sure your interests are aligned. If they have a net-zero target, you can do it,” Orchard Street Investment Management Head of ESG Lora Brill said. “With listed companies, if people don’t like your target, they can just sell the shares. If they do like your net-zero policy, they buy your shares, and you get immediate feedback and returns.”
That feedback for listed companies is starting to manifest itself as some investors target the greenest property companies. Last month, Nuveen launched a new fund to buy shares in real estate firms around the world “that have either achieved carbon neutrality, or have a target to or track record of reducing greenhouse gas emissions in a manner that is aligned with the Paris Agreement,” the company said.
It is not impossible for investment managers to set net-zero targets; nine of them have. Brill said Orchard Street undertook significant engagement with its institutional investors to determine their net-zero ambitions and set its own targets — net-zero across all types of emissions, including occupier emissions and embodied carbon, by 2040 — accordingly.
When other organizations, both investment managers and other types of real estate companies, were transparent and public about their carbon reduction plans, Brill said it helped the company to set its own target. The public pledges of organizations to the Better Building Partnership gave it an insight into where the industry was heading.
“If you're looking into any industry, you've got your early adopters and market leaders, you've got your middle of the pack, and then you've got your stragglers,” HOK’s Landreneau said. “I can't say it's shocking, but I do feel like it's got to change very quickly, not just because of the environmental urgency, which is certainly clear. I think it's going to have to change because of the way the entire financial market is changing.”
For those in real estate pushing for change, the sector's leaders are only just beginning to grasp how far they must be willing to go if they want to help avoid global humanitarian disaster.
“You can’t have an ESG strategy that is separate from your business strategy,” Brookfield-owned Alstria’s Elamine said. “It isn’t about changing your product or service or buying different assets. It is about what is your business model in a world where you can’t use carbon. How do you reorganize yourself to decarbonize? What business are you going to be in? It goes a lot deeper than saying you’ll be net-zero by 2050.”
Podcast by Miriam Hall. Editing by Ethan Rothstein.