April 4, 2023 by Mike Phillips, Ciara Long and Jacob Wallace

SPECIAL REPORT: Real Estate’s Efforts To Cut Carbon Emissions ‘May As Well Be Doing Nothing’

EDITOR’S NOTE: This is part two of an investigative series that examines one of Earth’s largest greenhouse gas emitters: the commercial real estate sector. You can read part one here.

The carbon reduction targets put in place by the world’s biggest property owners and managers don’t include almost 90% of the emissions they create, an investigation by Bisnow has found. 

The vast majority of the world’s 75 largest institutional investors, REITs and investment managers neither track the emissions created by the tenants of their buildings nor the carbon created during the development of buildings. 

Even among the companies that have set targets to decarbonize their portfolios, less than a quarter count these emissions, which are referred to as Scope 3, as part of their stated campaign to reach net-zero. 

Cement factory plant
The manufacture of cement is incredibly carbon-intensive.

Scope 3 emissions make up about 90% of the average real estate firm’s greenhouse gas output, Bisnow found by analyzing the carbon emissions disclosure of companies like German office owner Alstria and UK REITs British Land and Landsec. In omitting them from decarbonization targets, the real estate sector, which is responsible for close to 40% of annual global greenhouse gas emissions, is effectively ignoring the vast majority of its negative impact on the climate.

“Scope 3 is difficult, but it is also 90% of your emissions,” Alstria CEO Olivier Elamine said. “If you’re only doing the 10% bit, then you may as well be doing nothing.”

Scope 3 emissions for real estate companies include embodied carbon, which comes from construction and eventual demolition. It includes creating materials for the building, some of which — like cement, steel and glass — are notoriously carbon-intensive. Embodied carbon accounts for 50% of all emissions over a property’s life span among new buildings, a study from academics at the Karlsruhe Institute of Technology found. As electricity grids across the world draw more on renewable sources rather than fossil fuels, that figure will rise to 75%.

Energy used by tenants in a building is also included in Scope 3 emissions, accounting for 50%-65% of the carbon created by a building while it is in operation over its lifetime, according to a JLL study. 

If the company is primarily an owner of existing real estate assets, more than 85% of its emissions come from the areas of its buildings used by tenants. If it is an owner and developer, then embodied carbon emissions take that figure to 90%. For a development and construction company, like Lendlease and Skanska, Scope 3 emissions account for 99% of its greenhouse gas output. 

Of the 75 largest wealth funds, investment managers and REITs Bisnow analyzed, only 12 include both embodied carbon and tenant emissions in their decarbonization target. A further 12 include emissions from tenants, but not embodied carbon, in their target.

Overall, 51 of the 75 investors and fund managers, with portfolios valued at a combined £2T ($2.3T), don't have a concrete plan to cut their Scope 3 emissions. 

Bisnow’s investigation also uncovered that organizations that own or manage $1.2T of property worldwide had no decarbonization target at all for their overall portfolios. Only a handful are decarbonizing faster than they are legally required to do so, and some said they would only take action to reduce their Scope 3 emissions if they were forced to by regulators.

“We are currently working on building our coverage of whole building data across our portfolio, so that we can accurately track scope 3 emissions in the future, if required by law," Apartment Income REIT told Bisnow by email.

You can use Bisnow’s interactive data visualization tool to analyze which companies do and don’t have targets, and which of those targets exclude big chunks of the emissions created by real estate companies. Click on each dot to find more information on each organization.

The stakes could not be higher: A report from the UN’s Intergovernmental Panel on Climate Change last month found that all global emissions needed to be cut by 60% by 2035 from their 2019 levels in order to limit global heating to 1.5 degrees Celsius. If warming exceeds those levels, humanity will be catastrophically impacted, the U.N. has repeatedly warned. Action needs to be taken now by companies and governments in order for that target to be hit — and real estate’s targets are not encompassing all of the emissions it creates. 

Scope 3 emissions are the most difficult to eliminate: Embodied carbon is hard to measure and harder to reduce. Even the Science Based Targets initiative — a partnership organization from CDP, the United Nations Global Compact, the World Resources Institute and the World Wide Fund for Nature, whose metrics were used by a large number of the companies Bisnow surveyed — says that Scope 3 targets must be set individually for companies.

But substantially cutting back Scope 3 emissions is likely to mean a fundamental shift in the real estate business model toward refurbishing old buildings rather than developing new ones.

Whether the responsibility of reducing emissions for the leased parts of a building falls on the owner or the tenant is a matter of debate. The answer, sustainability experts said, lies in creating new structures to allow both sides to work together for the common good of reducing carbon. 

“Our Scope 1 and Scope 2 emissions are kind of a drop in the bucket, and those are the easy things to track and offset or mitigate. But Scope 3 is where the bulk of our emission is going to happen, and it's where our influence is,” HOK Global Sustainable Design Director Anica Landreneau said. 

“I don't think we're going to achieve the kind of reduction in carbon in the time frame that we need to, to actually do anything about climate change, if we don't have Scope 3 emissions included in the industry.”

‘If You Can’t Measure It, Then You Should Stop Doing It’

The IPCC report calls reducing embodied carbon from the development of new buildings one of the key tools that should be deployed if humanity is to limit global warming and avoid the worst impacts of climate change.

“Key adaptation and mitigation elements in cities include ... the efficient design, construction, retrofit, and use of buildings," the report says.

But Bisnow’s findings showed that the emissions created from development and the manufacturing of materials for buildings are not going to be reduced. 

A common refrain from these investors about why they don’t include embodied carbon in their decarbonization targets is that measuring the emissions created during construction and development is difficult and potentially inaccurate. A bag of cement doesn’t come with a label on it saying how much carbon was emitted in its manufacturing, but its footprint is hefty: Cement accounts for 8% of all carbon dioxide emissions globally, according to 2018 research from think tank Chatham House.

“As the calculations for embodied carbon are far but reliant anyway, it is impossible to set a target on this,” said a spokesman for APG, the Dutch pension fund that is the world’s largest direct property owner. “Instead, we do engage with companies in the cement industry in which we invest, expecting from them to set science-based targets.”

“Embodied carbon is not yet part of the scope, but might be included in future as soon as a commonly used methodology to calculate these emissions will be available,” said a spokesperson for Italian insurance company Generali, one of the 25 largest pension fund owners of real estate. 

Other respondents cited how the sustainability bodies that provide guidance on what constitutes a net-zero portfolio often don’t include embodied carbon when advising companies on how to reduce their emissions or set decarbonization targets.

While reducing embodied carbon is difficult, it is not impossible, and there is a case to be made for including these emissions in a target as a device to make sure they are addressed and reduced.

“When it comes to embodied carbon, yes, it is difficult. The science isn’t there yet when it comes to creating low-carbon building materials,” UK Green Building Council CEO Julie Hirigoyen said. “But you can’t just sit around and wait for it to happen. You need to just say you’re going to do it, and then go out and work out how you’re going to do it.”

And some companies are making it happen. As proof, there are those 12 organizations including embodied carbon in the decarbonization goals: REITs Prologis, Digital Realty, Choice Property REIT and SEGRO; investors TIAA, CalPERS, Norges Bank, QuadReal and CPPIB; and investment managers CBRE IM, LaSalle IM and BentallGreenOak.

Norges Bank Investment Management — the giant Norwegian sovereign wealth fund, which has about $1.3T in assets under management, including about $32B in real estate — includes Scope 3 in its decarbonization target even though "right now there is no clear decarbonization pathway for part of our Scope 3 emissions in our portfolio," Norges Bank Senior Manager of Unlisted Real Estate Nina Galbiati told Bisnow.

SPECIAL REPORT: Real Estate’s Efforts To Cut Carbon Emissions ‘May As Well Be Doing Nothing’
The City of London is making developers measure how much carbon will be emitted by demolishing an old building and developing a new one.

“We do however believe that, over time, and before 2050, new solutions will develop that allows us to reduce emissions also across our entire Scope 3 emissions," Galbiati said.

“We are currently investing time and effort in defining who we need to engage with in the value chain and formulate a data-gathering strategy for embodied carbon going forward. There is no doubt that more reliable — and comparable — carbon data is needed on building products and whole building life-cycle assessments. We are doing a few different things to solve this.”

Galbiati cited engaging with manufacturers to promote more disclosures of product-specific Environmental Product Declarations across materials and geographies, supporting awareness and research on the trade-offs between operational and embodied carbon, and promoting information sharing across industry stakeholders and among real estate investors for life-cycle assessment analysis.

QuadReal Property Group, which manages the real estate investment of Canadian pension fund BCI, includes embodied carbon in its decarbonization target, and it countered the assertion that data on embodied carbon is too limited to effect change. 

“As part of our net-zero targets, we have chosen to focus on the largest carbon-producing Scope 3 emissions areas such as waste, cement and steel,” QuadReal Director of Sustainability Nisha Agrawal said. “This choice was made not only because reductions in this area will have the biggest positive impact on our portfolio, but also because these large areas have a fair amount of data already, which we can use to create accurate reduction plans. We are currently evaluating our buildings waste outputs and working on reduction plans and are factoring embodied carbon emissions into our development projects.”

As well as promoting research on low-carbon building materials, there is another change that the real estate industry can embrace to reduce embodied carbon, one that is more systemic and involves a departure from the way the industry has operated for its entire existence.

It could build less and upgrade its existing building stock instead. 

“Saying it’s hard to measure is like going into a bathroom where the bath is overflowing and saying, 'I don’t know how to measure how much water is overflowing, so I can’t stop it,'” Alstria’s Elamine said. “Just turn the tap off. That’s the easiest thing to do. If you can’t measure it, then you should stop doing it until you can measure it, then start again.”

About 80% of the buildings that will exist in 2050 have already been built, according to the World Economic Forum. To decarbonize the built environment, making these buildings more carbon-efficient — rather than knocking them down and emitting more carbon from construction — needs to be the strategy of governments and property owners. Retrofitting existing buildings and making them more energy-efficient is specifically cited by the IPCC in its report as one of the tools the world needs to embrace in order to hit climate goals.

“Over the whole building stock, the largest portion of carbon savings by 2030 is in retrofitting existing buildings and replacing energy-using equipment due to the slow turnover of the stock,” the IPCC wrote in a specific report on the real estate sector in 2022.

It is a change that is starting to be enforced on real estate from the outside. Earlier this year, the local authority that governs the City of London, the UK’s financial center and home to its largest cluster of skyscrapers, became one of the first in the world to require developers to measure how much carbon they emit when they knock down an existing building and develop a new one compared with refurbishing an existing asset.

“This pioneering planning guidance puts the City at the forefront of the growing drive to give substantial, detailed consideration to retaining and refurbishing buildings rather than simply knocking them down and starting from scratch,” Shravan Joshi, the City of London Corp.’s Planning and Transportation Committee chairman, said in a statement.

Tenant Emissions: In It Together

When it comes to tenant emissions — around two-thirds of most operating buildings’ ongoing carbon footprint — there is a debate about whether it is the responsibility of the landlord or the tenant to reduce these.

“There's a lot of real estate owners that will say, ‘Well, what does it matter to me? It's the tenants, right? It's not me,’” Jamestown Director of ESG Becca Timms said. “But the big trend I see is emissions are everyone's problem. Our Scope 3 emissions are another company's Scope 1 emissions. So I think the idea of collaboration — even tenant collaboration — is really important. And I think it's important for owners to stop playing defense and start playing offense a little bit, in the sense of being a good partner for our tenants who almost always have their own decarbonization goals.”

Bisnow’s analysis shows that the industry is more advanced when it comes to including tenant emissions in its decarbonization targets and reduction strategies than it is at tracking embodied carbon: 12 of the organizations reviewed include these emissions. But that still leaves 51 that don’t. 

In some countries, it is illegal for landlords to make tenants disclose their energy usage, and thus to calculate the carbon emissions their use of a building creates. But in every country, it is possible to partner with tenants to encourage them to reduce emissions. 

Norges Bank, one of the institutions that counts Scope 3 emissions in its decarbonization target, is pushing the use of green leases, which require tenants to disclose their energy usage and can sometimes provide incentives for usage to be reduced. Even where Norges doesn’t have a green lease, it engages with tenants and asks them to share emissions data. Link REIT, Goodman Group and BVK are other companies that use green leases, while QuadReal said it engages with tenants to collect data.

“It's really important to use tools, whether it be a green lease or a policy, to ensure that you have the agreements in place to get the information that you need, and that different parts of the industry are working towards more transparency,” Timms said. 

Landlords have other levers to pull when it comes to reducing the emissions of their tenants. When owners have control over the energy supplier of a building, they can ensure that they use renewable energy, if possible, or even invest in creating their own renewable energy sources.

Boston Properties, the largest U.S. office REIT, is developing on-site renewable energy systems at some of its properties, investing in off-site renewable energy procurement, and voluntarily transitioning to 100% renewable green tariffs.

Beyond that, removing gas boilers and replacing them with electric heat pumps moves building power sources toward renewables, while improving insulation reduces energy consumed.

SPECIAL REPORT: Real Estate’s Efforts To Cut Carbon Emissions ‘May As Well Be Doing Nothing’
Savills Director of ESG Consultancy Hyon Rah

Owners are motivated to improve the energy-efficiency of buildings even if they aren’t responsible for paying the energy bill because data is increasingly showing it means faster leasing at higher rents. A CBRE study of 20,000 U.S. office buildings found that those with better sustainability credentials achieved 31% higher rents than less-sustainable equivalents. And a JLL study of London offices found that the more sustainable ones had vacancy rates 13 percentage points lower than peers — 7% versus 20%.

In a world of plateauing office demand in major U.S. and European cities, what tenants want, they are typically getting. 

“I think tenants have a lot of leverage right now because there’s a lot of empty office spaces waiting to be leased,” Savills Director of ESG Consultancy Hyon Rah said. “In those cases, when you’re an organization that has some decarbonization goals and also wants to save some operating costs depending on what the lease structure is … in those cases, you can actually make quite high demands to the landlord.”

Such commitments can be more of a guessing game than initially meets the eye, Rah said. In more than one case, she said she’s found that firms with the largest portfolios can hide underperforming properties behind the average sustainability commitments of their entire portfolio.

"Some companies you hear the name and you know that they have a certain prestige and a certain standing when it comes to sustainability ... but then they have these properties that are not quite there," Rah said. "In those cases, we would have to engage with them on a building level and see if they are willing to make the types of investments that they need to make."

Podcast by Miriam Hall. Editing by Ethan Rothstein.

CORRECTION, APRIL 5, 11 A.M. ET: Jamestown's director of ESG is Becca Timms, whose last name recently changed. This story has been updated.