April 5, 2023 by Mike Phillips, Ciara Long and Jacob Wallace

SPECIAL REPORT: Regulation Is The Only Thing Pushing Real Estate To Tackle Its Enormous Carbon Footprint

EDITOR’S NOTE: This is part three 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 and part two here.

An investigation into the carbon reduction policies of the world's 75 largest real estate owners and managers shows that if regulators push the sector to cut emissions faster, it will comply.

But until a harder push comes along, CRE will do only what it is obligated to by law. 

Bisnow data shows that where clear regulation is enforced, real estate owners are taking action to reduce their greenhouse gas emissions. Yet more stringent regulations would compel them to cut emissions more deeply and quickly, according to several investors interviewed for this investigation.

“The only way to get everyone to cut 10 years off their target is regulation,” Orchard Street Investment Management Head of Sustainability Lora Brill said. “You have to make holding high-carbon properties unviable or reward holding low-carbon properties.”

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Of the 75 largest institutional investors, investment managers and listed companies in the real estate sector, almost half have no decarbonization target for their real estate portfolios. Meanwhile, the majority of investors with concrete emission reduction goals omit roughly 90% of the greenhouse gases they emit, Bisnow’s investigation found.

The final installment of this series focuses on how quickly those 75 institutional investors, REITs and investment managers are looking to decarbonize compared to targets set by regulators. It also analyzes the degree to which carbon offsets are being used to hit net-zero targets — a controversial area given the ongoing debate over whether carbon offsets actually work. 

A report last month from the U.N.’s Intergovernmental Panel on Climate Change highlighted that government and city regulations need to become stricter and better aligned with climate targets if global warming is to be reduced and its worst impacts on humanity avoided. 

Bisnow’s investigation found a strong correlation between the net-zero carbon target of an organization and the target of the country in which that organization is headquartered. Of the 47 organizations that had a decarbonization target, 20% were cutting emissions faster than needed to hit government net-zero targets while two-thirds were exactly in line with targets. 

For many in the industry, that is evidence that although real estate has made great strides in tackling the arduous task of reducing carbon emissions, regulation is ultimately the force driving change.

“There is a lack of clarity on regulation and standards at the moment, which makes it difficult for investors to determine policies,” LGIM Real Assets Head of ESG Shuen Chan said. “A clear definition of what net-zero means would set a global standard and help avoid potential greenwashing.”

Bisnow’s interactive data visualization tool examines individual company targets and how they compare to national targets. Organizations can be sorted by when they plan to decarbonize and other metrics. Each dot can also be clicked to find information on individual investors and managers:

Less than half of the organizations reviewed said they don't involve the use of carbon offsets or that they would only use offsets when the vast majority of their other emissions had been reduced.

With the effectiveness of carbon offsets open to doubt, experts questioned whether organizations are shifting the burden away from reducing their own emissions and toward mitigation strategies that may be of no use at all. 

Too Few And Far Between

Across the globe, decarbonization is largely a choice being adopted by organizations rather than a requirement set by regulators.

Until that changes, experts said, there will likely always be large chunks of the market that choose not to decarbonize for a variety of reasons. Bisnow data highlights that 43% of the world’s 75 largest real estate owners and managers have no overall target to reduce emissions from their real estate portfolios. 

Several organizations said that regulation would determine what type of emissions they would seek to reduce from their portfolios and whether they include emissions from tenants or those from construction activities, known as Scope 3 emissions.

Brookfield Real Estate is reviewing and enhancing the process by which it collects and analyzes scope 3 emissions,” the world’s second-largest real estate investment manager said in a statement. “It expects to disclose scope 3 GHG emissions in the coming years, when there is a regulatory requirement to do so, and/or clear industry guidelines on how to measure and report these emissions.” 

“Right now, carbon neutrality feels voluntary,” Time Equities Director of Sustainability Elena Lebensbaum said. “In some cities, like New York City, we are adopting carbon limits and carbon penalties for the building owners. But as far as the market right now, it's voluntary. So governmental regulations must come into play and say you have to be carbon-neutral.”

An aerial shot of the Lower Manhattan skyline
New York City has some of the most stringent real estate emission reduction laws in the world.

New York’s Local Law 97 fines building owners if they don’t reduce their emissions by a certain level, which Lebensbaum said is forcing behavioral change on property owners. Boston and Washington, D.C., also have emission reduction mandates, while the UK’s Energy Performance Certificate regulation makes it illegal to lease a building if energy-efficiency is below a certain standard. 

Still, multiple interviewees cited the need for clearer, more holistic regulation taking factors such as embodied carbon into account within municipalities, at the national government level and on a global basis.

The IPCC report, which took into account all types of emissions, indicates the world needs a net-zero target closer to 2040 than 2050. Bisnow’s research shows that just 10 out of 75 organizations targeted net-zero portfolios before 2050, and those targets didn’t necessarily cover all emissions. 

Some net-zero definitions include all emissions that fall into the Scope 3 category, which includes those created by tenants in a building and those created during the construction and demolition process. Others don’t, meaning emissions making up a huge proportion of those created by real estate owners can be omitted from decarbonization targets. 

“These regulations are important drivers when it comes to property owners improving efficiency  these things are driven by targets,” Chan said. “Clear timelines and goals give us the confidence to invest in what needs to be done to reduce the carbon emissions of our portfolio."

Greater regulation when it comes to climate change is coming, as evidenced by the increase in legislation to encourage decarbonization generally, as well as legislation aimed at real estate specifically. 

According to the Institute for Market Transformation, 30 U.S. cities or local authorities are moving forward with regulations similar to New York City's Local Law 97 in the next two years.

On an international level, 40% of all global emissions were subject to some sort of carbon tax or levy at the end of 2021, according to the Organisation for Economic Co-operation and Development, up from 25% at the end of 2018, with more countries gearing up to introduce such levies. The European Union’s Emissions Trading System, which makes companies buy permits for the emissions they create, is set to be applied to emissions from buildings, with new rules expected by 2026. 

But there are gaping, country-sized holes in coverage — the sovereign wealth funds of Abu Dhabi, Qatar and Singapore are among the giant investors with no decarbonization targets.

Carbon emissions don’t obey national boundaries, and as the IPCC pointed out in its report, regulation needs to happen on an international basis and be strictly enforced or it will be ineffective. 

“We’re in a really chaotic place right now when it comes to regulation and definitions,” UK Green Building Council CEO Julie Hirigoyen said. 

Because the effects of climate change are now being felt in the developed world, there is a sense that the wealthy countries of Europe and the U.S. are starting to act faster. Hurricane Sandy, which in 2012 caused huge damage to the Eastern Seaboard of the U.S., New York in particular, was a wake-up call for the city’s authorities and property owners. 

“In New York City, the southern tip of Manhattan is already at risk from flooding, and some of the world’s most expensive real estate — around $130B in building value — exists within existing floodplains,” Cushman & Wakefield Global Head of Sustainability and ESG Insights Andrew Phipps wrote in a note after the recent IPCC report. “We’ve reached a place in time when some of the richest cities in the world are facing dire social and economic consequences because of climate change.”

The question now is how we react, Phipps added.   

Offsets — Passing The Buck

The final element of Bisnow’s investigation into the decarbonization targets of the world’s 75 largest real estate owners and managers looked at the extent to which offsets form part of their strategies. 

The analysis found there was an almost equal split between those explicitly not using offsets to hit net-zero targets — or only using them once other emissions have been drastically cut to eliminate the last 5%-10% of GHG output — and those either using offsets or offering little in the way of public disclosure and declining to comment on requests for information. 

The use of offsets to aid decarbonization is a highly contentious practice. Companies can buy carbon offsets, sometimes called carbon credits, which fund actions outside of their own business that remove carbon from the atmosphere.

SPECIAL REPORT: Regulation Is The Only Thing Pushing Real Estate To Tackle Its Enormous Carbon Footprint
The efficacy of carbon-offsetting strategies like reforestation has been called into question.

Green energy isn’t widespread yet, and it is so inaccessible, even in places like New York City, that companies like Brookfield and JPMorgan Chase are leaving the grid and supplying their own energy to buildings to avoid getting slapped by fines from local emissions regulations. Without green energy, any property is likely to be powered, at least in part, by fossil fuels, spurring many to buy carbon offsets to incorporate into sustainability plans.

Yet crucially, by purchasing offsets, companies don’t have to change their own behavior to reach net-zero or carbon-neutrality goals. 

“Our decarbonization policy does not allow for offsetting as this would transfer responsibilities from the real estate sector to other sectors,” a spokesperson for APG, the world’s largest real estate owner, told Bisnow

Companies from airlines and multinational banks to agricultural interests have been purchasing renewable energy credits for more than a decade, allowing them to claim carbon neutrality without reducing emissions. Even in places like NYC, which has local regulations designed to force building owners to reduce emissions, environmental advocates have warned that landlords could follow suit.

“In a not-very-ideal scenario, it could really incentivize organizations not to change their operations and behaviors at all because you could keep on with your polluting behavior,” Savills Director of ESG Consultancy Hyon Rah said. 

A further problem with offsets, beyond making it easy for firms to avoid reducing their own emissions, is how much they cut them overall. 

The voluntary offset market was worth £1.6B ($2B) in 2021, according to a report published by Boston Consulting Group and Shell earlier this year. That could grow to $40B by 2030 as companies face increasing pressure from customers to incorporate sustainability measures into their business models.

Yet the ability to purchase offsets has allowed heavily polluting industries like mining to accelerate operations without worrying about how many metric tons of greenhouse gasses their actions release into the atmosphere, a joint investigation from the Guardian, German weekly Die Zeit and nonprofit investigative journalism platform SourceMaterial found.

Problems also exist with how rigorously the offsets are verified. Verra, the world’s leading provider of carbon offsets, has issued more than 1 billion carbon credits globally to companies such as Disney, Shell and Gucci. But more than 90% of those credits don't represent real carbon reductions and may actually contribute to global warming, the investigation found.

Those real estate organizations using offsets argued they are a necessary and effective part of the decarbonization process. 

“We always do our best to reduce emissions before they happen — but for those we can’t eliminate, we compensate,” Australian industrial REIT Goodman says on its website. “We know it’s not an ideal solution, but we’re still proud to say that offsetting has allowed us to be certified as net-zero.”

But the extra layer of complication and the additional hurdle of needing to investigate if verified credits are as good as they claim add another obstacle for real estate owners and investors.

“If you do go with carbon offsets, I think it’s really, really important to verify and make sure that the source that you’re using is actually a reliable, viable carbon-offset project,” Rah said. “It’s not a regulated industry, and so that comes with its own risk.”

When it comes to the techniques for carbon offsetting, Cushman & Wakefield's Phipps said real estate has a duty to make sure it doesn't impact legitimate ways of reducing the amount of carbon in the atmosphere. 

There are two main sources of carbon removal: those reliant on land and those taking place in oceans, ranging from nature-based to technological approaches. 

“The built environment must pay careful consideration to how it carries out the groundwork of new buildings, how it looks to reforest areas that have been reduced to provide building materials, and to ensure carbon sinks, such as peat bogs, freshwater lakes, and wetlands, rainforests and grasslands, continue to grow and thrive,” Phipps said.

More generally, the real estate industry has a huge role to play in the fight for humanity’s survival, he said. It must do more in that fight, and it must do it now. 

“The actions we take — or fail to take — today will resonate for thousands of years and for innumerable generations,” he said. “We could not be in a better place, as part of the real estate industry, to make significant changes that will change the lives of many millions, indeed billions, of individuals across our planet.”

Podcast by Miriam Hall. Editing by Ethan Rothstein