‘2040 Is Tomorrow’: How Builders, Investors Are Getting More Serious About Slashing Emissions
Buildings account for approximately 40% of carbon emissions globally. With global pressure to act and Paris Agreement deadlines drawing ever closer, commercial real estate investors are facing increased pressure to figure out how to bring down emissions fast and how to fund the transition.
Many fundraising efforts have 10-to-20-year holding periods, the exit times of which are starting to force investors to think of solutions as a near-term, not long-term, issue, Tishman Speyer Global Head of Sustainability and Building Technologies Jonathan Flaherty said onstage last week at Bisnow’s National Sustainability and ESG Conference.
“They're doing the math in their head and saying, ‘It's 2023 today, if I give you money for 15 years … when I get it back, it's 2040. Wait a minute, should that be net-zero by 2040,’” he said. “So all of a sudden you've got a lot of equity saying, actually, 2040 is tomorrow. Because in essence, that's the cycle of real estate.”
Pressure is increasing on multiple fronts, CRE experts said onstage at the event, held at the New York Marriott Marquis.
“Let's say three, four years ago, we had maybe one or two clients a year that were talking to us about going net-positive anything,” said Myrrh Caplan, Skanska’s vice president for sustainability. “Now it's a flood. The floodgates have opened. We have so many clients that are looking for net-zero, net-positive energy, net-positive water, even sometimes net-zero or net-positive waste.”
A crucial angle for accelerating the pace of sustainability is the finding a way to finance the added upfront costs, which more industry sustainability leaders voiced optimism for as they face shareholder demands and brace for potential regulation, like the onset of Local Law 97 fines for New York City buildings.
One obstacle is making sure investors know the right questions to ask, RXR Senior Vice President for Social Impact and Sustainability Investments Eric Clement said.
“When institutional investors are asking me for any information on ESG or impact, they don't know what to ask, and because they don't know what to ask, they ask you everything,” he said, adding that compiling that information often takes as long as two weeks.
The solution, Clement said, is learning how to educate investors and communicate with them about sustainability goals and language.
“There's no way that any of the stuff we are talking about today is going to move forward if we do not get better at this,” he said. “We have got to figure out how to make it very easy for the money to build.”
Despite the obstacles, the technical conversation is advancing. Commercial real estate companies are increasingly aware of not just what Scope 1 and 2 emissions are, but also what Scope 3 emissions — indirect emissions from tenant activity and embodied carbon, which is carbon created in the construction process — are, and the role they play in overall emissions.
“Embodied carbon, that's where everyone is going and what everyone's talking about,” Nicholas Pasquenza, LCOR’s director of development and construction, said onstage. “We're starting to evaluate our embodied carbon on some existing projects, and start using those tools on our current projects so we can establish some goals.”
Widespread embrace of reducing embodied carbon emissions would be a sea change for the industry. A Bisnow investigation from April found that 51 of the world's 75 largest commercial real estate investors and fund managers, with portfolios valued at a combined $2.3T, don't have a plan to cut their Scope 3 emissions. Only 12 firms included embodied carbon in their decarbonization targets.
To this point, most of the attention has been focused on reducing the amount of energy that existing buildings use, either through better monitoring or upgrading building systems, CodeGreen Solutions President Julia Rogers said.
“Because of good local law legislation, as well as really good mandates and regulations going on across the world and across the United States, we're seeing operational efficiency really kick up,” she said. “Embodied carbon has been a little lagging. It is, I think, because of a lack of education — not asking those questions right upfront.”
While developers are still missing opportunities for things like geothermal energy in projects due to a lack of education, Rogers said, they are making a shift with their construction materials. Some are swapping aluminum for zinc to reduce embodied carbon, and others are picking more durable materials for interiors that are less susceptible to mold, thereby extending the life span of their buildings.
Lendlease Americas has also been able to swap out some materials, Sara Neff, the company’s head of sustainability, said onstage, replacing 40% of the concrete for the foundation of one project with recycled glass pozzolan at no extra cost.
But there’s still room to improve, like figuring out a way to pour concrete at low temperatures for construction in Northern Hemisphere winters without creating a lot of heat and adding more carbon to the atmosphere. There’s also the construction equipment itself, which is still largely powered with diesel fuel.
“We need all-electric construction equipment,” Neff said. “I don't live in Oslo, which means it's very hard for me to get all-electric construction equipment — and even if I did, it's really hard to plug it in and getting the tech power fast enough. So I just had to turn down an all-electric crane.”
Sustainability talk may seem daunting, Flaherty said, but there’s far less science involved in conversations about policies than most investors might imagine.
“We're going out and talking to big global pools of capital, trying to understand what they're interested in investing in, and what kind of returns they want, and then trying to structure funds around that,” he said.
There are financing tools that every developer can employ when it comes to ensuring sustainability is built into their product, Neff said, such as sustainability-linked construction loans or green bonds.
“For example, with our two JVs that we have with foreign pension funds, those assets are required to be net-neutrally operating, including historic construction emissions, Scope 1 and 2, and tenant emissions,” she said. “That's just table stakes. We break our covenant if we don't achieve that. And so that's very helpful in terms of getting everybody on board.”
“We have all the technologies we need today to turn this world into a zero carbon world. It's here. All it takes is the will,” Rouco said. “Decisions are still being made purely financially, despite what is being said.”