Posted by Adam Smith

A race to the top- the Better Buildings Partnership's Climate Commitment group set out their pathways to net zero carbon

Amidst the disruption to commercial landlords caused by COVID-19 in 2020, one group of leading businesses marked the year out for more positive reasons. The UK Better Buildings Partnership’s ‘Climate Commitment’ group – comprising 26 of the world’s largest real estate owners and managers – outlined their individual pathways to achieve net zero carbon across their operations and value chain before 2050. Together these businesses represent the majority of the BBP’s total membership of £240bn in AUM.

It is difficult to overstate the significance of this milestone. These pathways represent a powerful statement of intent from a number of the world’s largest and most influential commercial landlords. Diverse in scope, scale and style, the pathways follow a consistent framework laid out by the BBP with a set of common principles. The majority are now publicly available, with a flurry crossing the finishing line in the final working days of last year. The Verco team supported a number of the Commitment’s signatories in the development process.

We have been reviewing the pathway documents in detail. In this article we share our reflections on the key themes and the next steps that will see these plans realised.

1. Radical transparency

The BBP’s framework document pushed the NZC signatories to outline at length the scope, delivery, desired outcomes and reporting metrics underpinning their strategies. The result is a set of commitments that are transparent, measurable and backed up with honest assessments of current gaps. The level of candour found in the ‘challenges’ sections of the pathways shows that businesses are looking carefully at how they must change their investment and development activities to prevent climate breakdown. This will give confidence and clarity to the wider real estate supply chain. It signals to occupiers and investors that changing sentiments around ESG are being heard and that commercial landlords are willing to facilitate a zero-carbon transition. The ‘ripple’ effect this is having for asset managers beyond the BBP membership is already detectable. This group of 26 businesses are likely to be influential in setting the ‘terms of engagement’ for the market on sustainability going forward.

2. Widening the net

The scope of these pathways goes well beyond merely energy consumed in landlord-controlled areas to the wider value chain and almost the whole property lifecycle. Measuring these indirect Scope 3 emission sources is complex, and the diversity of datasets requires a more sophisticated approach to data collection and target setting. The BBP signatories have committed to net zero covering all carbon impacts – some as early as 2030. This will be a major challenge – most businesses do not yet appear to have the data.

While several businesses report their total Scope 1, 2 and 3 emission baselines, large chunks of the Scope 3 portion are currently based on benchmarks. Embodied carbon from developments is one such area. As electricity grids decarbonise and operational carbon emissions decrease, embodied carbon will become increasingly material in the asset lifecycle based on current measurement approaches. The vast majority of businesses have not been able to measure the embodied carbon intensity of their development or refurbishment activity. It is important that we see progress in this area - recognising ‘Paris-proof’ resource limits and applying end-of-life circular economy principles. The industry is moving in this direction – the London Energy Transformation Initiative (LETI) for example is developing guidance.

A handful have undertaken whole life carbon assessments of case study projects – in one case going as far as developing a 3-year rolling average. Another incorporates embodied carbon targets in their sustainability development brief and tracks each project via a quarterly environmental scorecard. We can see a rapidly increasing need in the industry for skills and delivery partners to undertake whole life carbon assessments. Several businesses commit to doing this as standard for all developments from as early as this year – a significant undertaking. The different starting points across this group on embodied carbon are reflected in the targets being set. Some have committed to a percentage reduction on an as yet unspecified baseline, others have set a single intensity target expressed in kgCO2/m2.

Tenant energy use is another Scope 3 component that is typically only partially covered by real metered data. We have supported a number of BBP members to develop tailored estimates of tenant consumption based on their activities and extents and are rolling-out automated data collection using AI-bots and ‘bill-scraping’ technologies, and green lease arrangements. This process can take time and be as much about people as processes. The action plan within the first two to five years of many pathways appear to focus on striving for 100% data coverage. For some businesses this might require some head-scratching to identify the levers that will convince tenants this is worth their while – educating, supporting, empowering and incentivising tenants, rather than mandating. Often, this may require direct engagement with sustainability and executive teams of larger tenants, where data sharing may be more commercially sensitive.

3. Reporting for zero

The signatories have committed to annual updates of their progress. Some sustainability managers may be nervous about adding another reporting obligation into their annual cycle on top of investor-driven voluntary initiatives such as GRESB and UNPRI and emerging regulation such as mandatory TCFD reporting, SFDR and EU Taxonomy rules.

The additional data demands should not be seen as simply another obligation. They represent significant opportunity and other reporting initiatives are converging around the same key themes. Occupiers sharing energy data with their landlords can bring mutual benefits - empowering tenants to achieve their carbon goals and enabling landlords to assist with energy management. Landlords will need to find innovative ways to engage with their tenants and facilitate data sharing with a minimal burden for either party. Better engagement with suppliers can identify collaboration opportunities, or simply ways of doing business better.

To successfully deliver on net zero it will not be enough to simply check in on progress once a year. Sustainability managers will need to ensure that estimated and benchmarked data is eventually superseded with real numbers and analysis of actual performance trends. A host of disparate data streams, from spend on services to utility data to development extents to business mileage will need to feed coherently into a central data hub to ensure that progress can be monitored in real time. This system will need to be flexible and able to deal with the flux due to acquisition and disposals and the process of asset onboarding. Further, visualisation of this data will need to be easily manipulated to suit a growing range of interested stakeholders and to feed into a wide set of mandatory and voluntary reporting schemes. Progress against net zero carbon pathways will need to be tracked at the individual asset level providing timely and actionable information to decision makers. The transformative potential of digital twins to monitor building performance in real time could be a key enabling technology.

Finally, for many BBP members climate-related metrics are one strand of a wider ESG and social benefit strategy. It will not be efficient to hold this information in separate siloes. Data management platforms will need to be malleable to social, environmental and commercial data – from carbon to charity to community to commercial data.

4. Setting the standard

There is currently a ‘wild west’ of voluntary net zero claims in the market today. A host of definitions and benchmarks are referenced in the BBP pathways- CRREM, UKGBC, LETI, SBTI and MSCI. What can we make of this level of fragmentation of approaches?

Ultimately all net zero definitions in the market today are acting ahead of regulation. They are predictions of a future policy environment in which carbon and energy performance of buildings is constrained by regulation in the face of the realities of finite carbon budgets or renewable energy supplies. Different methodologies and assumptions are used to derive these different benchmarks. Some are relevant at an asset level while others are more appropriate at the fund or house-level.

So how might we expect things to play out? The next development is likely to be widespread verified net zero claims against established standards. The UKGBC for example has begun listing the projects, buildings and organisations that meet their ‘net zero’ standard. This will soon be reinforced by requirements for larger buildings to get annual operational energy performance-based ratings and mandatory public disclosure - a BEIS consultation on this piece of the jigsaw is anticipated shortly. All of these steps promote transparency in the market. Ultimately, we might anticipate a move from greater transparency to mandating of operational performance levels through regulation, as has already started in Australia for new developments at the planning stage and might be considered by the GLA Be Seen policy for London, possibly this decade. This would be followed by greater accountability, with penalties for those not achieving a mandatory performance level. Throughout the process of all these steps the market becomes permeated with the right behaviours - valuations come to reflect performance and liabilities and the market is empowered to drive the system to net zero like a well-oiled machine.

To focus on one project in particular, CRREM has seen widespread uptake and provides wide coverage by geography and asset class but doesn’t capture the full story. Some country-level frameworks such as Décret Tertiaire in France or the UKGBC’s Paris-proof benchmarks go further. When developing asset-level energy use intensity targets we typically advise our clients to pursue the most stretching of CRREM or local frameworks for any given region or asset class as the best strategy to mitigate risk or gain first-mover competitive advantage.

Until a formal net zero carbon certification scheme emerges, enabling a formal verification process, some members express an intention to have their pathway reviewed by a third party, a sensible way to have an objective party undertake some tyre-kicking.

5. All aboard

An asset’s net zero journey can start before it is even acquired. There are several mentions in the pathway of ‘net zero carbon due diligence audits’, to be undertaken during the course of a potential deal as part of wider commercial and technical due diligence. These are designed to identify ‘red flags’ to potential buyers such as prohibitively expensive retrofit costs or major commercial or leasing constraints preventing access to undertake net zero measures. Over time these will provide price signals to the market so that valuations better reflect the NZC risks.

We expect net zero due diligence audits to become part and parcel of the acquisition process in the next few years. This will change the type of information expected of vendors. While each business is currently designing their own approaches, we anticipate standardisation over time as industry bodies start to provide guidance. For now, it will be up to buyers to set the terms of these audits and to decide whether a given vendor is disclosing enough information about the building’s potential net zero readiness to satisfy any concerns. The acquisition process can be fast and furious and adding further checks into tight timeframes might seem a stretch, but ultimately this could avoid deals that create a costly liability for fund managers and investors.

6. Offset or not?

Many businesses describe a need to develop an offsetting strategy. Some describe the types of credit and certification they plan to pursue, or the year in which they plan to begin purchasing offsets annually. Many are at an early stage here and have instead focussed their efforts on the earlier stages of the ‘mitigation hierarchy’. This is quite understandable given that the industry position on offsetting in real estate appears to be under development.

The UKGBC’s task group on offsetting and renewable energy procurement are due to publish their recommended guidelines later in March 2021. Their guidance could have implications for BBP signatories that have decided REGO-backed green tariffs are a sufficiently additional form of renewable energy procurement in their pathways. This is not to mention the apparent contradiction of following UKGBC Paris-proof targets – built on the premise that all renewable energy supplies form a shared national resource to be distributed equitably – while at the same time claiming rights over a portion of this resource through standard green tariffs with little or no demonstrable additionality.

The SBTI’s criteria for a net zero standard – currently under consultation – also include recommendations that permit carbon removal within the scope of such a commitment, but offsetting in the form of carbon credits from reduction / abatement projects are excluded from the ‘neutralisation’ options to claim net zero. There are still conversations to be had before an agreed place for offsetting in the journey to net zero is decided. BBP members will be following this closely.

7. Built to last

There are a number of references across the pathways to addressing the ‘performance gap’ between design and operation in new assets. Several BBP members reference the NABERS Design for Performance Framework and NABERS UK rating scheme, or BSRIA’s Soft Landings approach. These will be critical to ensuring that new construction is future-proof.

Final reflections

Manoeuvring real estate to net zero carbon will require a huge and well-coordinated effort. By walking in step, addressing common challenges such as data sharing, valuation and net zero definition, the commercial property sector can be a true force for good in preventing climate breakdown. These pathways are an impressive statement of intent. Now it’s time to get to work.

Verco supported a number of the BBP Climate Commitment Group to develop their published pathways. We are now supporting these businesses with implementation and advising real estate companies outside this core group on their own pathways. For more information or any queries on the journey to net zero real estate please get in touch.

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