Transferring real estate net zero plans into successful business models
There has been a noticeable shift in the tone of conversations around net zero for investors and asset owners. With many leading asset managers having committed to Paris-aligned carbon reduction targets, the scale of the task is now starting to hit home.
For example, in the UK, commercial real estate is reported to have reduced emissions by 59% over the 30 years since 1990 – but over 90% of these savings can be attributed to decarbonisation of the UK electricity grid, rather than direct action by the CRE sector.
It is now imperative to realise in-sector savings through decarbonisation of heat and meaningful demand reduction, while continuing to provide a functioning market for built assets across the world. What’s more, the pace of change must accelerate considerably in order to match the carbon reduction pathways specified by frameworks such as the Carbon Risk Real Estate Monitor (CRREM) or Science-Based Targets initiative (SBTi). In theory we could just focus on electrification and ensuring assets are ‘NZC Ready’, where a building has identified and eliminated any inefficiencies and has also replaced any fossil-fuel driven heating, hot water or catering services with low carbon equivalents. The building is therefore ‘ready’ for the final step to NZC – the total decarbonisation of the electricity grid. However, electrification of transport and the burgeoning power consumption from ICT and data infrastructure will also increase demand, requiring both additional renewable capacity and significant improvements in energy use intensity.
So, how can asset owners and managers pivot successfully to an emerging energy efficient and low-carbon world? Verco have identified three success factors that can ensure organisation-wide net zero commitments are translated into successful business models:
Firstly, it is necessary to be meticulously clear about where you are at the moment, the organisation’s level of ambition and what this change will mean in practice. Carbon accounting is complex and evolving, and defining specific scope and targets will enable leaders to develop a focused change programme. We recommend that roadmaps are created by working backwards from target dates, as well as forward from the present, in order to make sure climate plans are robust. What will the portfolio look like in 2030, and what will be its energy and carbon performance? How will company culture and structure have changed? How will key stakeholder relationships (for example with suppliers or occupiers) need to evolve?
2. Change Management
Secondly, successful organisations are already mobilising to convert strategic plans into action. This may require additional resource, especially while the necessary structures are being created. However an effective plan cannot be implemented by a NZC Manager or an ESG team alone. Instead, it requires a change-management approach to integrate climate reporting and action into the wider business including redefinition of roles, budgets, objectives and targets, metrics, operating processes, fund strategies and mandates, internal and external stakeholder engagement, and data management practices. We are working with a number of clients to help prioritise and clarify these actions.
3. Allow for Flexibility
As the military saying goes, no plan survives first contact with the enemy. So our third success factor relates to an organisation’s ability to create management systems that can flex as the climate agenda continues to evolve. We can expect at least a further 10-15 years of adjustment in regulations, stakeholder expectations, and market pricing. Those businesses that can remain in-step as the market changes will be best protected from the risks of asset stranding or excessive transition costs. By creating transition processes rather than one-off projects, these risks can be minimised.
This article has summarised a few of our findings from our work as net zero transformation partners with leading real estate clients but for further insight, why not get in touch and sign up for our Live Q&A session: Q&A hosted by Business Green: The net zero transition - From targets to action.