Climate Risk and Decarbonization


Recently, investors made net-zero commitments, regulators developed reporting standards, governments passed laws targeting emissions, employees demanded action, and tenants demanded more sustainable buildings. At the same time, the world will feel both the physical effects of climate change and the economic, social, and regulatory changes necessary to decarbonize.


Real estate is central to global climate change mitigation efforts. Real estate drives approximately 39 percent of total global emissions. Approximately 11 percent of these emissions are generated by manufacturing materials used in buildings (including steel and cement), while the rest is emitted from buildings themselves and by generating the energy that powers buildings.


Following suggestions could be taken to thrive throughout the climate transition:

  • Incorporate climate change risks into asset and portfolio valuations. This requires building the analytical capabilities to understand both direct and indirect physical and transition risks.

  • Decarbonize real-estate assets and portfolios. This requires an expert involvement to guide and implement green and sustainable methods for those existing assets and new developments (from predesign stage until construction completion stage).


Decarbonizing the industry requires considering a building’s ecosystem

Ultimately, the only way to reduce the risks of climate change is to decarbonize. Real-estate players have a wide array of options for how to proceed, including designing sustainable/green, build smart, low-carbon development, and construction; building retrofits to improve energy efficiency; upgrades to heating, cooling, and lighting technology; and technology to manage demand and consumption. However, decarbonization is not solely a technical challenge. To develop the most appropriate path, real-estate players need to understand the range of decarbonization options and their financial and strategic costs and benefits.


Decarbonization

To decarbonize, industry players need to take the following steps:

  1. The key is to understand the starting point — Quantify baseline emissions of each building. This helps prioritize where to start and determine how far there is to go to reach zero emissions.

  2. Create an emissions reduction and reporting engine — Firms should determine what people, capabilities, tools, and processes they need to understand each property’s emissions. They should determine which insights are required to find the most cost-effective ways to reduce emissions, and what execution capability is required to deliver reductions.

  3. Build a solid view of material climate impacts — Developing a clear understanding of the impact of climate on the performance and value of assets. It is important to forecast the impact of changing physical risks such as seismic, fires, floods, storms, and heat on materials and the fundamental economics of assets.

  4. Execute — Set up the mechanisms to effectively deploy the decarbonization plan. These may involve making changes to financing, design, governance, stakeholder engagement (investors, joint-venture partners, operators, and tenants), and a range of operational and risk-management aspects of the business.

  5. Track and improve — Much of the value of decarbonizing will come from the ability to demonstrate emissions reduction to potential stakeholders. Building the ability to monitor and progressively reduce emissions on the path to net zero will create an opportunity for players to differentiate.

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