By Jake Goodman, Manager, Real Assets. PRI

Jake Goodman

“The fastest decarbonisation of any sector in the world” – that was the assertion made by a speaker at a real estate event last year, referring to the Australian office market. The data is impressive, pointing to average reductions of 50% for some areas. Progress is primarily due to an innovative rating scheme called NABERS, The National Australian Built Environment Rating System, an Australian-wide initiative that measures the environmental performance of buildings. The world has many ESG rating systems for buildings, but what makes NABERS different is a focus on real-world performance rather than a paper-based assessment.

Climate change and real estate

For readers who do not follow the real estate industry day-to-day, Australia’s success will be new information. Climate change conversations often focus on sectors with high scope 1 emissions – aviation, meat production, power production and fossil fuels. But while there is plenty of discussion on where our energy comes from, there is much less focus on who uses it. For example, buildings use 30% of the world’s energy because they need to be cooled or heated in order to achieve a comfortable temperature for human habitation. This demand is set to increase, especially in the fastest developing countries where temperatures are warmer and new air-conditioned buildings will be required. Energy for air conditioning is expected to triple by 2050 according to the International Energy Agency (IEA). This will require a new electricity supply equivalent to the current combined capacity of the United States, the EU and Japan.

Our battle to reduce greenhouse gas emissions is waged on two fronts: new technologies and behavioural change. On the former we are doing remarkably well, with electric cars, solar panels and wind turbines, for example. On the latter point, the news is less encouraging. Though there is lots of potential (and some progress) on the supply side, the demand side is trickier.

People in the developed world are accustomed to all manner of creature comforts, few of which they will be keen to give up en masse – who wants to fly less, eat less meat or work in an uncomfortably hot office? Even if a few well-meaning people do, it is more than offset by increased demand elsewhere. A 2019 report from UK FIRES (Locating Resource Efficiency at the Heart of Future Industrial Strategy) looked at the change required to meet the UK’s carbon reduction target. The report starts from today’s technologies and assumes that the much-hyped breakthrough technologies will not be operating at scale until after the net-zero deadline of 2050. It is a reasonable assumption that leaves us with behavioural change as the main weapon.

It also noted that while energy sources can be transferred to renewables, the greatest challenge is cement. The chemistry of making cement, or any of its known alternatives, leads to unavoidable emissions, but cement is an essential modern construction material. The rate of replacement for buildings is around 1-3% per year. So most buildings standing now will still be standing in 2050. That is good news for embodied emissions from concrete but bad news for operational energy use. Eliminating emissions is not a case of super-efficient new buildings, it is a case of improving the existing stock. As has been stated many times before: energy efficiency is the first fuel.

Responsible investment in real estate

Institutional investors own a sizeable portion of the world’s building stock, somewhere around $8.9 trillion according to MSCI, which makes them the ideal audience for behavioural change. To that end, the PRI recently published a short introductory guide to responsible investment in real estate. It is the latest addition to a new series of mini-guides outlining the basics of responsible investment within each asset class. The guides are short, jargon free and aimed at those with no previous knowledge of responsible investment. Not everyone has the time to read long, technical reports but hopefully they can make time for a brief introduction. We need a base level of understanding across the real estate industry on what responsible investment entails.

The NABERS scheme can offer insights into changing the behaviour of institutional investors. From a small idea, it has expanded rapidly and now 78% of the Australian office market has a NABERS rating. The scheme has been replicated in New Zealand and there is a similar initiative underway in the UK called Design for Performance. Its focus on real-world performance is the defining feature. The responsible investment industry as a whole is seeing a similar mindset emerging, focusing on changes in the real-world, rather than changes which will theoretically come to pass through more rigorous corporate procedure and policy - the ends rather than the means.

But this approach cannot happen until the appropriate processes have been established that ensure ESG issues are considered at each stage of the investment process, which takes us back to the rationale of the PRI introductory guides. Whilst the guides are aimed at newcomers, there are many real estate investors at the forefront of responsible investment, in fact, real estate investors were among the first PRI signatories to set net-zero carbon targets; buildings are a large part of the labelled green bond market; and there are examples of sophisticated climate change scenario analysis across this asset class.

The importance of buildings in any conversation about climate change cannot be understated. The prudent assumption of the UK FIRES report is a very sensible starting point – rely on the technology we have, not the technology we would like to have. In the words of the IEA, buildings present a source of enormous untapped efficiency potential. Behavioural change amongst institutional investors that own real estate will play a crucial role in tapping that potential.



This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

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