Trillion-dollar sustainability shift needed to combat risk of stranded real estate assets – Redevco panel

Huge amounts of capital coupled with bold corporate leadership are crucial if the world is to get back on track to reach its climate change targets and ward off a potentially disastrous storm for real estate assets, Redevco’s investor clients and business partners heard at a Networking Lunch hosted at The Old Course golf club house just outside Cannes during MIPIM. On Earth Day, it seems even more relevant to publish this recap.

Marga Hoek, moderator of the discussion and author of the book: ‘The Trillion Dollar Shift, set the tone for the panel discussion saying it was time for investors to put their capital where their mouths are. The world is way off track on reaching its climate change greenhouse gas emissions reduction targets and implementing the United Nation’s sustainable developing goals (SDGs), she said.  Marga added she’d been shocked to discover around 70% of so-called sustainable investment funds don’t comply with the Paris Climate Accords, including 50% of funds specifically focused on the decarbonisation transition. 

“Power comes with responsibility. And leadership is a privilege that comes with huge responsibility…What we need are CEOs from all over the world…to bring up the bravery, to be real trendsetters. In the end, it’s actions that count, not words.”

She compared the 17 UN development goals to a moral compass for a just and humane world where we, our children and grandchildren can live sustainably over time. That means truly beating poverty around the world, ensuring that climate change does not devastate our planet, confining the temperature rise globally to 1.52 degrees [by 2050] and eradicating inequality. Just under 100 companies signed up to the UN’s SDGs back in 2015, but with the deadline approaching in 2030, we’re not even halfway through in terms of making progress, she pointed out. “Of course, disasters like the pandemic happen and push us back, but we still need to step up and do much more.”

Marga urged investors to become frontrunners, embracing moving to a zero-carbon economy sooner rather than later. “Climate change touches on every one of those 17 SDGs…if we solve it, it will impact on everything. If we don’t, it will likely impact on everything as well.”

She pointed out that one in four people around the world currently has no access to fresh drinking water. “Throughout the pandemic, we had to wash our hands with soap, but three out of 10 people on this planet weren’t even able to do that. Almost half of the population on Earth is still not digitally connected and, with the fourth industrial revolution taking place, we know that digital connection is a crucial prerequisite to be able to bring good things to people. The percentage of renewable energy in the world is stuck now at 29% and I don’t need to tell you we have to get to 100% ASAP.”

More needs to be done on recycling and the circular economy as well. “We currently recycle a mere 9% of plastics and have a plastic soup the size of Germany and France combined. If we don’t radically change our behaviour, we will have more plastic in the sea than fish by 2050.”

Another system in need of a comprehensive overhaul is the food production chain. As much as a third of the food produced annually worldwide is wasted or isn’t consumed, equivalent to $1 trillion every year. That, in turn, is equal to the amount needed to feed all the undernourished people in the world twice over. The costs of climate change are also increasing at an alarming rate, she warned. “If you look at the climate disasters, we had in 2017 – the hurricanes, floods and so on – they represented 35% of the total cost of natural disasters in the entire 10-year period prior to that one year. So, the costs of disasters and all the things causing them are rising very rapidly and affecting GDP.”

Marga said investors had a fiduciary duty to put their weight behind the carbon transition to reach zero carbon emissions earlier than in 2050 as outlined by the Paris Accords. “There’s a lot of talk about the huge and staggering growth of ESG investments, which I’ve been told is going to be one third of all assets managed in the world by 2025. It makes total sense, but that’s not all there is to it. We also need to make sure that capital has a real impact in the real world to solve the real problems. I’ve heard that we need three to four trillion dollars annually – equal to the GDP of Germany or Japan – to get the carbon transition done. That means investing the GDP of those countries year after year after year for almost 30 years…We need all your capital to make one third of all assets sustainable by 2025. We need it all if portfolios are to do more than tilt towards change and have a real impact.”

The good news for the frontrunners is that they will win in the end, she predicted: “The business case for the world and the business case for companies are moving much closer together.  It’s been proven that sustainable investment and sustainable companies outperform unsustainable ones. Sustainable brands, for instance, grow 1.6 times faster. Many companies buy only sustainable brands, not only for moral reasons but because it makes clear business sense. And the same is true of investments.”

More than a third of Dutch real estate portfolios risk becoming stranded by 2030

Willemijn Verdegaal, Co-head Climate and ESG Solutions, at consultancy Ortec Finance, said her institutional investor clients are extremely concerned about being left with stranded investment assets in their portfolios stemming from climate change.

“The Dutch central bank just came out with a report last month saying they expect between 35% to 45% of Dutch real estate portfolios are going to be stranded before 2030, which is just not far away under a Paris climate scenario. The central bank also said from a physical risk perspective they’re worried that if a building is no longer resilient to physical risk it cannot get insurance, which may also cause an asset to be stranded,” she noted.

Another key issue is when is the market going to price in these risks, Willemijn added. “I do think that some of the decarbonisation mitigation risk is priced in a little bit, but not enough. And physical risk is hardly priced in at all. So, there are these strong forces that will maybe lead to some investors taking their commitments and their risk management seriously.”

Ortec Finance does scenario modelling to support investors in their investment decisions. The team integrates climate risks – both physical transition and market risks – into forward-looking scenarios to help all types of investors decide how they should be doing their strategic asset allocation to maximise their risk-adjusted returns.

“Typically, we work with institutional investors who invest across a broad range of different asset classes, one of them – and an important one – being real estate. When they look at their assets in the context of sustainability and climate, they mainly concentrate on the risk point of view and the question of how can I ensure that I maintain my returns even in the context of climate change? Some are not even all that motivated to do good in the world and are just concerned about the risk perspective. But thankfully, most of our clients look at it from the risk perspective as well as from the impact perspective, and they are increasingly signing up to net zero carbon emission goals by 2050.”

Willemijn added that the real estate investment industry should be well-placed to benefit from the massive investments underway in decarbonisation and renewable energy technologies, because private markets in property, infrastructure, forestry, and agriculture are now widely seen as the areas where the greatest impact can be made compared with listed equities and fixed income.

“Real estate together with other physical infrastructure is the biggest remaining asset class where action can be taken,” she pointed out. “So, there’s going to be a huge demand for green infrastructure or green real estate because, frankly, where are asset owners going to go, especially in the current high-inflation environment? They’re looking for that kind of protection as well. So, if you are a real estate manager who can say, look, I’m really going net zero and I’m really dealing with locked-in physical risks…and I’m able to bring you the data to show that I’m doing it so that you can convince the regulator…I think then you are solving your client’s headaches. And I think that’s what good business is about: that is being responsible.”

Building with wood can accelerate decarbonisation process

James Drinkwater, Head of the Built Environment at the Laudes Foundation, told the audience building with wood could also accelerate the decarbonisation process within the real estate industry:

“We develop about 180 million square metres of residential properties a year in Europe. Arguably more is needed now. If 80% of that was done in wood, this wonderful stuff you see around you, it could sequester, because of the forests it comes from, around 55 million tonnes of CO2 per year, from the atmosphere,” he said. Equivalent to half the annual emissions produced by Europe’s cement industry. “This is where quite a lot of these emissions are coming from. So, we have opportunities to choose low-carbon materials to start to address these wider climate impacts and start to look beyond to where the climate science says we need to go. There are ways for the real estate industry to actively contribute to removing a lot of this stuff from the atmosphere.”

Laudes is a philanthropic foundation created to really challenge and inspire industry. “We work with large industry coalitions, investors, developers, and others in the built environment to set out very clear pathways. What does implementing the Paris Agreement mean in real nuts and bolts?”

The Laudes Foundation is seeking to create a clear pathway for the real estate sector through frameworks that not only look at the energy piece but across the whole lifespan of a building such as the Whole Life Carbon Roadmap that it has co-financed. This common vision and agreed actions for achieving net zero carbon in the construction, operation and demolition of buildings and infrastructure was recently adopted by the World Green Building Council.

The work the Laudes Foundation has done to obtain clarity at national market level has also become a source of inspiration for European policy, James said. “The European Commission is now setting out a Paris-proof roadmap and they’re starting to look at embodied carbon as well…and how we can choose materials that start to work with nature very explicitly…There are solutions in front of us today and 80% [of buildings made of wood ed.] may sound like a lot, but there are cities in Sweden already using wood for 50% of their new build. So, it is possible today.”

Laudes also works with investors on tools to align their portfolio with the Paris Accord standards, James continued. “So, for example, we invest in tools like CRREM…the carbon risk real estate monitor.  That’s starting to say: how do we go there? How do we start to set targets across our portfolio, across different asset types, across different countries? And increasingly, we are starting to work on the social side of things as well…This transition is going to be about climate, but also about taking society with us and really understanding what that means and how to create some win wins. Our urban built environment can increase stress and anxiety, but we have a real opportunity to embrace wonderful built environments like those built with nature and people in mind that just make us humans feel an awful lot better.”

The current energy crisis sparked by the war in Ukraine is also leading to a more intensive focus on the energy performance of buildings and the carbon that’s emitted through energy use in our buildings, he pointed out. “We mustn’t forget that 28% of the world’s emissions relate to the way we operate our buildings. 10% of global emissions relates to what we call embodied upfront carbon – all the stuff that’s in materials…even before your tenant gets into a new build.”

Europe has a very clear global role to play in defining the taxonomy and rules while a market tool like CRREM has created a target to apply to a legal framework, James added.  “These are the kind of tools we need to be promoting internationally. CRREM started off in Europe being used by the European Union and it is now starting to be used in Asia and increasingly by some players in the US.”

Redevco translates sense of climate urgency into science-based targets

Clemens Brenninkmeijer, Head of Sustainable Business operations at Redevco, told the networking lunch the urgency around climate change and its possible effects on investments has increased dramatically in the last three or four years. “It has risen so sharply that we’ve also made it a central point to our strategy. Redevco now has 280 assets in the portfolio, and we are aiming for net carbon zero by 2040, because we felt the World Building Council target of 2050 was too far away – the urgency must be higher. So, in the past year, we’ve established a science-based target to reduce emissions by 50% by 2030 en route to our net zero target by 2040.”

This strategic goal was partly driven by a personal passion, Clemens explained. “A recognition that if we want to have a family business that has been around for six generations…for another six generations, well then, we must have a planet on which to do business. So, I keep beating that drum.”

The task facing the real estate sector is huge. “It’s daunting. You can also think, well, what are 280 assets in the context of the entire built environment? It’s a drop in the ocean, but we must do our bit, we must take responsibility. And every little bit that we can do does count. Over the past 15 years we’ve already been working on futureproofing and improving the energy performance of our assets using BREEAM as a methodology to guide us on our way.”

Ultimately a systemic shift is needed, however, Clemens said. “Things are not going to change overnight despite the enthusiasm and the engagement with the topic which has, of course, massively increased. People are also struggling because fundamentally we’re still working in an old system and the system needs to change.”

Getting investor clients on board is an important consideration. “Of course, we must ensure that all our investors are happy with what we’re doing on their behalf. But we’re also convinced that ultimately, if we don’t do it, five or 10 years down the line the entire investment community is ultimately going to wake up and say this really isn’t sustainable,” he said.

Climate change is now fully embedded in Redevco’s strategic objectives, asset management and asset development activities. “We want to make deliberate choices every day at every intervention moment with our tenants, with our supply chain, to drive down not just the operational emissions, but also to make deliberate choices around materials and so on, to drive down the embodied carbon upfront emissions. It’s a learning journey. We can’t do this immediately, everywhere, and with all assets at the same time. So, we must be realistic – it’s going to be a challenge but it’s also great fun. We have joined a whole load of companies to really put our money where our mouth is and we have a lot of colleagues who get it, who want to have actual impact and that generates a lot of energy. That’s the translation of being a force for good and what we’re trying to do with this agenda.”

Redevco is also looking to have an impact beyond the level of an individual asset to the broader community, Clemens said. “We see a huge opportunity for helping cities to transition to a more sustainable and a more equitable environment where people want to live, work, play, shop and enjoy life. We cannot do it alone…so we must find partners and fellow stakeholders to work on things together. And I think we are starting to see that – the asset management and investment management community do get it. They see that there is value in working on projects together to look at regeneration and optimisation of neighbourhoods.”

Redevco already has a couple of great projects in the pipeline, for example in the UK, he added. “We’re taking an old shopping centre and transforming it into a bit of a district with resi and some food and beverage, some leisure to optimise the retail offer and maybe even some other services to create an area that people will adopt as their new community… You can make one asset in a street perfectly [climate] resilient, a lovely, sustainable, commercially fantastic building but it’s also about the rest of the buildings in the neighbourhood. If the community around it is derelict, then that asset is not going to sustain its value. It’s not easy, but you just must start and do it.”