Zero.

A few weeks ago, I had the pleasure of attending IMN’s Decarbonizing Real Estate Forum. 

Some of my personal highlights included moderating a panel with top sustainability leaders focused on taking decarbonization from talk to action, as well as the special dinner we hosted with 30 sustainability leaders who are leading the decarbonization charge at their respective organizations. 

Most notably, I felt a distinct shift at this conference. The consensus was resounding: sustainability is no longer perceived as a cost center. It is now widely acknowledged as a key driver and protector of asset value. As such, it has graduated in status from a nice-to-have, check-the-box activity to necessary table stakes to attract investors and compete in capital markets.

It’s incredibly motivating to see people from all backgrounds work together and recognize that decarbonization has now become a core imperative  — and it will only play a bigger role going forward.

Repositioning decarbonization using the language of investors

The sustainability community at large has struggled to position decarbonization efforts successfully. We can often find ourselves getting lost in the macro, talking about the broader climate imperative, or getting too mired in the micro, focusing on the economics of individual projects. In both cases, we end up missing the thread of what truly matters to the key decision-makers who need to buy into decarbonization.

At IMN, we saw the two distinct worlds of sustainability and investment converging. We listened to panel after panel reaffirm a shared understanding and acceptance that decarbonization does meaningfully impact asset values by improving NOI and facilitating cap rate compression. (As an aside, companies that fail to decarbonize are expected to risk up to 20% in economic profit, on average, by 2030.)

All of this points to the need to start deploying meaningful capital against decarbonization, but in order to do that, asset managers first need to map out which projects should get prioritized, the impact of those projects on carbon and financial performance, and, of course, what timetable they should take place on. And that’s not as easy as it sounds — according to CBRE, only 36% of companies have strategies in place to meet their carbon-reduction goals.

The missing ingredient? Actionable, investable asset-level transition plans that ladder back up to portfolio-level goals so that real estate managers can be confident they are on-track to achieving their targets. 

That’s exactly what we are focused on at Audette, and I have never felt more motivated or committed to ensuring we can make decarbonization planning easier, faster, and widely available to the entire industry. Now is the time, in the face of increasing carbon regulation and shifting market sentiment, to unlock decarbonization at scale.

From reporting to action

Reporting was a hot topic in our final closed-door session — right now, it eats too much budget and time. We’re sinking preciously scarce time and resources in the wrong places. Echoing the same sentiment, the opening panel of the conference was aptly named “Less Reporting, More Reduction.”

It is time to rethink reporting for reporting’s sake. Instead, real estate investment managers should apply the same critical lens to reporting as with any other investment. What truly matters to your particular clients and investors? By focusing on only the big-ticket reporting items that deliver material value, transparency, and trust, and reprioritizing resources towards active decarbonization efforts, you can balance meeting the needs of investors while also continuously moving the needle on action.

Innovation is more important now than ever to accelerate the pace of decarbonization

Understanding protein folding is essential to medicine and combating disease, and it was one of the biggest problems in biology — until Google’s AlphaFold AI predicted the 3-D structure of almost every known protein (about 200 million in total).

In the 2000s, a Wall Street trader wanted to reduce the time it took for data to travel between Chicago and New York. The result? A one-inch long cable that cut 3 milliseconds off the previous route of lowest latency, according to Forbes, and cost $300 million.  

In other industries, from finance to tech to EVs, the scale of our ambition matches the scale of the problem.

But that’s not happening with decarbonization in real estate. We need to change that. 

Real estate accounts for 40% of carbon emissions. But our building stock is old (the average commercial building is 44 years old), and a lot of the mechanical systems used are relatively straightforward. We’re not facing an unsolvable tech problem. While the problem is big (5.9 million commercial buildings alone contained 97 billion square feet as of 2018), it’s not as complex as we’re making it out to be. 

IMN made it clear to me that we are just at the cusp of seeing incentives (and penalties) become meaningful enough to spur real innovation in real estate decarbonization. Carbon and capital are becoming increasingly intertwined. 

Europe is putting a price on carbon (read more about the EU Emissions Trading System). So is Canada. In 2022, China announced it aims to reach net zero emissions by 2060. And in the US, the ~50 jurisdictions that have either rolled out or committed to rolling out building performance standards (which could rack up multi-million dollar fines) were yet another hot topic at IMN.

Carbon emissions and performance are becoming baked into the global economy and the price of doing international business. Future asset values will be impacted by carbon performances, and even US companies are increasing demand for low-carbon office spaces (70% of which may not be met by 2030). 

Those who leverage decarbonization as a competitive advantage will gain a significant edge during this economic transition. Those who don’t adapt will get left behind. 

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We’re in a time of great transition as finance and decarbonization converge, and the momentum we’re witnessing is energizing. 

Successfully reaching a zero carbon future is a team effort. I’d love to hear your thoughts here or on LinkedIn.

Until next time, 

Christopher

(Missed my last newsletter? You can check out our past issue here.)

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