Zero.

Welcome back to Zero. It’s that time of year when many of you are finalizing your GRESB submissions and kicking off the capital planning season for 2025. Now is a good time to ask — to what extent should decarbonization be a part of that?

Securing capital for zero-carbon efforts can be a significant challenge, but not integrating decarbonization into capital planning this year compounds the ‘carbon debt’ being carried by our commercial buildings stock. 

With CRREM coming to the United States and Canada (more below) and escalating investor and tenant pressures to decarbonize, we don’t have another year to wait to make meaningful steps and move the needle. Those who don’t start including decarbonization in their budgets are exposing themselves to financial risk through penalties and asset value loss. 

So how do you successfully build decarbonization into your budget? 

It starts with thinking like your investors.

Tackling the business case for decarbonization

When securing stakeholder buy-in, and ultimately capital, for decarbonization, we need to focus on how value is created and destroyed. Because decarbonization has historically been thought of as a cost center, and not a driver of value creation, getting funding has been challenging. 

At best, we’ve been constrained to the simple payback model, where only the quickest payback solutions get prioritized. At worst, we delay action entirely. 

The good news is that the tide is turning — now is the time to reframe the conversation within the context of value creation and value protection.
That was the conversation I had with Mauricio Serna of Starwood Capital Group and Jill Brosig of Harrison Street in our webinar a few weeks ago. (Couldn’t make it? You can watch the discussion here.) 

Key takeaway: Think about decarb like any other investment 

Both Mauricio and Jill advocate quantifying the impact of decarbonization on value creation and risk mitigation. While this wasn’t the case 10-15 years ago, more data is available that demonstrates how decarbonization reduces net operating costs while enhancing and protecting asset values (read: investment returns). 

So, let’s use this data. To reach net zero, it’s crucial to showcase the long-term benefits of decarbonization, not just the upfront expenses. 

This requires us to break out of the simple payback paradigm, which is short-sighted and leaves a lot of meaningful decarbonization projects on the table, according to Jill. We have to think holistically about value creation. Connecting the dots from decarbonization to the bigger picture helps your internal stakeholders understand how deeper retrofits materially impact asset value. 

This holistic perspective ensures you don’t miss out on key opportunities just because they require longer payback periods, Mauricio explained.

The overall direction of our conversation was encouraging: as practitioners, we’re starting to surface the data we need to quantify the true value creation of decarbonization for investment markets. We’re starting to witness this play out in asset values and priorities for capital allocation — it’s the progress we need to drive economy-wide decarbonization. 

Questions from our webinar

Thank you to everyone who participated during our webinar — if you have questions or thoughts about building a decarbonization business case, please let me know by responding to this email. I would love to hear what’s on your mind. 

Here were some of the questions raised during our conversation:

Q: Has there been pushback from your firms’ leadership regarding the cost of buying offsets in response to your tenants’ emissions? How have you handled this?

Jill: We do not purchase carbon credits as that goes against our fiduciary duty. Even without that, we think we can reduce emissions by around 80% across our portfolio. We hope the rest may come with technology improvements, but for now, we are only focusing on what we can control. 

Mauricio: Like Harrison Street, we do not purchase carbon credits or offsets. We aim to identify and implement initiatives that help improve the energy efficiency of our buildings, eliminating energy waste, and thereby improving the carbon footprint of our portfolio. 

Q: How do you assess low-carbon or net-zero buildings’ value appreciation with time?

Christopher: Every organization approaches this differently. At Audette, we work collaboratively with our customers. We marry the intelligence delivered by our technology with the methodology and assumptions their internal teams used to develop the business case and pro forma plans for their properties.

Q: What role do you see regulations and building performance standards playing in meeting ESG goals? 

Christopher: A large number of our customers are focused on preparing for BPS — in 2024, many of them are working to assess their exposure (whether through tech-enabled tools or traditional onsite energy audits) and develop budget-ready decarbonization plans for those assets with high exposure. Especially for larger portfolios with a distributed footprint across the US, BPS is emerging as a key prioritization criterion for near-term capital deployment against decarbonization.

CRREM is coming to our shores

What is CRREM? 

The Carbon Risk Real Estate Monitor (CRREM) is coming to the US and Canada this year and will play an increasingly important role in how we talk about decarbonization in real estate investment portfolios. CRREM is a framework that establishes market-based targets for operational carbon emissions, allowing industry professionals to assess current and future transition risks in their portfolios. 

CRREM puts forth new metrics like “floor area at risk,” aiming to predict future financial exposure from the failure to meet science-based emissions targets. CRREM asserts that high-carbon assets, or stranded assets, will see “brown discounts'' during property transactions, reflecting a loss in asset value from the failure to decarbonize. 

Already widely used in Europe, CRREM is table stakes when raising money from European institutions. Early conversations with large asset managers indicate that it will become an important prioritization metric in US and Canadian markets in the second half of this year (and beyond).

Check out our recent blog post for a more thorough breakdown of CRREM. 

What’s different about CRREM?

Most existing benchmarking tools:

• Are peer-to-peer. They provide relative guidance and insights, but they’re ineffective if everyone is performing poorly.
• Are subject to reporting bias. Most reporting is voluntary, so those performing better are more likely to report.

In contrast, CRREM: 

• Has an absolute, not relative, framework. It uses science-based targets to determine what must be done to meet global carbon emissions targets.
• Helps us establish a common language around decarbonization. It helps drive greater transparency. 
• Gives us another tool to evaluate risk. CRREM puts additional pressure on decarbonizing, but it also offers owners the insights to prioritize those efforts and investors with the intelligence to future-proof their portfolios. 

What are your thoughts on CRREM’s potential impact? Let me know here or on LinkedIn.

Will CRREM work in the US and Canada? 

In Europe, CRREM’s adoption is primarily driven by regulations, which often dictate which buildings can and can’t be leased based on building performance. 

In the US and Canada, we can expect CRREM’s adoption to be much more market-driven and dependent on investor sentiment (while about 40 cities are targeting building performance standards, they’re not ubiquitous).  

As we know, opinions in free markets tend to be divided, now more than ever. But at the same time, investors are paying greater and greater attention. 

60% of institutional investors consider carbon within their strategies. Anchor tenants are looking for low-carbon workspaces, but only 34% of that demand will be met in the coming years. There is already clear, multi-sided opportunity and pressure that will only increase in the near future. Those investors who adopt CRREM now, rather than wait, will attract smart capital, higher-value tenants, and stay ahead of the rising tide. 

CRREM also stands to provide tenants accessible leverage during lease negotiations, an opportunity for tenants to ensure that the building’s owner is taking actionable steps toward decarbonization.

You’re invited: Join the conversation

CRREM’s impact on the US and Canada will unfold over the next couple of years. That’s why I’m hosting a webinar on June 26 with Michael Chang of Host Hotels & Resorts, and Cope Willis of Greystar, to explore CRREM’s current and ongoing influence on commercial real estate. Save your spot. I hope to see you there.

Until next time, 

Christopher

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

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