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CRE strategizes to meet 2030 commitments

Nov 15, 2022 | Public | 0 comments

Among its many challenges, the race to meet 2030 commitments for greenhouse gas (GHG) emissions reduction could have some public relations complications. Companies that hypothetically hit their targets at 11:59 p.m. on December 31, 2030, won’t be able to reveal those results until their 2031 annual reports, which would typically be released in 2032.

“You have to report on the most recent year’s results and you’ll need 12 months of data from the projects you’ve undertaken to tell the full story,” advises Eric Chisholm, principal and co-founder of the engineering consulting firm, Purpose Building Inc.. “So if you want your 2030 year to show low-carbon emissions, you’ll need to get that done by the end of 2029.”

That accelerated schedule would eliminate more than 12 per cent of the currently remaining timetable. Broadly, the Canadian government’s 2030 Emissions Reduction Plan envisions a 38-megatonne (Mt) cut in the output of carbon dioxide equivalent (C02e) from the buildings sector — representing a 41 per cent decrease from 2019 levels — as a key milestone toward the 2050 goal for net-zero carbon. Meanwhile, many commercial real estate organizations have announced ambitious targets of their own, which also align with various environmental, social and governance (ESG) imperatives and/or reduction campaigns related to the United Nations Framework Convention on Climate Change.

“Anyone who is planning on delivering results by 2030 has seven to eight years to get this done,” Chisholm says. “The clock is definitely ticking.”

He applauds the Canadian government’s recently pledged tax credits as a significant boost for tackling required work. Many details won’t be available until the 2023 federal budget is released next spring, but building owners/managers could receive tax rebates of up to 30 per cent of the capital cost of various investments in low-carbon heating systems, on-site renewable energy generation and energy storage. As well, they’d be indirect beneficiaries of the proposed tax credits for large-scale renewable generation — solar, wind, water-based and small nuclear reactors — and a range of energy storage options since such investments would bolster the clean electricity supply that’s needed to make the switch from fossil fuels to electrification truly effective in reducing GHG emissions.

“It would be even better if the tax credit was expanded to include things like triple-pane windows, high-performance insulation, low-carbon concrete, mass timber structures and other passive low-carbon technologies,” Chisholm adds.

He also cautions that capital planning cycles are typically lengthy, so the seemingly generous term for the tax credits — which would see them on offer from 2023 to 2032, but phasing down to lower levels in the final three years — risks being squandered in corporate inertia. Companies that already have a clear picture of their portfolios’ emissions profile and where building-level improvements are needed will likely initially be in the best position to take advantage of the incentive.

“This tax credit is well aligned with owners with ready-to-go plans to deliver deep decarbonization. They could mobilize those plans as this credit is rolling out and maybe decide to get things done sooner than they originally thought was feasible,” Chisholm says. “For the owners who do not yet have plans for their assets, now there’s a good incentive for them to figure things out and try to get it done in this nine-year window.”

Asset-level plans underpin net-zero progress

Other decarbonization proponents share Chisholm’s conviction in the importance of asset-level plans. Speaking during the online release of the 2022 GRESB results earlier this fall, panel discussion participants stressed that the every building should have its own individual map to net zero. That should also flow into the data and transparency that’s central to establishing a credible portfolio-wide baseline starting point, from which progress can be accurately measured.

Chris Pyke, senior vice president of the United States Green Building Council (USGBC), defined the aspirational end-point as “a clean, fossil-fuel-free, generally all-electric asset that is efficient, grid-interactive and high-performing”. To get there, he suggests asset managers and investors will increasingly want to monitor how each building is advancing toward that status and refer to its “carbon neutral playbook” of further required interventions.

“We are really good at demonstrating exemplary buildings. However, what we increasingly recognize is: we’re not going to achieve our climate objective or business objective by focusing only on exemplary buildings,” he mused. “The three elements are: transparency for every asset; celebration for the best assets; and a strategic approach to identify, target and improve the low-performing assets.”

Philippe Bernier, executive vice president, strategy and growth, with JLL Canada, reiterates that net-zero goals come with a heightened degree of difficulty and exposure of less-than-stellar buildings. Yet, he foresees the more arduous exercise could be the less risky choice as the “dirty building value drop” becomes a more prevalent threat.

“A carbon-neutral portfolio is perhaps easier, where you can estimate your emissions and then substitute in carbon offsets to clean it up without necessarily systematically working on emissions reductions. A net-zero carbon portfolio follows the hierarchy where we have to start with rock-solid baselines and drive energy efficiency,” Bernier said. “The key point is: don’t wait. Now is the time to capture emerging clean building price premiums.”

Tenants drive clean building premiums

On that front, he urges capital budgeters to consider net operating income (NOI) ahead of return on investment (ROI) — a philosophy grounded in the growing complement of influential tenants with their own net-zero agendas. Drawing evidence from JLL’s tenant services’ business practice, he cited the increasing reliance on site selection scorecards that prioritize clean heating sources, smart utility controls, the building’s environmental performance relative to its peers and the landlord’s ESG commitments and outcomes.

“Tenants are going to vote with their wallets and lease in space that is aligned with their own targets,” Bernier maintained. “The concern, if you own a big portfolio, is: will you get the lease or not? If you can’t get the NOI, it’s going to undermine the value of your assets.”

To date, real estate organizations pursuing significant emissions reduction for 2030 and/or net-zero targets are largely forging their own way, albeit with guidance from industry organizations and collegial sharing of experiences with their peers. Governments have been lagging with supports and innovative financing strategies are still embryonic.

“The transition is now disorderly. We don’t have the right policy settings and we don’t have the right mechanisms to orderly transition our built environment,” acknowledged Jorge Chapa, head of market transformation with the Green Building Council of Australia. “So the question is how you can take ownership of your transition strategy and move forward quickly as possible. Because we just can’t wait.”

Chisholm likewise sees Canada’s proposed new tax credits as one component of a slate of transitional tools, which need to be put in place quickly.

“Tax credits support conservation incentives, net-zero development standards, green financing, carbon taxation and easy access to low-carbon energy grids,” he notes. “All of those elements have to work together to support Canada’s transition to a low-carbon economy. Any jurisdiction that is making credible progress on that entire group of supports is going to see results.”

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