December 12, 2019 | Chris Brown

Recently, one of my IMT colleagues asked me: “When you think back over the past year in commercial real estate, what developments stand out?” Without hesitation, I jotted down the first things that came to mind. Stepping back, I quickly saw a theme: Changes in investor pressure over the past year are now sending a message to building portfolio owners and asset managers that they need to act on climate change. Here are five specific examples.

1. Investor action on climate change was more elevated in 2019 than in the past years.

The ability to predict the effects of climate change is increasingly leading investors to measure and assign value to those impacts. For instance, in June, Moody’s Corporation acquired a majority stake in Four Twenty Seven, a leading provider of data, intelligence, and analysis related to physical climate risks. Their goal in doing so: “integrating potential climate impacts into risk management and investment decisions.”

Asset managers should take note: How you prepare for, and react to, climate change impacts—say, coastal flooding—is becoming increasingly relevant to investor decisions. Will a firm that evaluates investments with longer time horizons (for example, 16 years, rather than six), write down the cost of coastal assets because of anticipated sea level rise? If municipalities pass through the cost of improving infrastructure to address more frequent flooding via increased real estate taxes, how will that impact you? These types of climate considerations will need to become standard practice to stay ahead.

2. In 2019, GRESB participation grew, scores improved and North America narrowly exceeded Europe’s overall regional score.

Smart asset managers pay attention to GRESB and its metrics. Today, 65% of listed real estate made up of REITs, funds, and developers who represent more than $ 4.1 trillion in assets participate in GRESB’s environmental, social, and governance (ESG) benchmarking and the 2019 results had a lot to say. The CRE industry continued to increase the reporting of its ESG data at the portfolio level and the asset level. GRESB also highlighted that many companies (90%) have a sustainability task force. However, more revealing is that nearly 65% of these companies have members from their Board of Directors participating, underlining that companies are taking sustainability seriously and ensuring that investor demand for performance from the real estate sector is being addressed by this growth in board participation.

3. Increasingly, city climate action plans are including buildings as targets for improvement.

Whether it’s Boston or Seattle’s climate action plans, or the District of Columbia’s  CleanEnergy DC Omnibus Amendment Act and New York City’s new Local Law 97, cities are more explicitly calling on the real estate community to improve building energy performance as a necessary pathway to address their climate needs. Real estate decision makers cannot ignore this as it will affect them in the form of significant fines, capital and operational investments, or increased real estate taxes to finance city-level climate change mitigation measures (such as sea walls to tackle coastal flooding). Ultimately, as cities pass more stringent laws that target inefficient buildings, increase spending on climate change mitigation, and suffer from the physical impacts of and losses due to climate change, it increases the potential for major changes in how real estate assets are insured, valued, and financed. This could have devastatingly negative impacts for building owners and businesses that don’t start taking action now.

4. Investors are making a fundamental shift in how they use green bonds.

 Historically, the largest segment of green bond proceeds goes to green buildings and energy efficiency, helped in large part by the success of Fannie Mae’s Green Mortgage Backed Securities. This past fall, Ceres hosted a panel to discuss with a number of investors how they are using green bonds to finance their efficiency initiatives. One of the big takeaways is a very purposeful and fundamental change in how they use green bonds, moving from primarily financing new construction to financing energy efficiency improvements in existing buildings because they represent the bulk of building sector emissions. This shift in bond guidance and frameworks is also consistent with regulations that aim to achieve carbon reductions from existing buildings, such as the Washington, DC or New York City efforts mentioned above.

5. Companies continue to adopt green leases and those that already use them are continuing to raise the bar.

In 2019, IMT’s Green Lease Leaders recognition program welcomed 24 new participants, continuing an uninterrupted growth streak for the program since its inception in 2014. Green Lease Leaders now represent more than 2 billion square feet of commercial office, industrial, and retail space. This year, we awarded leaders that spanned from local city governments to global real estate investment firms.

Each year, we see new types of innovation in green leasing from participants that highlights leadership and an increased alignment of sustainability in their overall business strategy. Consider STAG Industrial, one of this year’s Silver Green Lease Leaders. To expedite energy projects in its properties, STAG offers tenants zero-interest internal financing—a smart, business-enhancing effort that few other landlords are executing. By supporting tenant improvements, STAG is reaching portfolio-wide energy and sustainability goals while improving working conditions through activities such as retrofitting warehouse lighting to high-efficiency LEDs. Partnering with tenants to execute major efficiency upgrades makes STAG’s buildings more competitive and attractive to new tenants and retain existing ones. (Read more on STAG as well as other Green Lease Leaders here.)

Across the real estate sector, we are seeing more commitment to climate change action, from increases in investor action, expansive regulations, rising stakeholder pressure, and thankfully, companies that are willing to respond. It is my hope that 2019 laid the foundation for the real estate industry to build upon in 2020 to substantially reduce emissions and put us on the track toward a prosperous, robust future.

Program Area(s):

Finance , Real Estate

Meet the Author

Chris Brown

Former Director of Private Sector Engagement at IMT

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