COP28 Implications for Real Estate Institutional Investors

COP28 Implications for Real Estate Institutional Investors

The 28th session of the United Nations Climate Change Conference (COP28) took place between 30 November and 12 December 2023, in Dubai. Representatives of 197 countries attended COP28 in an attempt to make significant steps in the global effort to combat climate change. The conference was highly anticipated as the world experienced a range of extreme climate events in 2023, many of which broke historical records. 

 In this blog, Alexander Carlo, a Ph.D. candidate in finance at the School of Business and Economics, Maastricht University, explores the implications of COP28, especially the Buildings Breakthrough, for institutional real estate investors.

2023 was a year for the record books regarding extreme climate events

Extreme weather affected both developed and developing countries. These included exceptional hurricanes on the Pacific coast of North America, unprecedented heat waves and forest fires in Greece, and record rainfall in Beijing. Expectations were high in Dubai, not least in the real estate sector. It is not only one of the sectors most exposed to climate change, but also responsible for roughly 40% of carbon emissions.

Highlight Outcomes of COP 28 

COP28 reinforced the global commitment to reduce greenhouse gas emissions, but also saw a shift in the COP process, with the emphasis switching to a sector-specific strategy. COP 28 urged participating nations to move away from reliance on fossil fuels towards renewable energy sources. Participants also submitted a proposal for a global carbon tax, targeting fossil fuel companies and high-emission industries and set ambitious target to double the efficiency of global energy use by the year 2030. There was also an $80 billion funding commitment from Government, corporate and private funders.

Increased regulations pose risks, while additional funding opens opportunities

The global carbon tax proposal implies governments will need to impose stricter regulations on high-emission industries, like real estate. Measures are already being implemented in different parts of the world. For example, the Dutch government has required office buildings of more than 100 square to meet a minimum requirement of energy label C to remain operational, since 1 January 2023. A recent study by researchers at Maastricht University concluded the regulation led to an approximate 20% drop in value for buildings with a label lower than C. With more regulations on the horizon, investors not making their portfolios more sustainable, risk their buildings losing value and potentially becoming stranded assets.

Access to insurance will also be key to navigating the threats from climate change in the real estate market, as well as managing the impacts of additional government regulations. In particular, insurance costs for buildings may increase more rapidly with climate-related risks on the rise. For more on this, read my previous blog.

However, the changes being stimulated by climate change and regulation, also offer opportunities for real estate investors. Investors anticipating tighter regulatory standards can proactively invest in energy-efficient buildings to ensure future compliance and avoid costly retrofitting. Institutional real estate owners can also use incentives and subsidies to invest in renewable energy projects, including potentially, the additional 80 billion in new commitments agreed at COP28.

The Buildings Breakthrough

There was also a new initiative focusing on the built environment at COP28 signed up to by 27 nations. The Buildings Breakthrough is a global push for near-zero emissions and resilient buildings by 2030. This multifaceted initiative focuses on renovating old buildings to more sustainable standards, implementing sustainable building codes for new buildings, and making buildings more resilient to different climate change factors.

The countries committed to the initiative represent around 34 percent of the global population and account for about 51 percent of global greenhouse gas emissions. “The Buildings Breakthrough” is promising, as it demonstrates collective effort by multilateral parties to tackle sustainability in the real estate sector. However, many major emerging markets have not committed to this initiative (yet). These countries will have to invest in new buildings as their global population share is expected to grow significantly in forthcoming decades. In other words, while they do not currently represent a major share of the population and pollution, they will in the future. The first Buildings and Climate Global Forum is scheduled for March 7-8, 2024, in Paris and for it to be a true success, more nations should commit to it by this inaugural meeting.

Collaboration will be key to make good on all the promises

COP28 and the weather events of 2023 highlighted the importance of incorporating climate-related risk management into real estate investment strategies and the importance of international collaboration in addressing climate change.  COP28 president, Dr. Sultan Al Jaber closing speech emphasized the need for further action and collaboration.  “An agreement is only as good as its implementation. This historic consensus is only the beginning of the road.”

Real estate investors will need to explore the opportunities and efficiencies from participating in collaborative efforts. Involvement in initiatives like green building partnerships and climate resilience programs, can promote sustainability and mitigate risks. Consequently, investors will be able to more effectively contribute to a sustainable future while safeguarding their long-term returns in an increasingly climate-conscious world.

Call upon other investors to collaborate to achieve real-world impact

GREEN is a not-for-profit collaborative engagement initiative for institutional investors, focusing on reducing climate risk in the real estate industry. GREEN members acknowledge the importance of collaboration to initiate change and maximize impact. We, therefore, call upon other institutional investors to join GREEN and work together towards a Paris-aligned real estate sector. Check the investor statement for more information.

Disclaimer

The views presented in this article reflect the views of the GREEN Secretariat but do not necessarily represent those of the individual GREEN members.