Q&A Webinar: Unlocking Climate Insights in Real Estate
GREEN recently organized a webinar about Unlocking Climate Insights: Risk Metrics and Collaborative Engagement in Real Estate. During the webinar, our panelists explained how investors assess the environmental performance of real estate companies and demonstrated how GREEN’s investor members engage with REITs to accelerate progress toward the Paris Climate goals.
The Q&A session gave some great insights into this topic so we summarized all the interesting Q&As, including live answers and those addressed via email after the event.
Session 1: Danny Ismail, Green Street
#1 Do you believe the current order of regulation will prevail in the next 5 years or will there be a change in who will be the regulatory leaders?
In Western Europe and the US, there has been a growing divergence across regions in the last 6-9 months. In the US, New York City, which had been at the forefront of green regulations, has started to pull back as implementation progresses. In contrast, California has taken steps forward in implementing new disclosure laws, and we’ve seen other cities, such as Boston, also moving forward with regulations.
Conversely, in the UK, there has been a step back in terms of implementing certain regulations. Additionally, in several European countries, including Germany and France, there have been concerns and pullbacks by governments regarding regulations.
Clearly, there is room for more divergence as we begin to experience the impacts of physical climate risk and ongoing discussions about who will bear the cost of compliance and the timing of regulation implementation.
These are very complex issues and navigating them can be quite challenging for most real estate owners.
#2 What is the difference in impact on IRRs between sectors of climate risk mitigation and transition?
There are clear differences between sectors, for example, the self-storage sector, characterized by a simple box with lights, consumes significantly less energy than a data center.
#3 Thinking about insurance issues in Florida and California, do you see public authorities being more willing to distinguish in regulations for certain types of real estate and insurance?
Rental and residential housing typically receive preferential treatment compared to commercial properties. For instance, in California, there are preferential tax regulations for residential properties. This sets a potential precedent for single-family homes and residential landlords, who may not have to bear the full burden of increased insurance costs and may benefit from state-provided insurance policies.
However, in the long run, they may still incur costs, possibly through higher taxes, shifting the financial burden away from areas with higher physical climate risk.
#4 You mentioned new regulation coming in NYC. Coupled with the high vacancy rate in NYC across offices? Do you expect further capital decline and further bifurcation of the market?
In theory, the regulations are considerably more onerous for NYC offices, especially lower-quality office buildings. While lower-occupied offices may emit fewer greenhouse gas (GHG) emissions, the current regulations do not differentiate between quality and rental rate differences.
Compliance with Local Law 97 is expected to continue creating bifurcation between high-quality and low-quality offices, leading to a probable ‘brown discount’ for offices subject to large carbon penalties.
#5 Some US residential REITs are citing compliance with new building energy codes as key headwinds to supply of new housing stock. How much truth do you think there is in this statement? Or do you think interest rates and rising input costs (labour, materials) are bigger headwinds to US residential housing supply?
I think there is a decent amount of truth to new building energy codes being a barrier to new supply. Building all-electric or transitioning to a lower embodied carbon approach may demand additional expertise and possibly increase costs for new housing supply. REITs with the scale and resources to navigate these new regulations have an advantage over smaller market participants.
It’s challenging to separate the extent to which construction costs are driven by overall inflation compared to new regulations. In general, higher land use regulations tend to result in slower supply growth in any given market.
Session 2: CenterSquare – Prologis Engagement
#1 What do Centersquare do if the right information on emissions data is missing?
Uma shared that many REITs are in the early stages of their ESG journey. Centersquare, with its expertise and in-house team, engages with companies. This experience helps us identify information gaps and ensure that the portfolio is compared accurately.
It also enables partnering with these companies to help move them forward.
This partnership could include providing consultant details to help a REIT build an ESG strategy or connecting them with suitable energy engineering consulting firms that can help with the initial inventory of emissions across their portfolio.
#2 What is needed to make installing PV on all flat roofs the default option for Prologis?
Ethan provided an example from Prologis’s Denver office. Although Colorado enjoys 300 days of sunshine, a single utility dominates the Denver electricity market, offering diverse and affordable energy. This makes the business case for on-site solar challenging, given the utility’s control over excess generation and pricing.
However, the introduction of Energized Denver, a new building performance standard, will change this landscape. It will make on-site solar an economically viable option for both Prologis and its customers, especially when considering potential penalties associated with the standard.
The pricing of excess electricity generation is crucial for Prologis and its customers, and investments need to be wise long-term decisions. This requires thorough market analysis and evaluation of long-term investment opportunities, aligning with Prologis’s responsible management of investor capital.
In summary, Prologis is seeing more solar markets open, and Prologis certainly has a strong platform for solar.
#3 Are investors assessing environmental performance or are they measuring risk mitigation? The two do not have identical metrics. If they are assessing performance, are they incentivizing superior performance?
Uma confirmed that Centersquare are assessing both (risk mitigation and environmental performance) and yes, incentivizing superior performance because they believe it generates better financial outcomes.
#4 How will Prologis get from 15% Scope 3 emissions reduction to Net Zero across your supply chain by 2040?
Ethan explained Prologis’s original SBTi (Science-Based Target Initiative) approved in 2018, which set near-term targets to reduce Scope 3 emissions by 15% by 2025 and longer-term targets to reduce Scope 3 emissions by 40% by 2040. Prologis continues to advance its ambitions in reducing global greenhouse gas emissions.
They are committed to achieving Net Zero emissions across their value chain (Scopes 1, 2, and 3) by 2040, aligning with the SBTi’s Net Zero Standard. This commitment is part of their efforts to help customers decarbonize operations and reduce embodied carbon emissions from construction.
Questions about the webinar?
Do you have another question? Feel free to contact the GREEN team.
Did you missed out on this webinar, don’t worry! Go this the page to find access to the full webinar recording and the presentation slides online.