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Transition to net zero in real estate: Insights for surveyors and managers

From homeowners to multinational companies, there is huge interest in sustainable real estate. ESG factors are now considerations in many major real estate decisions.

From homeowners to multinational companies, there is huge interest in sustainable real estate. Environmental, social, and governance (ESG) factors are now considerations in many major real estate decisions, while stakeholders are increasingly aware that unsustainable assets are at risk of depreciation.

In order to examine the underlying risks and challenges of making buildings more sustainable, Marsh held a surveyors and property consultants briefing in November, hosted by Stuart Mangion, Chief Client Officer for Professional Indemnity, with presentations by Ed Woolcock and Lydia Pridham from Marsh Advisory.

The discussion highlighted current ESG trends that are shaping the real estate landscape, such as renewable energy generation, improvements in the monitoring of energy performance, demand for electric vehicle (EV) charging points, and the growing need to measure and report greenhouse gas emissions. We set out below a summary of some of the key factors put forward to enable the real estate sector to move to a more sustainable future.

Measuring greenhouse gas emissions

A key first step an organisation can take to improve the sustainability of real estate assets is to identify any emissions hotspots. The most widely accepted approach is to categorise emissions-releasing activities into three groups or scopes. The three scopes are:

Scope 1 (Direct emissions): Activities owned or controlled by an organisation that release emissions straight into the atmosphere. They are direct emissions, for example, those from combustion in boilers, furnaces, or vehicles.
Scope 2 (Energy indirect): Emissions released into the atmosphere associated with consumption of purchased electricity, heat, steam, and cooling. These are indirect emissions that are a consequence of an organisation’s activities, but which occur at sources that it does not own or control.
Scope 3 (Other indirect): Emissions that are a consequence of actions occurring at sources that an organisation does not own or control and that are not classed as scope 2 emissions. Examples of scope 3 emissions are business travel by means not owned or controlled by an organisation, waste disposal, or purchased materials (such as furniture) or fuels.

Reducing carbon and energy consumption

Once an organisation has pinpointed areas where emissions can be cut with maximum impact, a realistic and actionable roadmap can be put in place to achieve those reductions. A building’s performance can be monitored by the deployment of sensors to determine whether at certain points in the day, heating and lighting can be reduced.

Improving building design, for example, by introducing new heating and lighting technologies — such as heat pumps, solar panels, and LEDs — can lower energy usage and costs. However, strategies must be realistic. For example, the process of adding solar panels to listed buildings is likely to be complicated, if at all possible.

Implementing upgrades can be difficult in practice. Adding electric vehicle chargers to buildings can be an exasperating process in the UK, with contractors often failing to deliver what they promised. In addition, EV charges can pull excessive amounts of electricity from the grid, especially with staff coming to work to recharge their cars.

The need for improving the sustainability of buildings, however, goes beyond reducing energy consumption to meet regulatory requirements. The ESG credentials of buildings are a strong marketing component and it is increasingly common for tenants to be unwilling to renew a lease until a building’s emissions are reduced.

Carbon offsetting

Once residual emissions are at a minimum, any remaining carbon footprint can be cancelled out by using carbon offsetting techniques. These could involve investments in projects that reduce or store carbon, such as forest preservation and tree planting. Carbon credits are also awarded for schemes that reduce fossil fuels in other ways, such as windfarms or improved farming methods. As offsets are expensive, it is advisable that residual emissions are brought down as much as possible before they are considered.

The role of surveyors and property managers

A strategy aimed at enhancing an asset’s energy performance has theoretical aspects — the physical initiatives put in place to support decarbonisation and behavioural aspects — and the real-life actions of those using the building. While relevant technology can be introduced into a building, if people are using it incorrectly, then sustainability targets may not be met.

Surveyors and property managers play a crucial role in the maintenance and management of a building’s net-zero plan. They oversee the design performance — what the building has been designed for and how it is expected to perform — and the operational performance — how the building is actually performing. They need to ensure any gaps in a building’s performance are on track with the net-zero roadmap.

Achieving optimum risk transfer

The identification of problematic issues in the transitioning of real estate assets to net-zero emissions will allow for the development of effective risk mitigation and management strategies. Considerations could include shifts in consumer preferences as a result of climate change concerns, as well as regulatory, liability, and reputational risks. Asset valuations and long-term revenue streams may also be impacted by the transition. Involving a broker early on in the transition to net zero will enable sufficient time to negotiate favourable terms with insurers.

For more information on ESG-related real estate risk, please contact your Marsh adviser.

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