Climate Change and Investment Roundtable

Location: Crystal, London
Date: 27/03/2013

Earlier this month, World Cities Network brought leaders from the built environment together for the Climate Change and Investment Round-table. Hosted by Siemens and attended by representatives from Aedas, Barclays, CBRE Global Investors, Deloitte, IVG Immobilien AG, Mazars, Norton Rose, Sustainable Development Capital and The Climate Group.

The main challenges considered during the roundtable were:

  • How to relate climate change risk to systemic business risk?

  • How can businesses respond to the risk of a 4 - 6 ‘C rise in temperature?

  • How to incentivise real estate investors and developers to consider resilient design now?

  • How to make the potential impact of climate change clear so that it can drive change in the behaviour of individuals and organisations? 

Participants felt that in general climate change was still not a significant issue to the core operations for developers and investors. The existing investment model is mainly based on lowest capital cost for highest possible return and does not incentivise sustainable design. The group recognised however that for ‘owner occupiers’ of buildings, investment in building features, which improve sustainability and resilience, could be shown to deliver returns, both in terms of direct cost savings and positive PR.

“The ‘trend’ of sustainability is no longer about the ‘premium’ but about the ‘discount’. So it is not about ‘green makes buildings more expensive’ but sustainability ‘minimises losses.”Participant at round-table 

The challenge is to connect up the players early and to build sustainability features in at the design stage. Building sustainability features in as early as possible minimizes investment cost. However it is difficult to see how this can become commonplace without changes to the real estate investment structure to incentivise whole life cost considerations. 

There are of course many excellent initiatives across the real estate sector focused on making buildings more sustainable. Reference was made to the Global Real Estate Sustainability Benchmark (GRESB) initiative and the Green Rating Alliance.  Several leading investors are supporting such initiatives and some have a clear position. For example, CBRE Global Investors policy states “with buildings generating over 40% of the emissions of CO2, we recognize that, through our investment and asset management activities, we can make a tangible impact on improving energy efficiency, reducing greenhouse gas emissions and slowing climate change.”

Some round-table participants expressed the view that investors in infrastructure projects were more willing to consider resilience and the long-term sustainability of a structure’s design, because investors, developers and users are more interconnected and investment returns are required over a longer term.

Governments also have a role to play in creating legislation that delivers a level playing field. The group felt market mechanisms, which promote change, were more influential than penalties for lack of compliance.

“The intervention of governments is important and necessary. Don’t let always the market dictate!”Participant at round-table                    

It was felt crucial to connect up short and long-term interests to ensure that climate risks do not drop off the agenda in the face of competing short-term priorities. In many of the world’s largest cities, existing planning rules and commercial considerations limit the extent to which passive design features can be used to improve sustainability. For example, standards in the UK for office floor plates demand a minimum of 15m, meaning that rather than rely on environmentally benign passive systems, the building must have mechanical climatic controls, with associated energy consumption, operation and maintenance costs.

Investors in existing real estate stock are beginning to consider energy performance and risks associated with their buildings, particularly in the UK in relation to the Energy Act (2011). From April 2018, it will be illegal for UK residential or commercial property certified below the minimum energy efficiency standard (EPC rating ‘E’) to be rented out. Properties with the lowest EPC ratings could become devalued unless cost-effective energy saving features are retrofitted moving them to a higher rating. Costs of non-compliance, including fines and vacant properties, could be significant, which is driving debate around the economics of upgrading vs. demolishing non-compliant properties

The UK Green Deal is intended to incentivise landlords to invest in energy efficiency upgrades.  In Australia, provisions have been created enabling landlords to add upgrade costs onto existing leases, providing them with some security for their investment.

Eugene Philips, CBRE Global Investors shared that on a European level, governments are creating policies that stimulate ‘green buildings’. Among others, the Dutch government ‘as a tenant’, will set restrictions on the use of energy for all the new buildings they will rent.

The challenge for designers is to persuade clients to buy-in to long-term resilience, and to consider whole life cost of a building in their investment decisions. Increased focus on energy consumption and associated legislation has been a lifeline to the design industry, enabling architects to engage clients in the issue of whole life cost and encourage better decision making.

Judit Kimpian, Aedas explained how considering sustainability at the design stage enabled them to reduce energy consumption by 20% in a fully glazed building, on the coast in Abu Dhabi, by installing fully automated louvres to mediate daylight and reduce glare. Without the responsive ‘mashrabiva’ screen the building required dark and reflective black glazing, constant internal lighting and a much larger plant for climate control.

However, while buildings are becoming smarter, building management systems and operations are proving to be limiting factors in achieving predicted savings as greater mechanisation is rarely matched by investment in expert management.  One of the reasons why it is difficult to engage clients with long-term costs is that 80 – 90% of business costs relate to staffing, with only 3 – 5 % referring to maintenance and energy costs. Nevertheless energy savings in real terms can amount to significant sums for larger buildings or portfolios and overwhelmingly persuasive when measured at the urban scale – hence the recent trend amongst global cities to mandate the disclosure of energy use from commercial buildings

Judit also explained the Aedas parametric building model that generates data on capital costs and whole life cost, detailed energy consumption and embodied carbon. The client can then assess this in relation to their investment priorities. In the future the model will includes options for how a building will be used, such as expected occupancy rates, hours of operation, installed equipment and rental costs, which will enable the real whole life cost to be estimated. Post occupancy surveys have highlighted that a disconnection between designers and users means actual energy consumption is often substantially higher than design predictions. In existing buildings, reliable, detailed data for energy consumption over time is often unavailable, so more research must be done to assess what drives consumption before any efficiency measures or upgrades can be evaluated.

Investors and insurers are increasingly taking sustainability and climate change into account in their analysis of risk & return, and this may become a significant driver for resilient real estate investment. Increasing numbers of freak weather events such as Hurricane Sandy & Australia's ‘angry summer’ are putting climate change on the agenda and insurers are beginning to look for checks and balances to reduce these risks. However, this is not yet delivering consistent action on the ground, with rebuilding generally undertaken to existing standards rather than building in greater resilience.

"Climate change is creating the possibility of near term systemic risks to the whole business model for property and infrastructure investment. We are finding implementing energy efficiency measures challenging now - how can we face up to the potentially much greater challenge of wholesale disruption to tenants and supply chains?" Brian Kilkelly, World Cities Network

A crucial question considered around the table was ‘do investors and managers use climate change effects in their statistical models for allocation of capital?’

The general sentiment was that this was happening on quite a limited level due in part to the difficulty of implementing actions in a quantitative way.

Maeve Hall from Deloitte shared her insights into what leading corporates are doing to address climate change risks in their direct operations and global supply chains. Climate change and climate volatility is being viewed in terms of impacts to operating costs, continued license to operate, business continuity and responsiveness to changing market demand for goods and services.

Increasingly, collaborative efforts are being taken to address climate related challenges. Multi-stakeholder groups are addressing large-scale climate related challenges such as flood risk, water stress and energy security and price volatility.  

Enlightened owner-occupiers are understanding the risks, making informed decisions early and are developing compelling business cases for climate adaptation which are being incorporated into investment criteria, specification documents and operating practices.

To date, players in the real estate industry are often relatively disconnected in dealing with the impacts of climate change. However, increasing physical risks and changes to insurance and regulation are likely to see it gain increasing attention.  Greater integration between investors, developers, operators and occupants is essential for understanding the implications and incorporating into investment, design and use decisions.” Maeve Hall, Deloitte

The discussion concluded that there was value in further consideration of how the real estate, infrastructure, and insurance industry work together with governments on these issues.

With thanks to Siemens for hosting this event at the Crystal, London.

Categories: World Cities Network Events, Past Events