Daily vigilance is central to achieving operational energy savings, but rare decisions typically have the most acute carbon consequences in buildings. Sharing their thoughts and experiences during the online presentation of the Canadian GRESB results earlier this month, sustainability champions within the commercial real estate sector discussed a range of actions their companies or clients are pursuing to reduce greenhouse gas (GHG) emissions and align with Canada’s target for net-zero building performance by 2050.
“When decisions are made about reducing or eliminating carbon, they are 20- and 25-year decisions for things like upgrading a boiler plant, or getting rid of a boiler plant or signing long-term green power purchase agreements,” observed Conan O’Connor, vice president, technology, with the energy management and analytics firm, Energy Profiles Limited. “They’re big decisions and they’re big investments of a different magnitude from the energy efficiency projects we’re accustomed to thinking about.”
For commercial real estate owners/managers that doesn’t necessarily mean a tactical shift, but, rather, a broadening of sustainability strategies. Arguably, a sector that’s already focused on long-term returns and opportunities to add value is well positioned to make the cognitive leap. The spectre of investors, lenders and insurers coming onside also bolsters the rationale for the major expenditures that will be required to realize a dramatic drop in emissions.
“On the investor side, they’re pressuring real estate operators to do more. On the lender side, with Europe’s sustainable finance directive, lenders there are starting to screen owners on their carbon footprints and we think that’s soon going to come to North America. And, of course, the regulated entities — the REITs, the banks and the insurers — have TCFD (Task Force on Climate-related Financial Disclosures) equivalence coming on the regulatory side,” tallied Michael Brooks, chief executive officer of REALPAC. “So for our members, for real estate operators, a lot of focus is on net-zero, or at least substantial emissions reductions, and how to get there.”
Nevertheless, those tasked with leading the charge for some of Canada’s most progressive players, to date, acknowledge that it is a formidable undertaking from a managerial, financial, technological and cultural perspective. Across large and varied portfolios, they’ll need the analytical resources to identify where and when best to act, and they’ll need the cooperation of their tenants.
Broader scopes will require tenant involvement
Outlining the parameters for mapping transitional climate-related risk in Choice Property REIT’s portfolio of more than 700 largely retail and warehouse/distribution properties, Ariel Feldman, the company’s director, sustainability and environmental programs, touched on one of the longstanding barriers to energy upgrades — split incentives. The GHG lens brings a new dimension to the debate around owners’ investments in systems that they do not control and gives them a more obvious stake in the benefits.
“Typically, REITs in North America haven’t really been focusing on the retail and industrial sectors (for sustainability measures) because there’s not a lot of control. We’re trying to reframe thinking about those types of assets because we know those assets are going to be subject to regulations going forward as we transition to a zero-carbon economy,” Feldman said. “We’re starting to think about things like: If you’re going to put a gas-fired rooftop unit on a retail sector tenant, what obligation do you have down the line to change that up to an electric heat pump? Because, how can you expect your tenants to go net-zero if they’re being given gas-fired equipment?”
That complements other emerging considerations both related to an evolving landlord-tenant relationship and the need to look at capital replacements in a larger and coordinated context. Brooks noted that, for now, commercial real estate owners/managers are mostly grappling with scopes one and two of the Greenhouse Gas Protocol, which account for: 1) direct emissions from owned or controlled sources such as natural gas-fired boilers; and 2) indirect emissions related to production of the electricity and/or district heating/cooling that buildings consume.
However, it’s expected that, as in Europe, scope three, which covers all other indirect emissions that occur in a company’s value chain, will increasingly draw scrutiny. That will place added emphasis on the flow of users and goods to and from properties.
“Scope three is the bulk of our footprint and many of our peers’ footprints as well,” Feldman maintained. “Any net-zero commitment that doesn’t at least look at scope three is not really going to be as impactful.”
Ringo Ng, director, climate and energy, with Cadillac Fairview Corporation, agreed there is an important role for landlords as “stewards” or a “resource” in helping tenants transition away from higher carbon intensities. “One thing we’re trying to look at is how do we collaboratively work with key tenants across the nation in innovative ways, whether that be financing or other ways, to lower common emissions collectively and jointly,” he reported.
“There are ways of looking at lease structures and who pays, and how they pay, and when they pay, and how much they pay, and all that can be part of the discussion,” suggested Rob Simpson, director of sustainability with Ivanhoé Cambridge. “If you don’t get the tenants on board, most of this is, frankly, impossible. So there’s got to be a solution that’s found there.”
Data informs priority setting and investment decisions
Reflecting on some of the challenges of expanding beyond North America and simultaneously shifting portfolio weighting from office to industrial properties, Ailey Roberts, vice president, sustainable investing, with BentallGreenOak, stressed the importance of having a full and comparable picture of assets.
“It did almost feel like we were starting from scratch when we went into Europe and Asia. When you get the data, you can make a lot of informed decisions,” she recalled. “Certainly, Europe is light years ahead of where we’re at in what is required through legislation so we’re looking at whole-building data for our industrial assets in Europe.”
Across the global portfolio, data is also key to priority setting. “The team is really digging deep and focusing on finding those opportunities that are most material and are going to have the biggest impact,” Roberts said.
That’s an approach that will increasingly be applied to capital budgeting. Asset managers are factoring carbon levies, other potential climate-triggered regulatory and due diligence imperatives, and what Brooks terms “avoided obsolescence” into the paybacks.
“The traditional way of thinking of equipment replacement through an OpEx or CapEx lens that we’ve historically followed in the industry for years and years and years is changing because it’s no longer enough to simply replace a rooftop unit with another one that’s maybe slightly more efficient,” Simpson said.
“It comes back to: what’s the market value of a net-zero asset going to be in 2030 or 2050 compared to a high-carbon asset?” O’Connor submitted. “In everyone’s portfolio somewhere today someone is making a decision that’s going to be a 20-year decision that’s going to have a big impact on carbon. We have to make sure we’re not missing those opportunities and we’re making the right decisions in those cases.”
Barbara Carss is editor-in-chief of Canadian Property Management
