Delivering net-zero, resilient real estate is supremely complex – but it’s possible. Mikkel Bulow-Lehnsby and Jeremy Oppenheim explain why NREP, Systemiq Ltd. and a group of forward-thinking investors are building a foundation for net zero in the built environment.
The most recent IPCC report is unequivocal. To have any chance of dealing with the “climate time-bomb”, the world must cut emissions by 50% by 2030. We are on the brink of passing the point of no return, and time is running out. The built environment is not exempt from this stark warning.
$600-650 billion
is needed each year until 2050 to transition the existing building stock. Estimates indicate that the transition will be driven 80-90% by private investment.
In fact, buildings and real estate today accounts for 40% of global greenhouse emissions. Built environment emissions in the Global North need to more than halve (i.e. around -2.5GT/year) over the next ~7 years for us to have any hope of keeping 1.5 degrees alive.
On average, energy efficiency will need to account for 70-75% of this reduction, decarbonising energy supply around 20% and action on embodied carbon (the sourcing and use of materials) the remaining 5-10%. But as we know, averages do not tell the whole story – different real estate investors face different “emissions portfolios”. As an example, for developers, embodied carbon could make up to 60-80% of the total reduction needed between now and 2030.
Finance is key to move at the speed required. $600-650 billion is needed each year until 2050 to transition the existing building stock. Estimates indicate that the transition will be driven 80-90% by private investment. This also presents a huge opportunity for first movers, particularly private investors who stands to capture much of the value. In other words, if done right, this is the business opportunity of a generation.
A recent study by Systemiq shows how parts of the global economy can move rapidly towards zero emissions. The right action can trigger a cascade of tipping points for zero-carbon solutions in sectors covering 70% of global greenhouse gas emissions. In other words: the Breakthrough Effect is possible.
No-one can move the needle alone
So, what’s holding the real estate sector back?
Delivering net zero and resilient real estate is supremely complex, requiring both deep investment and broad mobilization of market actors and solutions. Some of these complexities include:
- Real estate is highly localizedand dependent on local regulations/requirements
- It is a fragmented and heterogeneous asset class. Decarbonisation trajectories vary greatly between assets
- Traditional capital allocation planning creates a skewed view of the cost/benefits of deep retrofits
- Material providers are not incentivized to invest in scaling lower carbon solutions
- The traditional relationship between owners and occupiers is outdated. There is an urgent need to align incentives.
Today’s policy environment sends the wrong signals, both in terms of carrots and sticks. This prevents systematic pricing of risks.
Despite the critical role of investors, asset owners and managers are “going at this alone”. Best practices, lessons learnt, and an aligned viewpoint on what constitutes net zero, and how to get there, are still not shared by the sector.
This is why NREP, Systemiq and a group of forward-thinking investors have convened a collective action project to build that common foundation, pooling individual learnings and taking a collective step towards Net Zero across our portfolios. This group – which already constitutes more than half a trillion dollars in real estate assets under management – includes global developers, asset managers, pension and sovereign wealth funds.
”“Our ultimate goal is to turn these learnings into a public good for the sector, and ultimately create a tipping point for action.”
Shared vision, shared benefits
The project has three key focus areas:
- A “North Star” for real estate investors: Distilling a shared understanding on what net zero means for real estate owners and managers
- Putting net zero into action: Sharing and codifying investor best practices on how to “tip” the business case for asset decarbonization, including assessing carbon as a value protection/creation lever.
- Activating system solutions: Developing a set of collective action interventions with broader value chain actors to tip those business cases.
Of course, the built environment is big, and investors are only one part of the complex value chain. That is why the project must also complement and build on the incredible work coming out of different built environment initiatives and networks.
Given the size of our collective challenge the LOTUF project focuses – at least for the time being – on the Global North. We recognize that deep work is needed to build that clarity and shared capability in emerging markets, where most of the future building is set to occur. We are keen to speak to those who would like to pioneer a similar project for those critical markets.
Come join us!
We believe in the power of the collective, led by pioneers who dare to trust, share, fail and learn. Together. We are a diverse group of investors bound together by a shared set of priorities, urgency, and a joint belief that we need a profound transformation in the built environment. Fundamentally, being part of the solution to the climate emergency will be not just good for our planet, it will be a superior business model.
So come join us! The invitation is open for any direct real estate investor that wants to be part of this project, which is set to run until end of 2023. Let´s move towards a tipping point in the built environment, together.
Mikkel Bulow-Lehnsby is Co-Founder and Partner of NREP and 2150. Jeremy Oppenheim is the Founder and Senior Partner of Systemiq.
