The Wave of Net Zero Commitments in the Built Environment
Introduction
Following the 26th UN Climate Change Conference (Conference of the Partners or COP26), Alliance Global Advisors (Alliance) spoke about Sustainability and Net Zero with leading global Investors and at several in-person conferences, including the Pension Real Estate Association (PREA) and Institutional Real Estate, Inc. (IREI) this October and November. To provide our audiences with an informed point of view, we consulted with other panelists, the Global Real Estate Sustainability Benchmark (GRESB) and ESG experts in the field to provide this wrap-up on Net Zero targets impacting the real assets industry.
WHAT IS NET ZERO?
Net Zero Is the balance of greenhouse gases (GhG) in the atmosphere and a measure of carbon neutrality. Carbon Dioxide (CO2) is the primary greenhouse gas (of seven gases listed in the GhG Protocol) emitted from human activity, representing 80% of all of the greenhouse gases in 2019, according to a study by the Environmental Protection Agency (EPA). The most significant contributors to CO2 emissions in the United States include transportation (35%), electricity (31%) and industry (16%).
The recent focus on Net Zero commitments is driven by a recognition that CO2 contributes to climate change, which could have catastrophic consequences for future generations. Global temperatures are 1.1ºC above pre-industrial levels. According to the Intergovernmental Panel on Climate Change (IPCC), achieving Net Zero by 2050 could limit global warming to 1.5ºC, considered by experts to be the threshold necessary to mitigate global sea level rises, drought and hunger.
The GhG Protocol Corporate Accounting and Reporting Standard provides requirements and guidance for companies and other organizations preparing corporate level GhG emissions inventory. The GhG Protocol Corporate Standard classifies three ‘scopes’ of carbon emissions that make up a company’s footprint. Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company. The final scope includes various sources of GhG including employee/business travel, third-party distribution and logistics, tenant usage and production of purchased goods, among others.
Source: https://www.visualcapitalist.com/decarbonization-101-what-carbon-emissions-are-part-of-your-footprint
Real estate and real estate development account for approximately 40% of CO2 emissions worldwide, drawing attention to our sector. Our sector is also unique as a tangible asset class - there are now proven ways to improve and measure the environmental impact of the built environment through data collection related to GhG emissions, energy, water and waste consumption and climate risk.
GLOBAL INVESTORS & REAL ESTATE INVESTMENT MANAGERS WITH NET ZERO COMMITMENTS
Concluding in November 2021, the COP26 Conference in Glasgow called for additional country-level commitments to reach Net Zero. However, our findings show that private and public companies were on their way before the COP26.
Commitments to achieving Net Zero are rising, and our recent analysis shows that the institutional Investors are leading the charge in establishing targets, causing many investment managers to follow suit. In fact, our research shows over 550 global Investors have Net Zero targets, while only approximately 175 investment managers formalized a commitment.
The 550 plus global Investors with Net Zero targets include ESG veterans and newcomers alike. Investors like APG, Australian Super, Canada Post, Cambridge Associates, California State Teachers' Retirement System, California Public Employees' Retirement System, Church of England, Los Angeles County Employees' Retirement Association, New York State Common Retirement Fund and New Zealand Super are on the list.
Of the 175 plus global investment managers with Net Zero commitments, our research found that 123 managers are also members of the Net Zero Asset Managers Initiative, an international group of asset managers committed to supporting the goal of Net Zero by 2050 or sooner.
A further breakdown of asset manager data shows the following:
Of the asset manager group, roughly 94% are focused on real estate as an asset class
The asset managers with Net Zero initiatives are predominately global, operating in more than one country
79% of asset managers have a pledge of achieving Net Zero by the year 2050
9% of asset managers have a fund level Net Zero target
5% of asset managers have a 2025 pledge year (all are managers with fund-level targets)
WHAT'S NEXT FOR NET ZERO?
With nearly 30 years remaining before pledge year 2050, Investment officers and their asset manager partners are focused on learning how Net Zero commitments will impact portfolio construction, capital expenditures and future expected returns.
There is a significant cost to an effort to transition to Net Zero. Global estimates by the International Energy Agency show a cumulative cost of $150 trillion (over three decades), which will have a possible negative inflationary impact and a positive impact on GDP growth.
New studies are underway to estimate the cost of achieving Net Zero in real estate, including a recent research report published by AEW. Several other real estate asset managers and Investors are creating "road maps to Net Zero," including APG, Grosvenor Group, JLL, CBRE, MetLife, Mitsubishi Estate Co, Ltd. and PGIM.
CONCLUSION
An understanding of global efforts to achieve Net Zero and improve the environmental impact of the real estate asset class will be a topic of conversation in 2022. For more information on our research in this area, please contact Alliance Global Advisors. Alliance can help investment managers navigate the evolving ESG landscape, with the goal of preparing organizations to better compete for capital.
ABOUT ALLIANCE GLOBAL ADVISORS
Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with over $260 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.
Disclaimer: This blog was originally published in November 2021 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.