As we pass the halfway mark between 2015’s Paris Climate Agreement and its first key-milestone of 2030, the pressure for sustainable transition can increasingly be felt across industries globally, and the real estate and construction sector is no exception.
With heavy industry contributing a third of global greenhouse emissions, it finds itself alongside oil and gas, agriculture, fashion and transport as one of the planet’s heaviest CO₂ emitters.
So what is the carbon footprint of the real estate sector today?
There’s an irony that in building the modern urban world, we have contributed to the unbalancing of the planet’s environment. Concrete is the second most used substance on earth after water. Annually, the cement industry adds some 2.8 billion tonnes of CO₂ into the atmosphere, placing it directly behind China and the US in terms of emissions.
Considering that China alone has produced more concrete in the 21st century than the US did in the entire 20th century, one begins to get an appreciation of the scale involved. Put another way, by the time you finish this sentence, the industry will have poured almost 20,000 bathtubs of concrete. A year from now, it could have paved the entirety of Great Britain.
Concrete is a simple blend of sand, water, aggregate – typically gravel or stones – mixed with a lime-based, kiln-baked binder, typically known as cement, one of the core ingredients of which is clinker. In securing the necessary calcium required for it, limestone (calcium carbonate) is broken down in a furnace into its constituent elements, during which the emitted carbon and oxygen bind, before being released. Ironically, clinker makes up just 10% of concrete by mass, yet contributes 90% of its manufacturing carbon emissions. Ultimately, production of one tonne of concrete produces half a tonne of CO₂.
But it is by no means alone. The other basic building blocks of the real estate business all contribute significant CO₂.
Worse, from a proportion emissions basis, is steel. This is unsurprising when examining the process to purify iron ore. Not only does heating a smelter to 1700 degrees require considerable energy – often fossil fuel fired – but the presence of coke (a type of coal) in the process leads to the ore parting from its bonded oxygen to absorb carbon from the coke to produce the desired tensile strength provided by steel, but it results in the bonding of the emitted oxygen from the ore with the residual emitted carbon from the coke. Result: 1.8 tonnes of CO₂ emitted for every tonne of steel manufactured.
Similarly, the production of glass contributes somewhere between 80 and 100 million tonnes of CO₂ annually. Mostly, this results from the energy required to heat furnaces to the required temperatures to melt the core ingredients of sand, soda ash and limestone. But, as with concrete, use of limestone adds significant additional CO₂ release. The use of sand is also environmentally problematic due to the damage caused to offshore habitats when sourced from coastal shorelines.
The Environmental Prerogative
The events of the last few years have illuminated the environmental imperative dramatically.
According to the WMO’s 2022 report, there were 81 weather, climate or water-related disasters in Asia alone last year, of which 83% were flood and storm related, impacting China, Hong Kong, the Philippines and Myanmar, amongst others. More than 5,000 people lost their lives; 50 million were directly affected, and associated costs of approximately US$36 billion incurred.
The trend is clear.
And now, El Niño is back too!
Regulatory Pressures
It’s therefore not surprising emissions targets agreed at the 2015 Paris Climate agreement require the global concrete industry to reduce its overall emissions by 16% by 2030, and 100% by 2050. Yet CarbonCure Technologies predicts Asia alone will account for over half of the global construction market by 2030. Ensuring sustainably will therefore be of critical importance.
In response to these ambitious targets, regulators have been busy issuing waves of regulation. Their goal is to embed sustainability into the investment chain, thereby addressing the private capital required to accelerate the energy transition envisioned and to allow for national reporting to demonstrate progress.
However, a few barriers have to be dealt with first, particularly in Asia and the Middle-East, such as addressing a lack of available information on corporate sustainability efforts, levels of investment being made, and a lack of common language around what is sustainable and what isn’t.
To date, the EU has been at the forefront of regulatory thinking across the ESG space, and initiatives including the EU Taxonomy, the Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regime have influenced the regulatory framework to which the rest of the world is finding itself increasingly subject to, namely the IFRS’s International Sustainability Standards Board (ISSB) disclosures regime, or local variations thereof.
APAC and Middle-Eastern regulators are progressively adopting similar measures, often basing local regulations on their EU counterparts, with additional consideration to transition financing. Additionally, practical industry initiatives like the Singaporean, Malaysian and Vietnamese Green Building Councils advocate more sustainable building practices, while Indian government incentives promote tax benefits, accelerated approvals, etc, for LEED certifications on green building practices.
Dubai’s hosting of Cop 28 will serve to amplify scrutiny on the Middle-East and its current development boom. The expertise being brought to bear on achieving sustainable buildings is not in doubt. Ensuring sustainable construction techniques is therefore key also.
Dubai and Saudi Arabia, both countries undergoing significant development, have respectively launched the Emirates Green Building Council and Saudi Arabian Ministry of Housing’s Mostadam green building rating and evaluation platform. Both aim to promote more sustainable construction and assessment practices.
We expect regional governments to become increasingly focussed on lowering their nation’s carbon emissions, and those corporates found lagging may well see fines and other punitive consequences arise as a result.
Investor Pressures
The uptick in funds being channelled into sustainable products and companies clearly demonstrates the trend of investors increasingly seeking companies with sound environmental credentials. McKinsey estimate the green business market in Asia to reach between $4 to $5 trillion by 2030, with a required investment in energy and land-use systems between 2020 to 2050 of $3.1 trillion in Asia alone.
As a result, investors will pressure companies to disclose relevant information so that better, more insightful investment decisions can be made. Largely, this will be accomplished through the mandatory local and international reporting regimes, many of which are being issued by local stock exchanges and in cases also being applied to large private companies. Investor pressure may well expedite their adoption further to SMEs and entities not automatically deemed in scope.
Tenant Pressures
Tenants in high-risk locations will invariably find attaining property insurance increasingly hard, and in some cases impossible. Others, not located in high-risk coastal regions, may see premiums rise due to increased year-on-year payouts and as a result of pass-on costs from insurers seeking ever-more expensive reinsurance. Some locations, like New Delhi, who have witnessed increases in poor air quality, may see knock-on impact to health insurance premiums, too.
Tenants have also begun to seek more sustainable buildings with lower carbon footprints (as 70 % of the sector’s emissions emanate from building operations), more efficient energy and water usage, and a greater ability to withstand the effects of climate change.
For corporate landlords and tenants, more sustainable buildings will go a long way to realising their own emission reduction strategies, reporting of which they are increasingly being required to make through formal disclosures.
Risk, but also an opportunity?
While these pressures will doubtless expedite real estate companies’ drive to new and more sustainable materials and construction techniques, there are significant benefits from making the transition beyond simply managing reputational risk.
Research by Inrate, a Swiss based ESG specialist, shows that sustainable real estate companies do better financially than those which don’t, largely because green buildings tend to have lower vacancy rates, better tenant retention and the ability to command higher rents.
Pressures from investors seeking businesses with better sustainability records has also allowed for real estate companies to access green / sustainable financing at reduced costs of borrowing. As investors focus on climate change trends, carbon footprints, efficiency of their portfolio of buildings, and management attitudes, new products like green bonds and loans have facilitated a more focussed channel of funding to those deemed stronger in these areas.
Companies who become clear early adaptors may also find themselves afforded a seat at the table with government bodies to help them mould regulations, as has been the case in financial markets.
Being sustainable could also reduce long-term legal, reputational and regulatory risks as sustainable buildings will generally be safer, more durable, will allow for lower energy bills and lessen the impact of energy price surges – a critical consequence of the unrest in Ukraine and the Middle-East.
Investors and stakeholders acknowledge that real estate investments typically span over 20 years, constituting a long-term commitment. Climate change-related risks present a compounding threat with consequences materializing within the investment horizon. The risks observed today have the potential to double or quadruple over the next 10 or 20 years, directly impacting the returns on that investment. Consequently, it is imperative for players in the real estate sector to incorporate this risk into their due diligence processes and investment protocols at present. Businesses, investors, and governments need to recalibrate their sustainability metrics to align with more ambitious targets in response to the pressing urgency of climate change.
Buildings can change everything. The real estate sector must now take bold steps towards sustainability to secure a thriving and environmentally conscious future.
Written by Jaya Oswal, in collaboration with Compliance expert, Martin Smith.
