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October 2020

Aligning Real Estate with the Paris Agreement’s 1.5°C Scenario

In President von der Leyen’s State of the Union address at the European Parliament Plenary, she outlined a vision for the real estate sector to emerge out of the current pandemic more resilient against an even greater looming crisis: climate change.
The IEA estimates that until 2060, new floor space equivalent to the size of Paris is added every five days.
The buildings and construction sector is a huge driver of climate change:
  • Global residential and commercial energy consumption accounted for 30% in 2018, and including the construction industry, 36%.
  • The overall sector was responsible for 39% of global energy and process-related greenhouse gas emissions.
  • 2018 also marked the second year of consecutive emissions growth, hitting a record 9.7 Gt CO2e.
  • This was driven largely by an increase in real estate floor space, as well as higher demand for electricity, of which two-thirds is still generated from fossil fuels, according to the International Energy Agency (IEA).
Furthermore, the IEA estimates that until 2060, new floor space equivalent to the size of Paris is added every five days. Half of the buildings standing in 2060 have not yet been built. Yet where most construction is likely to take place, two-thirds of the countries do not have mandatory energy codes.
The UN projects that we will see 2.3 billion new urban dwellers by 2050 and the entailing construction activity for housing and infrastructure could claim 35-60% of the remaining carbon budget of a 2°C scenario. Furthermore, “The Emission Gap” report found that the world is not on track to meet the Paris Climate Goals, estimating an emission gap of 29-35 Gt CO2e by 2030 compared pathway towards a 1.5°C scenario.

Real estate has huge potential to help cut down on carbon emissions

Considering the current emissions footprint and future construction activity, the real estate sector cannot proceed with business as usual. It has the largest potential for energy efficiency measures. While global spending on building construction and renovation in 2018 was at a total of USD 4.5 trillion, only 3% was energy efficiency-related spending. The sector is also a primary target for climate change mitigation and is increasingly becoming a target for CO2-related regulations and taxation.
By establishing a climate strategy and contributing towards the Paris Agreement, ideally by setting science-based targets, investors can address transition risks, for instance regulatory or stranded asset risks. The Inevitable Policy Response (IPR) commissioned by the UN PRI assumes that when climate changes become increasingly apparent, it is inevitable that governments will act more decisively. The IPR concludes that more policy announcements should be expected between 2023 and 2025, leading up to the third round of countries affirming climate pledges to the Paris Agreement.

Real estate properties face significant stranded asset risks

Stranded asset risks or carbon risks related to GHG emissions occur when a building’s annual baseline exceeds a maximum allowance. Energy retrofitting actions can help avoid this “stranding event” and thus future-proof the asset. An analysis by the Global Real Estate Benchmark (GRESB) for all reporting entities in the Netherlands showed that without retrofitting activities, 75% of assets face the risk of becoming stranded by 2050.
To conclude, climate action has to become the center stage for the real estate sector. As a response, investors need to align their real estate portfolios with a climate goal, namely working towards a 1.5°C scenario and following a decarbonisation pathway that leads to “net-zero” by 2050 at the latest.
In 2020, J. Safra Sarasin Asset Management announced its Climate Pledge aiming for a carbon-neutral outcome in assets under management by 2035. The Swiss sustainable real estate strategy at Bank J. Safra Sarasin has already implemented the Climate Pledge, aligning itself with a 1.5°C scenario and aiming to become carbon-neutral by 2035.

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