Investors, tenants demanding that managers go green

Investor and tenant demands are pushing real estate managers to make their properties more sustainable. Commercial real estate contributes 30% of global annual greenhouse gas emissions, a recent report noted, despite early and continuing efforts by real estate managers to make their properties more environmentally friendly.

Many investment managers now are accelerating those efforts, notwithstanding the Trump administration's moves to loosen environmental regulations and drop out of the Paris climate accord. But the sustainability movement in real estate is driven more by market forces than regulation or politics, said Jacques Gordon, global head of research and strategy at real estate money management firm LaSalle Investment Management, Chicago.

"The overwhelming majority (of real estate managers and property owners) desires to have green buildings or sustainable buildings … It's true of big companies. It's true of small companies … it's true of Jones Lang LaSalle (LaSalle Investment's parent company) and LaSalle and most Fortune 500 companies," Mr. Gordon said.

Executives at these companies believe the best and smartest workers prefer to work in healthier, more environmentally friendly buildings, Mr. Gordon said. "That's not just in the U.S. but it's global," he added. LaSalle has approximately $60 billion in assets under management.

While many managers began focusing on the environmental impact of their real estate portfolios after the financial crisis, their efforts have not been enough to stem global real estate's affect on climate change. Real estate greenhouse gas emissions continue to grow rapidly and could reach 50% of CO2 emissions by 2050, according to the UNEP Finance Initiative, a partnership between the United Nations Environment Program and the financial sector.

Needed improvements to existing properties aren't cheap. Should the industry decide to embrace the goals of the Paris agreement — keeping the global temperature rise this century well below 2 degrees Celsius above pre-industrial levels — the building sector's energy consumption would have to decrease by at least 30% through building highly energy-efficient new buildings and a deep renovation of the existing stock of buildings by 2050. That would cost roughly $11.5 billion between 2015 and 2050, according to the UNEP Finance Initiative.

Investor pressure

Investors are increasing pressure on their real estate investment managers to make investments more sustainable. In 2017, the $324.7 billion California Public Employees' Retirement System's real asset managers, including real estate, were required to begin reporting into GRESB, formerly the Global Real Estate Sustainability Benchmark, an organization committed to assessing by environmental, social and governance factors real asset performance globally.

CalPERS' real asset portfolio has a net asset value of $31.8 billion and accounts for 10.8% of CalPERS' total assets. The GRESB results are expected to be reported as part of CalPERS' real asset review in November, said spokeswoman Megan White, in an email.

CalPERS adopted carbon footprint reduction goals as part of a five-year strategic plan for ESG approved in 2016. That includes reducing its carbon footprint by 50% by 2021. CalPERS is not alone. Sixty pension plans worldwide are GRESB members. For the full article click here.