Nearly 200 nations met in Paris in December for the annual gathering of signatories to the United Nations Framework Convention on Climate Change (UNFCCC), a historic agreement brokered in 1992 that called on countries to cut greenhouse gas emissions in order to prevent “dangerous, anthropogenic” (human-induced) global warming.
COP21, the 21st meeting of nations that signed the UNFCCC, known as the “conference of parties,” was considered game-changing compared with previous meetings because it resulted in countries committing to an ambitious goal: limiting the rise of global temperatures to less than two degrees higher than those in pre-industrial times and curtailing emissions to net zero by 2050.
The outcome of the meeting, known as the Paris Agreement, gives countries leeway in determining how they will achieve this target through so-called intended national determined contributions (INDCs). According to Sarene Marshall, executive director of ULI’s Center for Sustainability, the INDCs represent more of a bottom-up, grassroots approach to tackling climate change than the top-down approach of a previous climate treaty, the Kyoto Protocol in 1997. This new approach was key to inviting the participation of the private sector, business coalitions, and other subnational actors like cities at COP21.
“There were people who didn’t sign the treaty but have a stake in the game. [They] showed up, put pressure on the process, and said, ‘We are willing to do something,’” said Marshall. In addition, the presence and participation of the Compact of Mayors at COP21 created confidence in national governments that local governments—whose policies have the greatest impact on the built environment—and the business community are working together to achieve new carbon reduction targets, she said.
Marshall made her comments during a recent ULI webinar on the COP21 and what the Paris Agreement holds for the real estate industry. Given that buildings account for 30 to 40 percent of carbon emissions, the role of real estate owners, investors, and operators in reducing greenhouse gases and atmospheric temperatures cannot be overestimated. “You can’t solve climate change if you don’t address the building sector and, [specifically], energy in the building sector,” she said.
COP21 gave fresh attention to the role of buildings in reducing energy demand and emissions and in developing resilience in the face of climate change through the first-ever Buildings Day. In addition, a new coalition was introduced, the Global Alliance for Buildings and Construction, of which ULI is a member, to promote energy efficiency and other green building practices. Buildings were specifically called out in the INDCs of 46 countries, including some of the top emitters of greenhouse gases.
Sending a Market Signal
Webinar panelists made it clear that COP21 targets will not be achieved through regulation alone, but rather through market-moving actions of industry leaders.
“The primary message that we were providing was that green buildings [offer] the most impact and least costly approach to climate change,” said panelist Roger Platt, a ULI trustee and senior vice president of strategic planning at Green Business Certification Inc. He attended COP21 with a group of sustainability advocates who emphasized the market advantages that green, energy-efficient construction methods have over a conventional approach. “You can actually make money doing things that reduce carbon emissions in the building sector.”
The foremost example of a market-based incentive to improve energy efficiency and reduce emissions is the Leadership in Energy and Environmental Design (LEED) certification developed by the U.S. Green Building Council. LEED, whose tiered rating system of Certified, Silver, Gold, and Platinum offers further market differentiation, has served as a signal to the market that “green building is economically very attractive,” Platt said.
LEED certification and other performance-based metrics instill a competitive attitude among real estate developers, who are “not famous for being farsighted and progressive,” he said. “What they are is extremely competitive, and that has moved the market.” By 2018, green buildings will contribute $304 billion to the U.S. gross domestic product and add 3.3 million jobs to the U.S. economy, according to a recent USGBC study.
Investors, too, are increasingly considering a building’s environmental and energy performance as a “proxy for their economic performance,” Platt said. Many are using data compiled by the Global Real Estate Sustainability Benchmark (GRESB) to reduce the carbon footprint and improve other environmental, social, and governance (ESG) metrics of their real estate portfolios. According to Platt, nearly $1 trillion in clean and renewable energy investments will be needed worldwide each year to achieve COP21’s targets, presenting tremendous opportunities for further innovation in building performance technologies, green design, and construction methods.
“Companies are competing not just for tenants, but in the capital markets,” Platt said. “Be careful not just on where regulations are going, but where your competition is going.”
New Regulations and Federal Incentives
Leading up to and following COP21, all levels of government—national, state, and municipal—are developing laws to meet new climate targets. Those companies that have stayed one step ahead of regulations will likely find themselves in stronger market positions than those that simply react.
AXA Investment Managers, which manages more than €65 billion (US$72 billion) in assets across 23 countries, has been a market leader in sustainable investment, signing on to the U.N. Principles of Responsible Investing in 2012. In 2015, AXA committed to divesting from coal-related investments, said panelist Daniela Jorio, global sustainability analyst with AXA. “For AXA as a long-term investor, carbon is considered a risk,” she said.
Jorio shared several examples of new laws in Europe aimed at helping each country meet the new carbon-reduction targets. All will have a direct impact on real estate and on AXA’s assets, including continent-wide mandatory energy audits and net-zero-energy requirements for new development; a French energy transition law that requires a 60 percent reduction in energy consumption by 2050; and a new German law that requires a 25 percent reduction in energy consumption for all new development.
“We expect these [pieces of] legislation to be tighter in the future,” Jorio said. “What this means for us is we need to anticipate this legislation by actively managing sustainability.” In addition to divesting from carbon, AXA has also pledged to certify 75 percent of its assets as sustainable and conduct a portfolio-wide ESG assessment.
In the United States, cities have enacted benchmarking laws requiring building owners to monitor their efforts in energy and water consumption and waste reduction. And although the Clean Power Plan, President Obama’s signature law to combat climate change and work toward COP 21 targets, was temporarily blocked by the U.S. Supreme Court earlier this year, states are “moving forward with compliance” and looking at the law as “an opportunity to increase energy efficiency in rental housing, especially affordable rental housing,” according to panelist Harriet Tregoning, principal deputy assistant secretary for community planning and development at the U.S. Department of Housing and Urban Development (HUD).
HUD itself is launching several initiatives aimed at improving building performance and energy efficiency, including the Better Buildings Challenge, a voluntary program for developers and owners of multifamily properties to cut energy consumption portfolio-wide by 20 percent over the next ten years; a recent insurance rate cut for multifamily developers to stimulate the preservation of existing energy-efficient apartments and financing of new affordable ones; and Renew 300, an expansion of investment in clean energy and renewables in federally subsidized housing.
“We care about this because HUD spends $6 billion per year on energy bills,” Tregoning said. “If we had our druthers, we would much rather be building new housing with that money and not paying utility bills.”
ULI will be providing more in-depth analysis of the implications of the Paris Climate Agreement and the COP21 for real estate and land use, including how the international agreement is translating into new national and local laws and market shifts. ULI’s Center for Sustainability will be publishing a forthcoming paper on the topic by Jon Lovell, chair of the ULI UK Sustainability Council and cofounding director of Hillbreak, an ESG and sustainable development consulting firm based in the United Kingdom.