COP26 should accelerate net zero carbon real estate

Out-Law Analysis | 19 Nov 2021 | 4:40 pm | 6 min. read

Radical change in policy, regulation and finance, as well as in the actions demanded of businesses, can be anticipated in the real estate sector following COP26.

The formal provisions of the Glasgow Climate Pact, together with the announcements on the deployment of private finance for assets committed to net zero, will increase the growing pressure on the real estate sector to decarbonise the built environment, which is a major contributor to greenhouse gas emissions.

Cross Siobhan

Siobhan Cross

Partner

Already there are many examples of real estate actors being ahead of regulation in this area. Those that remain so are most likely to thrive. To ensure the whole sector embarks on the transition required it is likely further regulation will be needed

Implications for real estate from the COP26 outcomes

The call in the Pact for the phasedown of coal power and phase-out of inefficient fossil fuel subsidies fell short of the phase-out of fossil fuels that many hoped for, but it is likely to translate into fresh regulation that will impact the real estate sector – including that envisaged in the UK’s recent heat and building strategy.

The recognition of the primacy of the 1.5 degrees Celsius temperature goal and the need to reduce CO₂ emissions very significantly by 2030 to meet this goal and to achieve ‘net zero’ by 2050, confirms the approach taken by many leading real estate actors in setting targets to achieve net zero on or before 2050. Others in the sector will need to follow their lead or risk holding stranded assets.

Finance

Perhaps most significant for the real estate sector were the financial announcements by The Glasgow Financial Alliance for Net Zero (GFANZ) and the highlighting of the increased TCFD-aligned reporting in the UK, with similar requirements increasingly being seen in other jurisdictions.

These announcements will result in a growth in green finance coupled with transparent reporting and conditions linked to that finance to avoid greenwashing. Already the real estate sector is seeing a welcome growth in green finance and these announcements will see an acceleration of finance on preferential terms for low or zero emission-producing real estate assets or assets which have a credible transition path. This will no doubt lead to a focus on sustainable real estate assets and it is to be hoped will provide the innovative financial solutions required for the mass retrofit of the buildings which is required to meet 2050 net zero goals.

In other areas the Glasgow Climate Pact deals with issues likely to have a more direct impact on real estate.

Adaptation

First, on the issue of adaptation to the impacts of climate change it “urges parties to further integrate adaptation into local, national and regional planning”. In June 2021 the Climate Change Committee in the UK criticised the UK’s lack of adequate planning for and delivery of adaptation measures.

Second, the Pact “encourages” parties to take “an integrated approach” to addressing the issues of “protecting, conserving and restoring ecosystems to create sinks for greenhouse gases” in their national, local and regional planning. Increasingly, these issues are finding their way into relevant national and local policies – such as the recent Environment Act 2021 finalised by the UK parliament – but further and increased policy and legislation which will impact on real estate is to be expected in both these areas. 

Woolley John

John Woolley

Partner

There is potential for developers to work more closely with local electricity utilities in designing large scale developments much more closely integrated with electricity distribution infrastructure, electric vehicle charging infrastructure and smart meters
Energy efficiency and charging infrastructure

In addition to the statements in the Glasgow Climate Pact, there were a number of declarations and statements outside of the formal UK COP framework by various coalitions of willing countries and private sector actors. Some of these are also very relevant to the real estate sector and clearly show the direction of travel in the areas covered and the pace of change required.

The statement in support of the UK-IEA product efficiency call to action was signed by a number of countries and sets a goal of doubling the energy efficiency of specific globally produced appliances, including air conditioners and lighting, by 2030. In line with the established energy hierarchy, the energy efficiency of these core appliances in buildings will need to be factored into the energy efficiency of buildings.

The declaration on accelerating to 100% zero emission cars and vans, signed by numerous governments, cities and vehicle manufacturers, contained commitments to work together to ensure all sales were of zero emission vehicles by 2035. Adequate charging infrastructure will be needed to support this transition and regulation on the provision of such infrastructure in new or existing real estate developments can be expected and has been proposed in some jurisdictions, including in the UK.

Together with the Pact statement on the phasedown of coal and the phase-out of fossil fuel subsidies, these declarations strengthen the existing focus on finding solutions to the large-scale electric vehicle charging challenge. There is potential for developers to work more closely with local electricity utilities in designing large scale developments that are much more closely integrated with electricity distribution infrastructure, electric vehicle charging infrastructure and smart meters. This would open up the prospect of opportunities for storage of green energy in developments or vehicles.

Sustainable steel production

A large number of countries launched a “breakthrough agenda” at COP26 committing to work together to develop sustainable solutions which become the most affordable and accessible options in each relevant sector by 2030. Steel is one of the four sectors referenced in the statement, with the aim that “near-zero emission steel is the preferred choice in global markets, with efficient use and near-zero emission steel production established and growing in every region by 2030”. For the real estate sector, how to reduce the use of or decarbonise cement and steel is a huge challenge so this commitment to international collaboration is essential and welcome.

In a further call for joined-up action, the Better Building Partnership and the British Property Federation called for radical collaboration across the real estate sector to deliver the routes to achieving net zero real estate against the background of the built environment being responsible for 40% of global emissions. Their focus was on the need for finance to support the net zero transition and for green financing to become mainstream, with the need too for occupier cooperation and technological innovation to enable a reduction in the operational energy use in buildings. They also said that whole life carbon assessments which take account of the embodied carbon in a building should become standard.

Whole life carbon

Outside the main conference and timed to coincide with the cities, regions and built environment day at COP26, the UK Green Building Council, which is part of the World Green Building Council, launched an important document – its net zero whole life carbon roadmap.

The roadmap assesses the share of the UK’s carbon budget available to the built environment, including infrastructure, consistent with the UK’s legally binding emissions reductions targets of 78% by 2035 and net zero by 2050, and concludes that on a “business as usual” basis the built environment will only achieve reductions of 60% by 2050.

The roadmap further contains a series of policy recommendations to ensure the built environment reduces emissions consistent with the UK’s legally binding carbon reduction targets. Some of these are already in train and the policy direction on some others was covered in the recent heat and building strategy document. Others include planning and VAT reforms to incentivise the re-use of existing buildings and disincentivise demolition and new buildings, and building regulation reforms to make the measurement of whole life carbon mandatory, and to impose limits on embodied carbon and peak loads.

As parties to the Glasgow Climate Pact are urged to enhance their ambitions and countries turn to consider the policy and legislation required to meet their emissions reductions pledges, this roadmap provides a template for grappling with establishing the real estate sector’s share of, and likely future contribution to, a country’s emissions. It establishes the likely shortfall on emissions reductions in the sector and includes some radical but necessary policy suggestions if real estate is to play its part in limiting global temperature rises to 1.5 degrees Celsius.

A catalyst for change

The Glasgow Climate Pact sets the crucial high level direction of travel and should be a catalyst for the transition of the real estate sector to net zero.

The whole life carbon roadmap is a really valuable contribution to the challenge of understanding the whole life carbon implications of the built environment. It contains radical proposals which come from leaders in their fields across the real estate sector and is a measure of the deep understanding of those leaders of the consequences of a failure to keep global warning to no more than 1.5 degrees Celsius, as well as their willingness to embrace the radical solutions that will be required for the built environment to play is proper part in achieving this.

Already there are many examples of real estate actors being ahead of regulation in this area. Those that remain so are most likely to thrive. To ensure the whole sector embarks on the transition required it is likely further regulation will be needed and this should be accelerated given the long lead in times on development and the importance of reducing emissions in this critical decade.