As climate change risks increase, investors seek greener buildings


When developer Lendlease opens its $ 600 million residential and office complex in Los Angeles, scheduled for 2025, the site will have the typical features of sustainable development: proximity to a streetcar stop, an all-electric residential tower, solar panels and a pedestrian square.

But these characteristics are considered common today. What makes this development more striking is that sustainability is not simply an accreditation or a sign of corporate responsibility, but an essential feature of its financing plan.

“We were doing sustainability before investor pressure, but now there is investor pressure,” said Sara Neff, head of sustainability for the Americas region at Lendlease.

The company’s investor partner for this project, Aware Super, will monitor environmental performance and metrics, including eliminating tenant emissions by purchasing 100% renewable energy.

The project is part of a larger movement of investors directing money towards sustainable real estate, thanks to new technologies and stricter standards that allow better monitoring of a development’s ability to reduce its carbon footprint.

Other players in the industry include Hudson Pacific Properties, owner of Epic, a solar-paneled Hollywood office tower occupied by Netflix. And Prologis, the international industrial giant, sells green bonds that finance the construction of more sustainable warehouses.

Sustainable real estate is not a new idea. The Green Building Council has promoted more efficient development for nearly three decades through LEED, its standard for building sustainability.

What has changed in recent years is the perception of the risk associated with climate change, prompting investors to direct their money towards safer and better performing green assets. New measurement tools and standards allow them to raise the bar in terms of environmental and economic performance.

“Carbon counting and the focus on carbon will undoubtedly define the decade ahead,” said Dan Winters, Americas region manager for GRESB, a real estate sustainability benchmark used to analyze $ 5.3 trillion. of assets in the world.

Growing disastrous reports of more frequent natural disasters – like the floods and high winds from Hurricane Ida, which caused an estimated $ 27-40 billion in property damage in late August and early September, according to the company. CoreLogic data – have hammered the awareness. that climate change is affecting real estate much sooner than expected. Eighty-eight percent of large businesses have already had a physical asset, such as an office or warehouse, affected by extreme weather conditions, according to Cervest, an AI platform that monitors business climate risk .

On October 15, President Biden, who has placed various climate proposals at the heart of his Build Back Better agenda, released a strategy to seek more financial disclosures from publicly traded companies on climate risk in an effort to help investors to turn to more resilient assets.

Lendlease’s Los Angeles project is one in a series of new mixed-use developments the developer is building in North America, including 1 Java Street in Brooklyn. The company is betting that sustainability means attracting better tenants and getting ahead of regulations to create a more valuable asset that attracts more investors.

“You have to have development excellence, but that also has to translate into operational excellence,” said Ms. Neff. “These factors, along with the overall carbon picture, tend to be the metrics that investors look at.”

Developers are seeing a growing thirst for investments focused on three areas – environmental, social and governance – a trend that is channeling significant capital.

Mutual funds and exchange-traded funds invested nearly $ 300 billion in sustainable assets around the world in 2020, nearly double the previous year, according to BlackRock, the largest asset manager in the world. world. In April, Invesco launched an exchange-traded fund for green buildings, and a similar green real estate fund launched by Foresight last year posted double-digit returns.

“Five or ten years ago there was a lot of talk about sustainability, about ‘It’s good, but I don’t want to pay for this’,” said Stephen Tross, director of international investments. at Bouwinvest, a Dutch company. investment firm managing approximately $ 17 billion in assets with significant North American interests. “Today you don’t sacrifice yields for sustainability, you create yields with sustainability. “

The emergence of new regulations – New York passed a law in 2019 requiring building owners to reduce their carbon footprint and Massachusetts recently passed a similar law – adds to the risk of not investing in new sustainable development.

Real estate has a significant emissions and climate change footprint, said Brendan Wallace, managing partner of Fifth Wall, a technology-focused real estate investment fund. He added that construction operations in the United States accounted for about 40 percent of all energy use.

“The real estate industry has been, to an extent, the culprit that has lurked in plain sight,” said Mr. Wallace. “And now he’s starting to take a place in the spotlight.”

The effects of climate change are modifying the strategies of major financial players such as the Mortgage Bankers Association, which call for more transparency in investment standards. Initially, much of the focus on sustainability came from investors with a long-term view, including the California Public Employees’ Retirement System, the New York Common Fund and the Central Bank of Norway, who helped create the GRESB standard.

The alphabet soup of standards – like LEED and GRESB – can be confusing, and many see the lack of common guidelines and technologies as a problem, fueling the widespread belief that market pulling through greater disclosure may be one way. more effective at reducing carbon emissions than strict regulations alone.

“The SEC and others are just saying, ‘Disclose your risk,’ and investors will decide what they want to do,” said John Mandyck, chief executive of the Urban Green Council in New York.

Critics see many problems with sustainable investing, including what’s known as greenwashing, in which companies misrepresent environmental responsibility. Doing good doesn’t always improve the bottom line.

But the ESG investment selection process doesn’t just eliminate bad assets, it also helps investors turn to the best, according to a Harvard study. More sustainable buildings attract better tenants and allow higher rents, up to 10% more, according to a JLL study of offices in London.

More precise tools and data make it increasingly easy for asset managers and investors to compare properties, portfolios and performance. For example, Measurab, a climate technology system, measures energy and resource performance on 10 billion square feet of assets.

“If I have better ESG data, I can attract more capital, at a better cost of capital,” said Greg Smithies, partner at Fifth Wall and head of its climate technology investment team.

The most important use of this technology will probably be the evaluation and modernization of existing buildings. Fund managers will need to understand which can be updated to meet new standards and regulations and which are likely to become stranded assets, an increasingly tricky calculation as building technology evolves.

Older buildings that do not reduce their carbon footprint are likely to receive a “dark haircut” and depreciate in five years, said Oliver Light, chief commercial officer of Carbon Intelligence, a London-based business consultancy firm that manages $ 111 billion in assets. Not investing with sustainability in mind now means higher costs in the long run.

“Our larger clients will not purchase any more assets until our engineering team does a due diligence report on this acquisition,” said Mr. Light. “They’ll know what to spend on an asset in 10 to 15 years, and if that’s too much, let’s say a glass skyscraper that will never hit the right performance metrics, so why buy such a risky asset?” ? “

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