Real Estate Developers Need to Act Now to Transition to Net Zero

Climate change is no longer a future risk. It has already become an immediate present-day challenge. Apocalyptic natural disasters and rising global temperatures are essentially calling for immediate action on carbon emissions reduction and for businesses to incorporate climate-friendly practices in their operations. In the real estate industry, carbon reduction is a particularly weighty and material issue; studies have found that the sector is consuming over 40% of the global energy annually, while CO2 emissions from buildings are expected to increase 56% by 2030. With that in mind, given the wide array of operations ranging from land trading, building design to construction, real estate companies are in a critical position in the context of global movement for reduction of greenhouse gas (GHG) emissions. 

In the context of Hong Kong, buildings are the major source of energy consumption: Hong Kong Green Building Council (HKGBC) has found that building-related activities account for as high as 90% of Hong Kong’s total electricity consumption, an exceptionally large figure when compared to a global average of 40%. As a result, 60% of the city’s carbon emissions are generated solely from buildings, suggesting the importance of promoting green buildings for maximizing energy savings and achieving the net zero target. Aiming to facilitate the development of green buildings, HKGBC has put forth Advancing Net Zero (ANZ), an initiative that encompasses the practice of reducing negative environmental impacts of buildings while enhancing the health and wellbeing of building occupants. 

The idea of net-zero buildings has sprung up in recent years. It refers to buildings with zero net energy consumption, or in other words, buildings that produce the same amount of energy as they consume, but in the form of renewable energy. During the planning process, real estate companies need to take into consideration wall structures, window-to-wall ratio, building orientation, etc. for optimization of energy use and minimization of waste. Examples of green building designs include the use of energy modelling systems, energy-efficient heating and cooling systems, and renewable energy. 

As one of the signatories of the ANZ, Alaya has been advising a portfolio of real estate developers including industry leaders such as China Overseas Holdings Ltd, Guangzhou R&F Properties, Yuzhou Group and others on how to raise transparency in disclosing their green building efforts.  Over the years, we have observed that all our clients are sharpening focus on green buildings and reduction of carbon emissions, participating in development of new techniques and technologies for tracking and cutting CO2 emissions, as well as possible initiatives to promote green building practices. 

TCFD and SBT go hand-in-hand in advocating carbon reduction

Meanwhile, GHG and energy reduction targets have received remarkable attention from both property developers and their investors. From the regulatory perspective, HKEX has further enforced guidelines for listed companies to disclose their carbon emission targets, while ESG rating agencies such as MSCI have put great emphasis on measuring carbon footprints and promoting low carbon operations. In view of the correlations between environmental performances and financial benefits such as direct cost savings and reduced regulatory risks, investors have also grown to be more concerned with carbon reduction targets of real estate companies. 

Science-Based Target Initiative (SBTi) champions the setting of science-based targets (SBT) as a powerful tool to drive corporates’ competitive advantages while transitioning to a low-carbon or carbon-free economy. The organisation has recently announced that it is developing the first global science-based standard for companies to set net-zero targets, clarifying the role of decarbonization, offsetting and nature-based climate solutions in a business’s net-zero strategy.

As one of the first  ESG consultancies to receive approval for its SBT and sign the Business Ambition for 1.5°C commitment, Alaya has been advising its clients on adopting a four-step approach to setting ambitious yet attainable SBTs. So far, only 973 companies worldwide have taken part in SBTi, albeit recording a hundred per cent growth over the most recent couple of years; this number is quite marginal in a global context. Climate change is a global menace and only concerted efforts can lead to notable progress towards carbon reduction. Hence, companies should no longer remain armchair strategists, but actually take the initiative to set SBTs and commit to them.

While SBT plays a pivotal role in initiating carbon reduction plans, Task Force on Climate-related Financial Disclosures (TCFD) develops and designs climate-related financial risk disclosure formats for companies, which can be used to provide relevant information to stakeholders. In 2017, TCFD promulgated a series of recommendations for accelerating financial disclosures concerning the impact of climate change on businesses; one of the four key areas addressed was Metrics and Targets, which is where SBT comes into play as it enables companies to meet requirements set out in that area. Both SBT and TCFD have similar specifications, obliging companies to take into account Scope 1 and 2 emissions while considering Scope 3 emissions under certain circumstances. This illustrates how the two initiatives are compatible with each other, with SBT serving as an integral part for meeting TCFD recommendations on setting carbon emissions reduction target. 

Global effort is a must for achieving Net Zero by 2050

The concept of net zero is essential for mitigating climate change and meeting the Paris Agreement’s target of keeping global warming below 1.5°C. Simply reducing CO2 emissions is insufficient, instead, a net zero emissions must be maintained in order to stabilize and halt the intensification of climate change. According to World Green Building Council, buildings currently contribute to 39% of energy-related carbon emissions globally and thus it is especially crucial that the real estate industry takes action to transition to net zero. 

Despite the instability and uncertainties amidst the coronavirus pandemic, the clock is ticking, and climate risks are quickly escalating in all parts of the world. Net zero is not just a fad, it is a material topic that entails persistent efforts and commitment. Certainly, global synergies are vital and needed to achieve the net zero carbon emission target, while the real estate industry has to take the lead given its predominant impact on global GHG emissions. The World Bank has estimated that a 36% reduction in CO2 emissions is required in the real estate industry by 2030 so as to maintain temperature rise within 1.5°C. 

In the meantime, investors are also urging green building initiatives and renewable energy adoption. Net zero targets not only allow investors’ demands to be fulfilled, but also drive value for real estate companies’ long-term sustainability. Therefore, from multinational corporations, small and medium-sized enterprises, to individual levels, all parties need to take part and contribute in order to generate remarkable effects. 

Related insights