What Carbon Neutrality Means for the Real Estate Sector

As the global community continues to experience extreme and immediate climate effects, the need for climate action will persist. Since building and construction activities are responsible for 39% of all energy and process-related carbon emissions, real estate corporates have a distinct responsibility to develop ambitious, measurable climate strategies. Of the 838 companies taking action through the Science-Based Targets Initiative, 46 are classified in the real estate sector, but further work should continue to bring more on board – especially as the market grows its affinity towards carbon neutrality. 

Unlike science-based targets, there is no widely accepted standard to back up carbon neutral claims, and the definition of “carbon neutrality” often remains unclear. The World Resources Institute (WRI) defines carbon neutrality as the removal of all remaining carbon emissions after source emissions can no longer be reduced. In other words, carbon neutrality entails reducing emissions as close to zero as possible and addressing the leftover with carbon removals.   

While this makes sense on paper, ambiguity lies in identifying the boundaries of carbon neutral goals and what designates credible removals. Will companies be allowed to say they achieved carbon neutrality without assessing the impact of their value chain emissions? And to what extent will companies rely on offsets to achieve carbon neutrality rather than undergoing internal changes to decarbonize?

All sectors will wrestle with these questions to ensure credible climate action, but the real estate sector has unique elements to examine. Many companies choose to limit carbon neutrality goals to only scope 1 and 2 emissions, but this fails to acknowledge the substantial emissions associated with the real estate value chain. On average, scope 3 emissions make up 85% of a commercial real estate company’s footprint, but widespread accounting for these emissions has yet to be achieved.

The emissions derived from raw materials used in building construction and renovation are a notable example of these scope 3 sources. GRESB and other credible reporting bodies expanded their questionnaires this year to include the quantification of emissions from “embodied carbon,” which is the sum of all emissions attributed to the extraction, manufacturing, construction, maintenance, and disposal of building materials.  

As companies work to improve scores on these reporting platforms, increased ambition will help accelerate the adoption of lifecycle assessments and raise the popularity of lower emitting practices. Amid growing awareness of the impact of embodied carbon – which is responsible for 11% of annual GHG emissions – real estate companies should strongly consider the recycling of building materials and where possible, the avoidance of new construction in favor of reuse and renovation. 

Another key challenge faced by real estate corporates when setting carbon neutrality targets lies in the operational footprints of buildings – particularly the emissions associated with downstream leased assets. While operational efficiency has been a part of sustainability in commercial real estate for some time, its importance has been magnified through the continued efforts of tenant data collection.  

Again, carbon neutrality entails getting emissions as close to zero as possible, but there will inevitably be remaining emissions that must be accounted for. While a real estate company may choose to offset its own scope 2 emissions using RECs or other contractual instruments, some companies may still find it irrational to purchase these credits on behalf of their tenants. This may make the reliance of offsetting to achieve carbon neutrality less attractive compared to removing the sources of GHG emissions altogether. 

Although RECs and other contractual instruments certainly have a place in corporate strategies to reach carbon neutrality, real estate corporates should first decarbonize by implementing energy efficiency measures. Some examples include equipment upgrades, improved building insulation, and where possible, on-site renewable installations to the benefit of both a company’s own operations and their tenants. 

As carbon neutrality evolves into a mainstream climate target, companies should strive to keep up with the market transformation. While no formal definition of a carbon neutral claim has been established, limiting our world to 1.5 °C of warming will require milestone targets and iterative measures along the way.

For further discussion on how sustainability experts view the quandary of carbon neutrality, watch our recent webinar with Novo Nordisk and WWF on Accelerated Action Toward a Net-Zero Carbon Economy.

This article was written by Benroy Chan, Sustainability Associate, Schneider Electric Energy & Sustainability Services.