Key Takeaways for Commercial Real Estate from ‘Urgent’ IPCC Report

Emissions need to peak by 2025, earlier than previously estimated, per report

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The world is warming faster than initially predicted, and decarbonization efforts, including in commercial real estate, are not progressing quickly enough to prevent its escalating effects, according to the latest report from the United Nations’ International Panel on Climate Change (IPCC).

While many countries, governments and businesses have set decarbonization goals for 2050 — or 2030 at the earliest — the planet no longer has that much time, the report says. Emissions need to peak by 2025 for the Earth to remain under the 1.5-degree warming limit set at the Paris Agreement, according to the IPCC.

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“Scientists don’t often use the language of ‘now or never.’ They tend to be quite moderate,” said Juliette Morgan, the consultancy director for ESG at Gensler. “So this report feels different in its desperation and urgency.”

This latest release from the IPCC’s sixth assessment report, published on April 4, looks at the policies and tools available to mitigate global warming, as well as their rate of implementation, and was last updated in 2014. (An earlier report on the most up-to-date science was released in August 2021.) 

Along with the energy and transportation sectors, the commercial real estate industry is one of the primary emitters of greenhouse gasses, contributing 21 percent of global greenhouse gas emissions. Of that, 24 percent is from direct emissions, primarily from heating and hot water in buildings; another 57 percent is from indirect emissions such as energy usage, and approximately 18 percent is from embodied carbon in the built environment. 

In cities, buildings contribute a much higher percentage of emissions. In New York, buildings account for 66 percent of all greenhouse gas emissions, and in Washington, D.C., buildings contribute 75 percent.

“Emissions from buildings and from energy are going up, or going down very slowly,” said Anna Pavlova, vice president of strategy and market development at CarbonQuest, which offers carbon capture technology for buildings. “Clearly a lot needs to happen, and it has to happen very quickly.”

The good news is that there are many tools that are already available to minimize carbon emissions in each of the three areas where buildings contribute emissions: direct, indirect and embodied carbon in building materials. In addition, whereas passive or net-zero buildings were extremely rare in 2014, there are now many such buildings, the report points out. 

Still, adaptation is severely lagging, Gensler’s Morgan said. In other sectors, the cost of sustainable alternatives has plummeted over time: Solar and wind energy costs fell 85 percent and 55 percent, respectively, between 2010 and 2019, and the cost of electric cars in the United States decreased as demand increased. 

But while real estate and construction has seen innovation in terms of more sustainable building materials, it hasn’t reached the part of the innovation cycle where they are cheaper or competitive with the alternatives, Morgan said. 

“We’re at a point with new materials and new design techniques that they need commissioning,” she  said. “They’ve been in the incubator stage, they’re in the proof of concept stage and now they need people to buy them, and potentially buy them at high cost, so that they can be mass produced at scale and come into the mainstream.”

In terms of energy efficiency, too, the the technology to retrofit older buildings is already there, but is not often utilized — except in Class A buildings that justify the cost via higher rents, Pavlova said. And that’s a problem, because in more developed countries such as the United States, the majority of mitigation potential is in the existing building stock, while in the developing world, it is new construction that contributes the most emissions, according to the report. 

“Getting to more retrofits is what IPCC was really pushing for,” Pavlova said. 

President Joe Biden’s stalled Build Back Better plan had specifically allocated investment in retrofitting commercial buildings, while the infrastructure bill Biden signed late last year earmarked $3.1 billion for weatherizing homes. 

It’s a start but such investment from both government and industry is required for all areas of mitigation and adaptation. And the capital exists, within the global financial system to close the investment gap, but there are barriers to redirecting the capital to climate action, according to the 64-page summary of the report for policymakers. 

One of those barriers is “inadequate assessment of climate-related risks and investment opportunities,” per the report. 

That could change in the U.S., due to the disclosure requirements that the Securities and Exchange Commission (SEC) announced in late March. According to the new rules (which are not yet finalized), public companies will be required to measure their climate risk as well as their greenhouse gas emissions. That level of disclosure will likely lead to companies incorporating climate risk into their decision-making as well as pressure them into lowering their carbon footprint.

“The drivers of transparency are going to come through the requirement for reporting, which has been driven by the investment market,” Morgan said. “If companies have to disclose what their energy consumption is, and show over time that their energy consumption has gotten better, and that it’s sourced from renewables, then buildings will have to disclose their operational energy annually to their clients and their embodied carbon, if it’s a new building.”

The SEC’s requirement to disclose physical and operational risk is key to its success, Pavlova said. “Instead of people benchmarking against their own goals — if you have to benchmark it against your risks, it’s a much higher-pressure story,” she noted.

That said, disclosure alone can only go so far without further action, such as regulation and a standardized carbon credit market. “Of all the levers that are out there, financial disclosure is a really good one,” said Pavlova. “But I’m not sure that this lever on its own is quite enough.”

With the kind of radical change necessary to meet the 2025 deadline, it will require people and businesses who are willing to lead that change, Morgan said. 

“The opportunity for buildings to use things like laminated timber and biomaterials comes down to the bravery of whoever is commissioning the building. Now whether that’s the tenant, the landlord or the architect, we all need to hero the energy performance of the building above the aesthetics of the building,” she said. “We need to see passive as beautiful.”

As the IPCC puts it, we’re already in the critical decade, and there’s a lot to do. “The 2020-2030 decade is critical for accelerating the learning of know-how, building the technical and institutional capacity, setting the appropriate governance structures, ensuring the flow of finance, and developing the skills needed to fully capture the mitigation potential of buildings,” the report says.

Chava Gourarie can be reached at cgourarie@commercialobserver.com