COP26 and the outlook for sustainable buildings

COP26 and the first Cities, Regions and Built Environment Day of the summit shone a spotlight on the real estate sector – and rightly so. The operation and construction of buildings is responsible for almost 40%[1] of total global greenhouse gas emissions.

The transition to net-zero carbon emissions requires a fundamental transformation of the built environment as well as substantial investment, in both retrofitting existing assets and capital spend on social infrastructure. In the UK, 80% of buildings that will exist in 2050[2] have already been built.

Stepping up

This year at COP26, the formation of the International Sustainability Standards Board was an important move in improving transparency and comparability of sustainability disclosures for investors, which will have a significant impact on all sectors including real estate. In Glasgow, we also saw the launch of the Net Zero Whole Life Carbon Roadmap. This is an industry-led initiative that serves to quantify – for the first time – the specific emission reductions across sub-sectors of the built environment that need to take place every year towards meeting the 2050 target.

We also welcomed the UK’s new heat and buildings strategy, although it’s important to recognise that we need more tangible progress towards a global carbon pricing mechanism, which will be critical to quantifying the problem and incentivising consumers and producers on the path to net zero. Agreeing Article 6 in the Paris Agreement has been a positive step forward in addressing double-counting and promoting transparency, but we will need to see how that plays out in practical terms on the voluntary carbon markets.

By contrast, the private sector has stepped up significantly, as evidenced through the Glasgow Financial Alliance for Net Zero, where over 450 firms across 45 countries have committed $130 trillion of private capital with the aim of setting robust near-term, science-based targets to halve emissions by 2030. We think this is a positive step for the private sector, which reinforces our ability to engage constructively with our corporate tenants who occupy our buildings.

Future-proofing assets

Furthermore, the Minimum Energy Efficiency Standards requirement, starting in 2023, will set key milestones for the real estate sector around improving energy performance for occupiers. We expect to see more policy responses, and a widening gap between the best and ‘the rest’. More direct policy interventions could materially shift the economics in favour of occupying and owning low-energy buildings, potentially making them cheaper to occupy. In our view, the users of real estate will increasingly select their spaces based on the environmental and social outcomes that are aligned with key themes around environmental benefits and health and well-being.

At the portfolio level, we believe those that position towards the highest net-zero standards will see benefits to both occupier demand and investment performance, as well as risk reduction. We believe there is likely to be an early-mover advantage to positioning portfolios to capture this additional value through the future-proofing of our assets. But it is not only down to us. Occupiers procure their own energy and control all site operations across almost 50% of our portfolios and, therefore, play a central role in how efficiently buildings are used and energy is consumed. This will continue to be one of the biggest challenges for us in strengthening our occupier relationships to drive action.

[1] Source: UKGBC as at 2021.

[2] Source: UKGBC as at 2021.