5 Energy & Sustainability Trends for Commercial Real Estate

The momentum around corporate sustainability in 2019 was undeniable. A record number of companies made or accelerated commitments to sustainability or climate action, investments in renewable energy hit new record highs and the business community as a whole made leaps toward responsible operation.

For companies in the commercial real estate industry, these developments present both challenges and opportunities. Here, our Schneider Electric’s global energy and sustainability experts have listed their 5 Top Trends for industry professionals to have a close look at in 2020 to help their organization be a leader in sustainability.

TREND #1: Companies lead the way with bold new climate commitments

Companies across sectors are heeding the call to act on climate change by limiting average global temperature rise to no more than 1.5 degrees Celsius and reaching net-zero emissions by 2050. As part of the “Business Ambition for 1.5°C — Our Only Future” campaign, 201 signatories so far have pledged to set climate targets that align with limiting global temperature rise to 1.5°C, including Global representatives in the real estate industry such as Dexus of Australia, City Developments Limited (CDL) of Singapore, Gebalis of Portugal and Landsec of the UK. Many more are setting and meeting ambitious goals to invest in clean energy and drive sustainable solutions within their own business operations and supply chains. The RE100 initiative of companies committing to go 100% renewable also has strong representation from real estate players, from long-time signatory, Alstria of Germany, to one of the initiative’s newest members, Hudson Pacific of the U.S. Importantly, companies are not just taking action to tackle their own emissions, they are also driving policy change in their countries and regions and create ambition loops to accelerate climate action.

TREND #2: Global investors adopting green investments

Today's investment community is riding a wave of growing interest in sustainable companies—ones that show progress toward a 1.5C world. As companies’ sustainability journeys continue to evolve, so too do investor interactions. BlackRock C.E.O. Larry Fink’s influential annual letter where he said his firm would avoid investments in companies that “present a high sustainability-related risk” is just the most recent indicator of this trend.

In December 2019, 631 investors from around the world, representing some $37 trillion in assets, signed a letter calling on governments to step up their efforts against climate change. And on top of that, the EU recently laid out the “Action Plan: Financing Sustainable Growth” to move toward mandatory climate risk disclosure as part of a new set of regulations to finance sustainable growth and support a low-carbon economy. In a recent survey of corporate energy and sustainability practices, respondents from the commercial real estate industry told us that pressure from investors and gaining a competitive advantage were the top two drivers for green investments at their organization.

TREND #3: Corporates buying renewable energy always and everywhere

The real estate industry has a long history of renewable energy procurement. Digital Realty, one of the five largest publicly-listed U.S. REITs, has been a pioneer in renewable procurement, signing more than 274 MWs in renewable energy power purchase agreements (PPAs) since 2016 to provide its customers with carbon-free computing. Equinix, Prologis and Iron Mountain are among other REITs leading the industry in renewable purchasing. In 2019, we saw many interesting developments in the renewable energy space: in addition to a steady growth of renewable opportunities in the U.S., Europe continued to advance as an attractive market for corporate PPAs—a trend that will only speed up in 2020.

Beyond Europe, 2019 showed a growing interest, but also challenges, in some newer geographies for renewables: India and Brazil have seen an upswing in I-REC purchasing and both countries show greater potential for renewable purchasing in 2020. Australian companies, meanwhile, continue to explore a variety of deal structures from long-term PPAs to short-term renewable retail contracts. New and increasingly attractive markets for renewable energy to keep an eye on this year include Vietnam, Taiwan, China, Italy and Germany. One of the key drivers for renewables in 2020 is companies’ urgency to meet their sustainability goals. With rapidly growing global initiatives such as the RE100 and Science-Based Targets, more companies than ever are now positioning themselves among the league of climate leaders making bold commitments to renewable energy and greenhouse gas reduction.

With today’s market dynamics, it’s important to stay in tune with the changing environment and opportunities.

Learn more in our upcoming webinar, “How Market Disruption is Affecting Global Corporate Renewables”. REGISTER HERE

TREND #4: Climate risk and carbon neutrality top corporate agendas

2019 wrapped with some of the most extreme cases of natural disasters. According to the World Economic Forum’s top 20 risks facing the world in 2020, these risks are only growing. Over 70% of respondents think risks to businesses will increase in the next 10 years across all areas of short-term risk outlook, including climate-related disasters such as extreme heat waves and uncontrolled fires.

Source: World Economic Forum

Because of the reality of these risks, real estate companies should expect to see even more of a push from the investment community to address risks related to climate change. BlackRock’s recent announcement that it will exit investments that generate more than 25% of revenues from coal is a case in point. In 2020, companies should prepare themselves to respond to these investor pressures to act on climate change by undergoing scenario analysis planning, adopting key recommendations from the TCFD and taking tangible steps to mitigate carbon emissions.

To address growing climate risk and investor scrutiny, companies are turning to carbon neutrality as the next frontier in corporate sustainability. While many companies have joined this movement, there are still a lot of discussions on what exactly net zero is (and what it is not). Net zero, carbon neutral or climate neutral claims lack clear, widely accepted definitions and boundaries and initiatives can differ based on what a company sells, owns or influences.

Definitions aside, the best strategy that we often recommend to our clients is to first focus on energy efficiency and innovative technologies or process redesign. Then, credible carbon offsets can be purchased for the remaining unavoidable emissions.

Companies like Microsoft are taking carbon neutrality even further, now enter the carbon negative space by committing to remove more carbon dioxide from the atmosphere than it emits by 2030; but how exactly? 2020 will bring more granularity on these questions. In the meantime, it is safe to say that experts are aligned that the litmus test of carbon credibility are science-based targets (SBT) and any net zero initiative shall start with emission reductions in line with 1.5°C or well below 2°C scenarios

TREND #5: Scope 3 management demands advanced data practices

Companies with carbon neutrality goals or SBTs are increasingly looking to complement their Scope 2 carbon reduction efforts, such as renewable energy procurement, with efforts to tackle Scope 3. Scope 3 is a notoriously difficult category of emissions to address, inclusive of indirect emissions in a company’s supply chain. Companies with SBTs are not required to set Scope 3 reduction targets unless Scope 3 emissions are 40% or more of total emissions. Due to the nature of the business, Scope 3 emissions can be a significant risk factor for commercial real estate. In a summary of emissions reported by UK commercial real estate companies to CDP in 2017, it was estimated that Scope 3 emissions make up, on average, 85% of total emissions for a commercial real estate company. Mainstreaming supply chain carbon reduction will bring a breakthrough for real estate companies, as impacts could be exponential compared to focusing only on emissions from a company’s own operations.

Maintaining a centralized and reliable database will be essential, as Scope 3 emissions-reductions require analysis of many data streams, from emissions generated by building tenants to embodied carbon resulting from the production of building materials and construction. For companies in commercial real estate, tenant engagement on energy data collection will be a key challenge to overcome, as so much of the energy spend and resulting emissions is out of a building owner’s direct purview. Now more than ever, there’s a need for solid reliable data for external reporting to the various standards important to commercial real estate including RE100, CDP, SBT, GRESB, WELL, Fitwel, etc.

Schneider Electric provides its clients with both the tools and guidance needed to successfully set and achieve any kind of sustainability or carbon-reduction target. Our sustainability consulting services cover the full spectrum of activities and experience-levels, from first-time goal-setter to advanced corporate sustainability leader. Whether you need help understanding what goals you should set and what the boundaries should be, or you have robust carbon reduction targets and want to explore innovative solutions to reach them, our team of experts is here to help.

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