The need for urgent and significant action to combat climate change has fuelled worldwide demand for investments focused on decarbonisation. Real estate is responsible for almost 40% of global final energy carbon emissions, so is a key sector to meet the goals of the Paris Agreement.
There are several key reasons that property decarbonisation could benefit future returns in listed real estate.
Lower cost of capital
Companies that prioritise decarbonisation should have superior access to, and better pricing for, equity and debt capital relative to their peers. This could be a key competitive advantage in a market with tight financial conditions. Transparency has been rewarded in this regard.
Those that disclose Scope 3 carbon emissions can enjoy a cost of capital 20 basis points lower than those that do not disclose. Real estate businesses focused on carbon reduction also have access to the green bond market — a rapidly growing source of capital.
Hedge against future liabilities
As global scrutiny of carbon emissions becomes more of a focus, regulators are increasingly imposing taxes or penalties on landlords who exceed global greenhouse gas thresholds or own buildings that do not conform to minimum energy efficiency standards.
In Canada, for example, a carbon tax of can$65 (£38.7)/ton is set to increase to can$170/ton by 2030, and in the UK, it is now illegal to let out a commercial building with the lowest two EPC classifications.
The latter demonstrates this is not an issue that can wait to be dealt with in several years; it is critical today. It also explains why the market is rewarding real estate owners that are making long-term investments to decarbonise their properties through onsite renewable and energy efficiency.
Read the full comment in ESG Clarity’s October 2023 digital magazine.