In the face of climate change, investors are looking for green buildings

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When developer Lendlease opens its $ 600 million residential and office complex in Los Angeles, expected in 2025, the location will have the typical features of sustainable development: proximity to a tram stop, an all-electric residential tower, solar panels and a pedestrian mall.

But these functions are considered commonplace these days. What makes this development even more noticeable is that sustainability is not just a convenience or a sign of corporate responsibility, but a core element of the financing plan.

“We did sustainable development before there was pressure from investors, but now there is pressure from investors,” said Sara Neff, director of sustainability for the Americas at Lendlease.

The company’s investor partner for this project, Aware Super, will track environmental performance and metrics, including eliminating tenant emissions by sourcing 100% renewable energy.

The project is part of a larger movement of investors who, thanks to new technologies and stricter standards, are pouring money into sustainable real estate that enables better tracking of a development’s ability to reduce its carbon footprint.

Other players in the industry include Hudson Pacific Properties, the owner of Epic, a Netflix-owned, solar-powered office tower in Hollywood. And Prologis, the international industrial giant, sells green bonds that finance the construction of sustainable warehouses.

Sustainable real estate is not a new idea. The Green Building Council has been promoting more efficient development through LEED, its standard for sustainable building, for almost three decades.

What has changed in recent years is risk perceptions related to climate change, which is leading investors to invest money in safer, better performing green assets. New measuring instruments and standards enable them to raise the bar for environmental and economic performance.

“Carbon counting and a focus on carbon will no doubt determine the next decade,” said Dan Winters, head of the Americas region at GRESB, a sustainability benchmark for real estate that analyzes $ 5.3 trillion in assets around the world.

Ever worse reports of more frequent natural disasters – like the floods and violent winds of Hurricane Ida, which, according to data company CoreLogic, caused an estimated $ 27 billion to $ 40 billion in property damage in late August and early September – have made the realization clear that the Climate change affects real estate much earlier than expected. According to Cervest, an artificial intelligence platform that monitors corporate climate risk, 88 percent of large companies already have a physical asset such as an office or warehouse that is affected by extreme weather.

On October 15, President Joe Biden, who has made various climate proposals at the center of his Build Back Better agenda, released a strategy to get publicly traded companies to gain more financial disclosures on climate risk to help investors steer more resilient assets.

Lendlease’s Los Angeles project is part of a series of new mixed-use developments the developer is building in North America, including 1 Java Street in Brooklyn. The company believes that sustainable development means attracting better tenants and staying ahead of the regulations to create a more valuable asset that attracts more investors.

“You need development excellence, but also operational excellence,” said Neff. “These factors, as well as the overall picture of CO2 emissions, are usually the metrics that investors look at.”

Developers are seeing an increasing appetite for investment centered on three areas – environmental, social, and governance – a trend that is channeling significant capital.

According to BlackRock, the world’s largest wealth manager, mutual funds and exchange-traded funds invested nearly $ 300 billion in sustainable investments globally in 2020, almost double the amount last year. In April, Invesco launched an exchange-traded green building fund, and a similar green real estate fund launched by Foresight last year has seen double-digit returns.

“Five to ten years ago there was a lot of debates about sustainability that ‘it’s nice, but I don’t want to pay for it,'” said Stephen Tross, chief investment officer for international investments at Bouwinvest, a Dutch investment company with assets of around $ 17 billion under management with significant North American holdings. “Today you don’t sacrifice returns for sustainability; you create returns with sustainability. “

The rise of new regulations – New York passed law in 2019 requiring building owners to reduce their carbon footprint, and Massachusetts recently passed a similar law – increasing the risk of not investing in new sustainable development.

Real estate has a significant impact on emissions and climate change, said Brendan Wallace, managing partner of Fifth Wall, a technology-driven real estate fund. He added that building operations accounted for about 40% of total energy consumption in the United States.

“The real estate industry was to some extent the culprit that was hiding in public,” Wallace said. “And now it’s starting to take a place in the spotlight.”

The effects of climate change are changing the strategies of major financial players like the Mortgage Bankers Association, who are calling for more transparency in investment standards. Initially, the focus on sustainability was largely with long-term investors, including the California Public Employees’ Retirement System, the New York Common Fund and the Norwegian Central Bank, which helped create the GRESB standard.

However, those who want more transparency and long-term risk assessments include the Securities and Exchange Commission, which signaled this summer that it could soon make environmental disclosures mandatory for publicly traded companies, and private equity firms like Carlyle Group and BlackRock, whose CEO is Laurence D. Fink urges more disclosure of climate risks and supports the creation of a common global disclosure framework for corporate environmental risks. Canadian real estate company Ivanhoe Cambridge has tied $ 6.87 billion of its debt to the environmental performance of its portfolio; Achieving sustainability goals means paying less interest.

The alphabet soup of standards – like LEED and GRESB – can be confusing, and many view the lack of common guidelines and technology as a problem, fueling the widespread belief that disclosure is a more effective way of reducing carbon emissions can be considered strict regulations on its own.

“The SEC and others just say ‘Disclosure your risk’ and investors will choose what to do,” said John Mandyck, CEO of Urban Green Council in New York.

Critics see many problems with sustainable investing, including so-called greenwashing, where companies present a misleading picture of environmental stewardship. Doing good doesn’t always improve the bottom line either.

However, when choosing ESG investments, not all bad assets are weeded out; it also helps investors move forward to better ones, a Harvard study found. More sustainable buildings attract higher quality tenants and enable higher rents, up to 10% more, according to a study by JLL on London office space.

More precise tools and data make it easier for asset managers and investors to compare properties, portfolios and performance. For example, Measurbl, an air conditioning system, measures energy and resource performance on a 10 billion square foot facility.

“When I have better ESG data, I can attract more capital at a lower cost of capital,” said Greg Smithies, partner at Fifth Wall and head of the climate technology investment team.

The most important use of this technology is likely to be in the assessment and retrofitting of existing buildings. Fund managers need to understand which assets can be upgraded to meet new standards and regulations and which ones are likely to become stranded assets – a computation that becomes increasingly difficult as building technology matures.

Older buildings that don’t reduce their carbon footprint are likely to have a “brown haircut” and depreciate in value in five years, said Oliver Light, commercial director of Carbon Intelligence, a London-based firm that advises businesses on the value of assets of $ 111 billion. Not investing sustainably means higher costs in the long run.

“Our largest customers will no longer purchase assets until our engineering team has completed a due diligence report on this acquisition,” said Light. “They’ll know what to spend on an asset in 10-15 years, and if it’s too much – let’s say a glass skyscraper that never gets the right performance metrics – why buy such a risky asset?”

This article originally appeared in The New York Times.


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