by Yetsuh Frank, Managing Director, Strategy & Programs Building Energy Exchange
Originally published in Building Energy Exchange Quarterly Report (Q1 2020)
The reliance of the real estate industry on simple payback analysis to determine the effectiveness of energy efficiency measures has long frustrated those of us advocating for higher performing buildings. Dividing savings into increased costs to learn when a measure will pay for itself ignores the many benefits of better buildings, including healthier air quality conditions, greatly improved thermal comfort, and even direct savings like reduced maintenance costs. Perhaps more important than all those ignored benefits, simple payback doesn’t account for the potential costs of doing nothing–but changes in the superstructure of finance may forever alter the role of simple payback in our community.
Consider that Larry Fink, CEO of BlackRock and perhaps the single most influential person in global finance, recently announced BlackRock would place sustainability at the center of their investment approach. It’s one thing for the largest asset manager in the word to say they’ll invest responsibly in the future. It is quite another to say they will consider “exiting investments that present a high sustainability-related risk.” Other influential organizations are also shifting their investments– the European Investment Bank announced it will stop funding oil, gas and coal projects next year–while private corporations are making similar moves. Jeff Bezos’ $10 billion climate fund is getting most of the headlines, but Delta has committed a billion dollars over ten years to make itself carbon neutral, while Microsoft is carbon neutral today and has committed to being carbon negative for its entire existence (since 1975) by 2050. With the long history of corporate greenwashing as context, it is fair to question the true commitment of these organizations, but it seems clear that financial systems and the corporate sector are beginning to at least recognize the oncoming train of climate change impacts.
How real estate investment, in particular, negotiates the impacts of climate change has been something of a moving target. There are multiple reporting platforms available for those that wish to measure and disclose their environmental impact and each platform has its own approach, metrics and processes–resulting in a relatively confused market. Recognizing the need for clarity and consistency, the Financial Stability Board (FSB) has created a Task Force on Climate-related Financial Disclosures (TCFD)–a group whose recommendations are already having a significant impact on the real estate sector. The FSB–a global consortium of 24 countries, the International Monetary Fund and the World Bank is tasked with maintaining international financial stability, and as a result the recommendations of the TCFD are sweeping. Published in 2017 they cover four broad areas: Governance, Strategy, Risk Management, and Metrics & Targets. As of late 2019 more then 800 financial institutions have signed up as supporters, representing more than $100 trillion in assets. In November the United Nations Environment Programme (UNEP) published a report on the roughly 20 real estate investors that participated in the TCFD pilot program, including five in depth case studies. The findings of this report were not unexpected: impacts over the next 15 years are already locked in, current models don’t include all impacts, and the impacts considered are all direct, with little analysis that captures indirect impacts (say, to GDP, for instance.) On some level the TCFD simply adds climate risk to a long list of risks that real estate investors already navigate – market fluctuations, credit risks, tenant instability, natural disasters, etc. Though shifting your horizon on any issue from short-term payback measures to long-term risk scenarios is a fundamental change. A primary component of this shift will be a more nuanced approach to data, recognizing that data sets based only on historical data are not always sufficient (in the case of flood maps, for instance) and that the granularity of data must be carefully utilized (for instance, when applying data reported at the county level to individual assets). TCFD asks real estate investors to a) identify the risks your asset is exposed to, b) communicate those risks to your stakeholders (property managers, investors, etc.), and c) develop a response to mitigate or eliminate those risks.
“Increasing transparency makes markets more efficient, and economies are more stable and resilient.”
— Michael R. Blomberg, Chair, Task Force on Climate Related Financial Decisions
In 2018 I attended an annual reporting event for a major environmental assessment platform with roughly 100 representatives of the most progressive real estate organizations in North America. One of the speakers asked how many of them had assessed the risk to their assets from sea level rise. I was a little astonished by the number of hands raised: one. Spencer Glendon of the Woods Hole Research Center has pointed out that the long-term debt of 30-year mortgages is underwritten by annual insurance. When the insurance dries up, so do the mortgages. As he puts it, “it’s already foolish to lend money for 30 years” in Florida. At a minimum, the TCFD framework should force many more organizations to take simple risk management related to climate more seriously. But a long-term risk mitigation framework has indirect benefits as well, including growing your organizational capacity to respond to long-term trends of different kinds–something often lacking when quarterly returns are the sole focus.
“I believe we are on the edge of a fundamental change of finance.”
— Larry Fink, CEO, Blackrock
To properly study these issues the Building Energy Exchange is inviting our Industry Leadership Council (ILC) to gather on May 14th to participate in a dialogue with several leading real estate figures that will describe the structure and activities of the TCFD and discuss the role their recommendations are likely to play in our sector. Since the ramifications are significant for virtually every activity within the building sector (from new construction, to renovations and retrofits) we expect the dialogue to be dynamic and illuminating. ILC members can register for the event now. ILC members have guest passes at their disposal, and remaining seats will be available to the public after May 1st. We hope to see you there.