As Climate Change Risks Increase, Investors Seek Greener Buildings

When developer Lendlease opens its $600 million residential and office complex in Los Angeles, expected in 2025, the site will feature the characteristics of sustainable development: proximity to a light rail stop, an all-electric residential tower, solar panels, and a pedestrian plaza.

But these features are widely accepted these days. What makes this development all the more striking is that sustainability is not just a convenience or an indicator of corporate responsibility, but a key feature of the financing plan.

“We were doing sustainable development before there was investor pressure, but now there is investor pressure,” he said. Sustainability for the Americas region at Lendlease.

Aware Super, the company’s investor partner for this project, will monitor environmental performance and metrics, including eliminating tenant emissions by supplying 100 percent renewable energy.

The project is part of a larger investor movement that is channeling money into sustainable real estate, thanks to new technology and stricter standards that allow better monitoring of a development’s ability to reduce its carbon footprint.

Other players in the industry include Hudson Pacific Properties, owner of Epic, A solar panel office tower in Hollywood It is occupied by Netflix. And international industrial giant Prologis sells green bonds that finance the construction of more sustainable warehouses.

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

What has changed in recent years is the perception of risk associated with climate change, encouraging investors to channel money into safer, higher-performing green assets. New measurement tools and standards empower them to raise the bar for environmental and economic performance.

“The carbon count and focus on carbon will undoubtedly define the next decade,” said Dan Winters, president of the Americas region of GRESB, a real estate sustainability benchmark used to analyze $5.3 trillion in assets globally.

Increasingly dire reports of more frequent natural disasters, such as the flooding and gusts of Hurricane Ida, which caused an estimated $27 billion to $40 billion in property damage in late August and early September, according to data firm CoreLogic, help us realize this fact. it happened. He said climate change is affecting real estate much sooner than expected. Eighty-eight percent of large companies According to Cervest, an AI platform that monitors corporate climate risk, they already have a physical presence, such as an office or warehouse, affected by extreme weather conditions.

On October 15, President Biden brought several climate proposals to the center of the Build Back Better agenda. published a strategy Requesting more financial disclosures on climate risk from publicly traded companies to help steer investors towards more durable 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 bets that sustainable development means avoiding regulation to attract better tenants and create a more valuable asset that attracts more investors.

“You need to have development excellence, but it must also translate into operational excellence,” said Ms. Neff. “These factors and the overall carbon picture tend to be the metrics that investors look at.”

Developers are seeing a growing hunger for investment focused on three areas—environmental, social, and governance—a trend that channels significant capital.

Mutual funds and exchange-traded funds Investment of nearly 300 billion dollars According to BlackRock, the world’s largest asset manager, globally sustainable assets in 2020 are almost double the previous year. in April, Invesco launches an exchange-traded fund for green buildings and Similar green real estate fund launched by Foresight last year showed double-digit returns.

“Five to 10 years ago, there was a lot of discussion about sustainability that was ‘Good, but I don’t want to pay for it,'” said Stephen Tross, Bouwivest’s chief investment officer for international investments. roughly managing investment company 17 billion dollar assets with important North American interests. “Today, you are not sacrificing returns for sustainability, you are creating returns with sustainability.”

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

Brendan Wallace, managing partner of Fifth Wall, a technology-focused real estate investment fund, said real estate has a significant footprint when it comes to emissions and climate change. He added that building operations in the United States account for about 40 percent of all energy consumption.

“The real estate industry has, to some degree, been the culprit hiding in front of everyone,” Mr. Wallace said. “And now it’s starting to occupy a place in the spotlight.”

The effects of climate change are changing the strategies of major financial players, such as the Mortgage Bankers Association, who are demanding greater transparency in investment standards. Initially, much of the focus on sustainability came from investors with long-term views, including the California Public Employees Pension System, the New York Joint Fund, and the Norwegian central bank, which helped create the GRESB standard.

The alphabet soup of standards – like LEED and GRESB – can be confusing, and many see the lack of common guidelines and technology as a problem, fueling a widespread belief that more disclosure may be a more effective way than reducing carbon by the market. heavy rules alone.

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

Critics see many issues with sustainable investment, including greenwashing, where companies present a misleading image of environmental responsibility. Doing good doesn’t always improve the bottom line, either.

But the process of selecting ESG investments not only eliminates bad assets, it also helps investors move towards better ones. Harvard study found. More sustainable buildings attract better quality tenants and higher rentsUp to 10 percent more, according to a study of London office space by JLL.

More accurate tools and data are making it increasingly easy for asset managers and investors to compare properties, portfolios and performance. For example, Measurabl, a climate technology system, measures energy and resource performance across 10 billion square feet of assets.

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

The most important use of this technology will probably be in the evaluation and retrofitting of existing buildings. Fund managers will need to understand which ones can be updated to meet new standards and regulations and which can become dormant assets, an increasingly difficult calculation as building technology matures.

Old buildings that don’t reduce their carbon footprint are probably “brown haircut“And it’s going to start depreciating in five years,” said Oliver Light, commercial director of Carbon Intelligence, a London firm that advises firms that manage $111 billion in assets. Not investing with sustainability in mind now means higher costs in the long run.

“Our largest customers will no longer purchase an asset until our engineering team has prepared a due diligence report on this acquisition,” said Mr. Light. “In 10 to 15 years they will know what they need to spend on an asset, and if that’s too much, say a glass skyscraper that will never reach the right performance metrics, then why would they buy such a risky asset?”

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