The new CRREM tool reduces the risk of properties being ‘stranded’ by non-compliance with changing regulations
Climate change represents an enormous challenge for real estate, requiring adjustments at numerous levels. The property industry is affected not only directly, by changing environmental conditions, but also – as one of the largest carbon emitters – indirectly, by a variety of regulatory measures. Under the Paris Agreement, almost all nations committed to limit global warming to below 2°C. Current voluntary commitments (so-called nationally determined contributions) would result in global warming of about 3°C. Tightened legislation seems inevitable against this background.
Decarbonisation – the profound transformation of our economy from a fossil fuel basis to a sustainable, renewable energy basis – involves considerable transition risks. In the oil industry, the term ‘stranding risks’ was established for assets facing significant write-downs and premature obsolescence due to the ongoing shift to renewables. Changing market demand and regulatory requirements on energy efficiency now also affect the building sector. Properties that no longer meet the higher requirements face substantial discounts on rents and selling prices. At worst, buildings that do not comply with certain minimum energy standards cannot be leased at all. Overcoming this state of ‘stranding’ by applying retrofitting measures requires substantial capital investment.
Stranding risks can be minimised through clear decarbonisation targets. But while long-term oriented investors intend to align with the Paris Agreement, how are they to recognise which properties fulfil the necessary criteria? Existing approaches lack a property-specific focus or concrete targets. European research consortium CREMM (Carbon Risk Real Estate Monitor) has created a new tool to close this gap, enabling the property industry to assess and minimise the risks associated with poor energy efficiency and high emissions at the individual property level, and making it possible to develop strategies for portfolio decarbonisation.
The new CRREM tool captures stranding risks through precise decarbonisation targets. Its reduction pathways are aligned with international climate targets and are derived according to a reasonable methodology that takes into account inherent differences between building types as well as the different baseline situations in individual EU member states.