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.
CRREM’s decarbonisation pathways are based on global targets to limit warming to 1.5° or 2°C, as well as a compatible emissions curve for the next decades. The downscaling of this global emissions pathway to targets that are country and building-type specific relies on numerous studies, models and official statistics, and takes into account scenarios of future economic and technical development. Assuming a global convergence of per-capita emissions until 2050, the target pathway for the EU was derived and further broken down into different property sectors and individual member states. In a final step, the inherently different energy requirements and emission characteristics of various building types were taken into account.
The example here (figure 1) shows how the fundamental principle of CRREM’s stranding risk analysis works for individual properties. The y-axis quantifies greenhouse gas emission intensity as the pivotal target figure for measuring climate compatibility. Besides the emissions generated directly on site by the combustion of fossil fuels, the induced indirect emissions (through district heating and electricity consumption) are considered as well. The green line represents the target path valid for the given property according to its building type, which must not be exceeded.
The black line represents the examined building’s current greenhouse gas emissions intensity. In the given example, the property meets the requirements only at the beginning, and stranding then occurs well before the end of the observation period. Only appropriate measures to reduce emissions can ensure the building will meet future requirements.
CRREM takes into account that a building’s future carbon performance will be affected by the impact of climate change itself on heating and cooling demand, as well as by the decreasing amounts of emissions per unit of produced and consumed electricity as a result of a wider shift away from fossil fuels towards renewables in electricity production. While the latter effect may help in achieving individual emissions targets, the vast majority of emissions in the property sector emerge not from electricity consumption but from burning fuel for heating.