Real estate and infrastructure have evolved from alternative to mainstream asset classes, becoming valuable and growing components of institutional investment portfolios. For many banks and other lenders, the real estate lending market is the bread-and-butter business. This gives the finance sector a unique opportunity to shape demand and drive transformation in the built environment. By assessing their requirement for low-carbon solutions in built environment portfolios, financial institutions can help to cut emissions and increase circularity in building projects.
The built environment represents more than 13% of global GDP, 12% of employment and 50% of global wealth, yet it has a high impact on the environment and on society. Today, the built environment contributes to over one-third of global final energy use, generates nearly 40% of global energy-related carbon emissions and consumes 40% of global raw materials.
Financial institutions significantly influence the industry through their market decisions and transactions. The professionally managed global real estate investment market increased to USD $9.6 trillion in 2019. The global infrastructure asset management market size was valued at USD $22.6 billion in 2018 and is expected to grow considerably.
For this vast market, the costs of inaction are too high - as echoed by WBCSD’s Vision 2050, climate-related financial risks and opportunities are directing finance towards sustainable outcomes. The physical and transition risks of investing in a badly performing building stock can already be seen, and the post-pandemic world may see significant financial losses with a risk of contraction in the commercial real estate market. Regulatory risks are also emerging, with major markets including the EU and the US considering more stringent regulations. A continuation of business-as-usual will further exacerbate the climate emergency, and increasing greenhouse gas (GHG) emissions will negatively impact nature loss and social inequality.
The good news is that many companies in the finance sector are taking the lead. Under the Glasgow Financial Alliance for Net Zero, over 160 firms responsible for USD $70+ trillion assets have made public commitments to accelerate the transition to net-zero emissions by 2050 at the latest. These commitments are being translated into measurable targe. By taking an active role in transforming the high-impact sectors, including the built environment, towards net-zero carbon, financial institutions can tackle a significant portion of their “financed emissions” related to the real estate and infrastructure asset classes, and the associated financing and lending activities.
The role of finance in the built environment
Property developers, banks, and investors are deeply involved in the development process for real estate assets, but they are not directly accountable for the emissions. They are demand-side actors (influencers) who can set requirements for low-carbon solutions across the full life cycle of built environment projects. This includes the energy performance of buildings as well as setting requirements to reduce emissions from building materials and the construction process. For a full discussion of their role see the WBCSD Building System Carbon Framework.
Because of the notable environmental footprint and financial market size of the built environment, it is paramount for the financial sector to support the industry-specific alignment with climate and sustainability targets:
- Investors can adopt decarbonization policies and set requirements for the real estate part of their investment portfolios, in line with Paris Agreement compatible emissions trajectories. It is important that this includes whole life carbon emissions of built assets.
- Asset managers can support the investors in setting and executing their strategies.
- Lenders can link carbon performance to their loans and provide incentives (as currently done e.g., for mortgages related to energy efficiency).
- Property developers can set carbon performance requirements as part of the procurement process for their projects, also including circular solutions.
- All these firms occupy or manage real estate themselves and can develop policies for low-carbon performance in their role as tenants.
Two recently published WBCSD reports provide practical guidance to financial institutions for adopting policies and setting requirements to bring their investments in the built environment in line with the Paris Agreement and a whole-life carbon approach:
- “Decarbonizing construction – Guidance for investors and developers to reduce embodied carbon”: shows how investors can set requirements to reduce embodied carbon in projects they finance.
- “Net-zero buildings – Where do we stand?”: Discusses currently proposed benchmarks for whole life carbon (incl. embodied and operational) and provides a methodology for whole life carbon assessment based on WBCSD’s Building System Carbon Framework
How finance can accelerate the net-zero transition – a system-wide approach
While many promising technologies and solutions for reducing emissions in the built environment already exist, there is a need for legislative and financial support to transform the market and bring them to scale. Some key actions include:
- Measure and report on whole-life carbon performance. Use a common metric that aligns with mainstream reporting frameworks (TCFD, SASB etc.) to capture consistent, reliable, and comparable data at the asset level, so that financial institutions can make better-informed investment and financing decisions. WBCSD’s Building System Carbon Framework can be adopted as a monitoring and reporting tool to demand information on whole-life carbon impact of built assets.
- Extend the scope of carbon accounting from the current focus on operational energy (and carbon) to whole life carbon, including both embodied and operational carbon. Today, a widely adopted tool by investors is CRREM, which covers the operational emissions from energy usage in buildings. Several financial institution networks, such as the Partnership for Carbon Accounting Financials (PCAF) and the Institutional Investors Group on Climate Change (IIGCC), with support from the Laudes Foundation, are exploring how to adopt a whole-life carbon approach for setting targets for the real estate sector.
- Enhance the business case to develop risk-adjusted return opportunities and inspire more financial instruments (equity portfolios, ETFs, bond issuance, project finance, etc.) to move toward net zero and circular real estate and infrastructure. This can happen by connecting forward-looking financial institutions with the “best-in-class” companies to address environmental and social challenges through a variety of sustainability-aligned financial instruments.
- Improve built environment-specific ESG reporting and research to help foresee, assess and manage transition risks beyond carbon, in order to future-proof the portfolios and align with broader sustainability objectives.
- Engage with policymakers across key jurisdictions to provide industry-specific perspectives and evidence-based policy asks. With the EU Taxonomy regulation entered into force, the classification for economic activities will provide financial market players the basis to identify which investments are sustainable (such as the measurable criteria for building construction, renovation, and acquisition) and can be marketed as such, increasing transparency.
By taking a leadership position, financial institutions can reach their climate commitments, better manage risks, safeguard their investments in the long term, and become more resilient. At WBCSD, we look forward to supporting the finance sector on this critical journey!