Drivers of energy efficiency in buildings
In December 2015, the 197 nations that are parties to the United Nations Framework Convention on Climate Change (UNFCCC) signed the Paris Agreement, committing to limit global temperature rise this century to less than 2 degrees Celsius above preindustrial levels.
Since that initial commitment date, 188 countries ratified their commitment, while the US withdrew, joining Angola, Eritrea, Iran, Iraq, Libya, South Sudan, Turkey, and Yemen as the only countries not party to the agreement.
In Europe countries are implementing local regulations to move their economies along this trajectory, and this is particularly true as it relates to real estate. Globally, carbon emissions from the building sector were estimated to account for about 40% of all emissions in 2018 (considerably more in large, dense cities like New York, where buildings accounted for up to 66% of emissions based on the city’s 2016 GHG Inventory). Analyses are projecting sector decarbonization pathways (the decreasing level of emissions that the sector must achieve over time, year by year).
Financial institutions are starting to make commitments to align their portfolios with the Paris Agreement. In 2015 the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, created the Task Force on Climate-related Financial Disclosures (TCFD), to develop voluntary, climate-related financial risk disclosures for companies’ use in providing consistent information toinvestors, lenders, insurers, and other stakeholders. As of June 2020, there were 1,282 members, representing a market capitalization of over $12 trillion. Members represent all walks of business including real estate and related industries, finance (institutional investors and pension funds), rating agencies (S&P and Moody’s), as well as regulators (central banks, securities regulators, government entities), and industrial and commercial companies.
Globally, carbon emissions from the building sector were estimated to account for about 40% of all emissions in 2018
Given the large representation of the most prominent global pension funds and investment managers, the TCFD’s recommendations are being quickly adopted and are sure to become more prevalent. The core of this effort is for financial institutions of all kinds to better examine the companies in their investment portfolios, and ultimately, to be sure their portfolios are “Paris aligned”, that is, meeting the Paris Agreement. This has led to other efforts to develop the necessary analysis. The Science Based Targets initiative (SBTi), run by four prominent NGOs, is pushing companies and their investors to set specific, scientifically justifiable carbon reduction targets and disclose them. The Partnership for Carbon Accounting Financials (PCAF) is building a carbon emissions factor database including 70 related to real estate, to help financial institutions measure and disclose the GHG emissions associated with their lending and investment activities. The Carbon Risk Real Estate Monitor (CRREM), a research consortium of four European universities and GRESB (formally known as the Global Real Estate Sustainability Benchmark), has modeled the decarbonization pathways that building sectors must follow, per the European Union carbon emissions commitments. These “decarbonization” or “emissions” pathways refer to the level of annual carbon emissions that goes from the present to 2050, and are specific to country, property type, and scenario. Buildings which don’t follow this pathway run the risk of becoming stranded assets.
These drivers fall along a spectrum of high level commitments to what actually needs to be done in buildings to reduce emissions. This is where our company, Helios, comes in: we can answer the question, “what efficiency measures are needed to meet emissions targets, and what will they cost?”
US State and City Level Efforts
Notwithstanding no action taken on a federal level, many US states, municipalities, educational institutions, and private companies have signaled their commitment to the Paris Agreement.
According to the Center for Climate and Energy Solutions (C2ES), 31 states have climate action plans that are more or less Paris aligned. Of note are New York’s 2019 Climate Leadership and Community Protection Act (see climate.ny.gov) and California’s 100 Percent Clean Energy Act (passed in 2018 - see energy.ca.gov). Other state initiatives are discussed in the American Council for an Energy Efficient Economy’s (ACEEE) reports, the “2019 State Energy Efficiency Scorecard,” and “Mandatory Building Performance Standards: A Key Policy for Achieving Climate Goals,” as well as the Center for American Progress write-up, “States Are Laying a Road Map for Climate Leadership.”
On the city level, “Mayors Leading the Way on Climate,” by the Alliance for a Sustainable Future, provides survey results from 182 cities: 96% are feeling the impacts of a changing climate, 60% have launched or significantly expanded a climate initiative or policy over the last year, and 57% will launch or greatly expand a climate initiative or policy this year. The organization Climate Mayors says they’ve created “a bipartisan, peer-to-peer network of US mayors working together to demonstrate leadership on climate change through meaningful actions in their communities, and to express and build political will for effective federal and global policy action.” Another important city-level action is the public disclosure of building energy use, now required in over 25 cities nationwide and in the entire state of California (see https://www.buildingrating.org/ for descriptions of US and global programs). In the US, buildings are typically regulated at the municipal level, and many cities are passing laws and implementing regulations in line with the Paris Agreement. New York City recently passed the Climate Mobilization Act that for the first time includes both actual carbon emissions caps and penalties for noncompliance. These caps start in 2024, and become significantly stricter in 2030.
So why is this relevant?
Energy efficiency has long been called the cheapest source of energy. In commercial buildings, energy upgrades can have investment returns of 15% to 50% or more. However, well known barriers like the landlord/tenant split incentive, complex property ownership structures, sales cycles, and competition for capital budgets, mean energy efficiency projects that pencil out still don’t get implemented. In 2020, what with increasing pressure on institutional real estate owners towards aligning portfolios with the Paris Agreement, and with continually growing local efficiency and emissions regulations, the time has come when upgrades will happen. As economies slowly start to open, keeping in mind the COVID-19 pandemic, it will be critical to ensure that buildings have effective air circulation and HVAC systems, both of which are typically important efficiency measures.
