The growth of the net zero carbon agenda worldwide is changing the global approach to regulations and standards. After three decades of conflicting solutions with little consistency geographically, there has been a convergence of two themes – net zero carbon commitments and ESG disclosure, so much so that we are seeing a sort of harmonisation emerge in policies and markets. In this article we will look at how regulation is changing the reporting landscape and consider the direction of travel, outlining what needs measuring and why.
Background
Although net zero carbon as a concept is relatively new, already dozens of countries have enacted regulation towards this goal (more than 130 countries have committed to net zero, so more regulation is expected.) At both the national and local level, there has been a virtual explosion in carbon regulation around the world in a very short span of time.
What’s more, the requirements and timeframes of regulation are notably similar - this is in sharp contrast to the disparate nature of carbon regulation until now. Indeed, a hallmark of net zero carbon has been the degree and speed with which countries have “levelled up”, so that there is more uniformity and urgency to carbon regulation than ever before.
Notable among these countries is the UK, which in 2019 became the first major economy to pass net zero carbon regulation, committing to net zero by 2050. Although this was an economy-wide commitment, it quickly became apparent that companion regulation would focus on the built environment, which is a leading source of carbon emissions in the country.
Since 2019, the UK has steadily increased regulation requiring companies to measure and report carbon emissions. For example, the Streamlined Energy & Carbon Reporting (SECR) scheme requires medium and large businesses to measure and report carbon emissions as part of their annual Directors’ reports. This includes emissions across company activities, including travel. Importantly, it has encouraged (perhaps for the first time) companies to measure and understand the emissions that come from buildings, which for many businesses are the largest part of what needs to be reported to Government.
At the end of last year, Government announced that the UK will become the first G20 country to make it mandatory for businesses to disclose their climate-related risks and opportunities in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. The TCFD was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. New legislation will require firms to disclose climate-related financial information, with rules that came into force from April 2022.
The two features of UK regulation – measuring carbon and reporting emissions – are guiding policymaking elsewhere in the world, at both the national and subnational levels. The long-held belief that Europe was ahead in sustainability is quickly being dispelled as the US and Asian governments adopt net zero carbon commitments and reporting requirements at an unprecedented pace.
Towards more uniform regulation, practices and expectations
The reference to TCFD in the previous section is an important one, since it points to the UK following an international standard for carbon reporting. Indeed, TCFD, which is also relatively new, is the template upon which numerous countries are basing their regulatory carbon reporting requirements, including the United States and Japan. As carbon reporting picks up speed globally, there is a strong push to harmonise reporting requirements with recognised guidelines. TCFD has emerged as the frontrunner in setting these standards.
We are also seeing commonalities emerge in how emissions are reported at the building level, with owners increasingly being required and/or expected to report “whole building” energy and emissions (that is, landlord and occupier operational emissions) as part of reporting tools. This is far different from what has been the conventional approach in which owners would only publish “Scope 1” and “Scope 2” emissions, which were effectively landlord-only and not “Scope 3” occupier emissions.
This is no small matter, since in a typical office building, occupier emissions are estimated to be around 75% of the total building emissions. Although it is nascent, there is a prevailing movement to make owners measure and report – to effectively “own” – all the emissions that come from a property. This is the approach that has found its way into landmark legislation such as New York City’s Local Law 97, which promises to be a model upon which future regulation will be based in other countries.
In the UK, there is a consultation under review that would have building energy ratings be awarded based on actual energy consumption, but at present there is both a landlord and occupier option and not a “whole building” requirement. Although there is the expectation that more disclosure of whole building impacts by owners will become the norm, even if not enshrined in regulation.
For buyers there are questions of compliance, upgrading, future costs, risks, etc. Occupiers, especially those with their own carbon reporting requirements or public commitments, are expected to pay closer attention.
Beyond regulation
It is not just regulation that is encouraging carbon disclosure. Over the last decade there has been a growth in the number and variety of reporting tools. Some of these tools focus primarily on carbon, others on ESG more broadly.
Whole building energy and carbon reporting are now required by real estate’s two major reporting tools – the Global Real Estate Sustainability Benchmark (GRESB) and Carbon Risk Real Estate Monitor (CRREM). Although not regulation, these two frameworks are enormously influential in setting best practice and have already begun to reshape how owners think about energy and carbon – and what prospective buyers and occupiers ask to see. It is now a standard part of due diligence to ask for building operational performance and carbon numbers, especially important for those entities who have net zero carbon commitments and reporting requirements of their own.
What these tools have done is make voluntary reporting of carbon an easier and more accepted practice. The “knock-on” effect of these is a growth in the number of companies who have measured performance at the asset level. The growth of carbon reporting – whether mandatory or voluntary – has meant that asset performance is at the forefront of owners’ and occupiers’ minds.
For buyers there are questions of compliance, upgrading, future costs, risks, etc. Occupiers, especially those with their own carbon reporting requirements or public commitments, are expected to pay closer attention. The issue of sustainability and value (green premium or brown discount) has long been debated and remains unclear. What is clear, however, is that there is a lot more information for potential buyers and occupiers to evaluate when it comes to carbon.
Beyond Operational Energy
The net zero carbon agenda started with a focus on operational energy and has since expanded to include embodied and whole life considerations. To the same extent, regulation has followed suit. To date, the majority of regulation has focused on operational carbon, but increasingly the regulatory agenda is widening to include embodied and whole life carbon.
In 2021, the Greater London Authority (GLA) issued the revised “London Plan.” This requires all new major developments in the city to be zero carbon. Any offsets needed to meet the GLA NZC objectives are charged at a rate of £95/tonne CO2e/year for 30 years and must be paid upfront. Other GLA requirements include the need for a whole lifecycle carbon assessment, a circular economy statement, and an operational energy model. Actual performance must be reported to the GLA for five years, with an explanation provided for any difference between the predicted and actual energy use.
We are hearing more about “Part Z” that would address “embodied” and “whole life” carbon as part of building regulations, just as neighbouring France has done this year. Part Z, envisioned as part of new building regulations, would mean that an embodied carbon target could be required in any planning consent. It would be applicable to developments with a GIA of >1,000 m2 that create more than 10 dwellings.
But as with other regulation, the market tends to move ahead. Leading companies are already setting the pace by publicly stating embodied carbon targets independent of any regulation. Without set planning requirements, clients are acknowledging the impact their businesses have on carbon emissions and are taking it upon themselves to produce strategies and targets for achieving low/net zero carbon buildings by 2030. They are using the benchmarks and targets as set out in the New London Plan and are striving for betterment of these targets. This has been a significant change over the last 12-24 months and is heavily influencing the way projects are procured and delivered.
It is the voluntary disclosure of carbon (whether it is at handover or in operation) that will drive net zero going forward. It is the competitive advantage of net zero at the asset level that will determine its future course.
Where NZC is heading
To understand net zero (and predict where it is going), it is important to recognise the other driving force in sustainability – disclosure. Running alongside net zero has been the rise of ESG, with its public reporting of business environmental impacts, especially carbon. Indeed, these two twins – net zero carbon and public disclosure – arose primarily at the same time and have been the subject of regulation (and market expectations) ever since.
This is a new phenomenon in sustainability, and a bird’s-eye view shows that countries are virtually copying each other when it comes to carbon regulation and disclosure. Now, countries are embedding well-known low carbon reporting frameworks into their regulation.
Countries are also requiring the same kinds of disclosure, namely the actual energy consumption and carbon emissions from buildings. It is possible to anticipate where countries will be heading now simply by looking around. That is why France’s decision to regulate embodied carbon in 2022 makes the adoption of Part Z in the UK more likely. It is also why the UK’s proposed regulation on building energy looks a lot like Local Law 97 in New York.
It is also important to note the rise of “whole building” energy disclosure that is beginning to take place across the globe (and is under consultation here in the UK in the form of energy ratings based on performance). In this scenario, the energy performance of a building is reported publicly annually. This will effectively provide the market with information it has not had before and is likely to accelerate the demand for low carbon/energy buildings. This is particularly important for occupiers who themselves have low carbon reporting commitments and for whom buildings emissions represent the largest proportion of their total.
But regulation or policy doesn’t tell the whole story, or even most of it when it comes to net zero. Most countries that have adopted carbon commitments have not yet put them into law. The actions of bodies like the GLA are important, but they do not explain the rise of net zero carbon elsewhere in the UK. Regulation does not explain why companies everywhere are tripping over themselves to declare net zero carbon commitments.
It is the voluntary disclosure of carbon (whether it is at handover or in operation) that will drive net zero going forward. It is the competitive advantage of net zero at the asset level that will determine its future course.
The true test of net zero carbon will come not just from the embodied carbon figures, but whether buildings can meet the low whole building energy targets that are the fine print of net zero frameworks. These often get short shrift in design team meetings, but they are what will matter most to occupants and be the true test of net zero carbon in the long term. After all, if net zero buildings are not more energy efficient in the future, then this will be known, very likely publicly. There are critics of net zero (long familiar with the failure of sustainability certifications to prevent runaway energy usage) who are waiting for this day.
To think about net zero purely as a technical problem to a regulatory requirement is to miss a fundamental new element of this issue. Namely, the emerging consensus that financial and environmental performance are now linked - and will increasingly be so. This is what is motivating ESG developments within companies, and carbon is at the heart of ESG. Nothing else even comes close. Driving this activity – measurement, disclosure, improvement, etc – is the fundamental belief that lower carbon assets will be higher value assets, both at handover and in operation.
The challenge will be to demonstrate, to an increasingly educated audience, that your building is a better carbon proposition than: 1 what was there before (if your audience is planners), or 2. what is across the street (if your audience is investors or occupiers) or 3. what your competitors provide (if your audience is employees). In each of these instances, numbers alone will not satisfy, nor will distinctions between embodied, operational and end of life. Rather, it will be a compelling picture that the asset was thoughtfully constructed or refurbished and operationally efficient.
Already, we are beginning to see these issues play out as planners debate new build vs. refurb and as some investors/corporates question the optics of new buildings, particularly if they are full of steel and glass. The debate will accelerate as we see whether new buildings can meet the strict energy use intensities they are supposed to (if they cannot, that is a big problem both individually and collectively for new build). Now, new build is at a bit of a disadvantage in the net zero carbon debate, as refurbishment (combined with a decentralised grid) presents a hurdle that can be high. But we need to remember that we are at a point in time, and that developers and product manufacturers are racing to decarbonise their products and services just as power providers did for the grid. This will happen, and like the grid, come sooner than you think.
But it requires developers and their service providers to be diligent, thorough and to recognise that net zero carbon is for life. For any building - new, refurb or existing - to be net zero it will have to be net zero consistently, day in and day out, over the life of the building. The days of sustainability credentials given early and lasting (uninterrogated) for decades are over. This is precisely why net zero frameworks were written as they are.
The best net zero strategy looks beyond regulation, industry terminology and design stages and assumes that information about the whole building (construction, operation, end of life plans, etc) will be both measured and publicly known over the lifetime of the building. That is the test of net zero and the expectation of the future.
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