It is hard to underestimate the changes we have seen in the last five years with the creation of net zero carbon frameworks and the growth of ESG. Arising at the same time, net zero carbon and ESG more broadly have begun to fundamentally alter the construction and operation of buildings.
In this, our final piece, we highlight the major ways in which net zero carbon and ESG are reshaping the built environment. We focus on the major themes that are emerging and the most significant developments we expect to see in the short term. Finally, we offer advice about how to best deal with a regulatory and market environment that is in a state of flux, and likely to remain so for some time.
NZC and ESG: a new model of thinking
We are clearly at the beginning of a new model for sustainability. The existing system, most often associated with building certifications, has the following characteristics:
- Credentials are conferred via a third party, usually a green building council or NGO
- They are “static” and represent a point in time (usually handover)
- They are based on potential and not actual performance
- They last a long time (sometimes for life)
- Performance data is not required
NZC and ESG are revolutionising data and reporting. Sustainability credentials are now determined and reported by companies themselves (owners or occupiers). Such reporting is typically done yearly. Increasingly public reporting is required by regulation so there is transparency around the energy and carbon performance of assets. This makes a much wider audience fully aware of the contribution of buildings to overall company carbon footprints.
The watchwords of ESG and NZC are “quantifiable”, “continuous” and “public”. In essence, the standards are rising and the risks increasing. With ESG and NZC, sustainability is becoming far more real and strategic. Disappearing fast is the “imperfect market” where a lack of data about building performance makes decision-making based on information all but impossible.
NZC and ESG are reshaping traditional boundaries as well. What gets counted and what counts are continuously being updated. For example, in the beginning, net zero carbon was primarily focused on operational energy and existing buildings. Now the concept has grown to encompass embodied and construction carbon as well and is extending to whole life.
Simply moving the boundaries from operation to construction and onwards to whole life asks important questions about new buildings, the role of refurbishment, the need for innovation in materials, the availability and cost of renewables and so on. It is very much a moving target, and what passes as acceptable today may not work tomorrow. For example, a few years ago, an occupier who promised net zero through offsite renewables and carbon offsets would have been hailed as a pioneer. Today, that strategy would seem too easy (especially if energy efficiency was not improved) and subject to claims of “greenwashing.”
For ESG, the rise of whole building energy and carbon reporting is also significant. It has notoriously been difficult to understand the true impacts of a particular building because landlords and tenants tended not to share data. Now, in an increasing number of places, owners are required to compile this information and be subject to penalties for poor performance. In effect, they are the new “owners of the problem”, and this will have many knock-on effects in terms of greater cooperation with tenants, sharing of data, attempts to influence and possibly even “screening” of potential occupiers.
Likewise, the rise of net zero carbon commitments at the company level means that occupiers have newfound interest in the impacts of, and risks from, property occupation. As they collect more information about their own properties, they are increasingly aware of the limits of the certification model and the benefits of low energy buildings.
Toward a more informed market
Because of new regulation and/or emerging market expectations, buildings will need to report year-on-year, providing energy and carbon performance in a comparable and transparent manner.
At long last, this “imperfect market” (one without enough information to inform decisions) is beginning to disappear and with that comes a more educated tenant, a more at-risk owner and the very real possibility that environmental performance will begin to impact financial performance at the asset level. We think that process is already well underway, given the way occupiers and owners are now thinking about carbon, how regulation is favouring this change and how new tools around performance are facilitating data capture, comparison and an understanding of transition risks.
While there has been a lot of action to date, much more is still to come. The UK already has regulation that requires large companies to report carbon emissions, but that net is getting wider. Soon more companies will be required to measure and report officially. We are witnessing the first forays into regulation around embodied carbon with national policies in France and the very real possibility of embodied carbon regulation in the UK through the Part Z initiative.
But it’s not just regulation that’s important. It is expectation. The Task Force on Climate-Related Financial Disclosures (TCFD) is the fastest-growing sustainability organisation in the world and its voluntary principles are the framework for regulation in many countries, including the UK, US, and Japan. Given that many companies have carbon reporting requirements themselves, they are becoming more attuned to which buildings can help them with these goals. There is an emerging market for low carbon buildings being driven by information and disclosure.
The growth of voluntary tools like GRESB and especially CRREM have helped occupiers and owners better understand performance, targets, performance requirements and risks. They have ushered in an era where performance, not capability, is king and have done much to question the existing certification model.
Finally, the unit of analysis is changing and getting smaller. It is expected that in the short term there will be regulation that requires carbon disclosure at the building level, effectively providing information about which buildings are low energy/carbon. This will be true first for operational energy, but embodied carbon cannot be far behind.
What to expect moving forward
As we have shown in this series of articles, we expect net zero carbon to continue to develop and shape regulation and markets. We are only at the very beginning and already NZC is reshaping the built environment in significant ways. Our thoughts for the future include:
- We will see embodied carbon regulation at the national level. France has already incorporated embodied carbon in its regulation – by 2031 new buildings will have to reduce embodied carbon by more than 50% over existing levels. In the UK, there is a proposal known as “Part Z” that seeks to make embodied carbon a part of building regulations. There is every expectation that regulation will cover embodied carbon – the issue is simply too big for Government to ignore.
- Transparency of energy performance at the asset level will increase. 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 and regulation. 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. 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.
- Energy efficiency will become as important as, if not more important than, net zero carbon. Already, there are concerns that it is too easy to become net zero by purchasing renewable energy and offsets. There is the expectation that true net zero starts with energy efficiency, a fact reflected in the energy use intensity limits (EUIs) of net zero carbon frameworks. Industry tools like CRREM are also making it possible to assess the risk of “standing” not just based on carbon emissions but energy performance as well. Lastly, building ratings, including those here in the UK, may be based on energy use, not carbon performance. All this points towards a more important role for energy, not just carbon, as NZC progresses.
- Allowances will become less attractive as a strategy. As with the purchase of offsite renewables, there is an emerging belief that allowances will become a less desirable option, at least if they are a major component of the net zero approach. Because allowances tend to be low cost and easy to obtain, there is the growing belief that they can be “too easy,” especially if significant energy reductions are not made onsite. We expect that allowances will become a smaller component of net zero carbon strategies moving ahead, and that companies will do best to procure them from reputable providers (as with REGO/RGGO for renewables).
- Environmental (carbon) and financial (value) performance will converge. 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. With the advent of regulation there is likely to be financial costs for not meeting thresholds and reputational risks for poor performance. There is every expectation that energy inefficient and/or higher carbon assets will face a brown discount in the market.
How to prepare
The best way to prepare for an evolving net zero carbon future is to understand first principles and to stick to the basics. If it seems too easy and inexpensive to achieve results, it is. With increasing transparency and due diligence, the only real way to avoid risk and retain value it to make the sound choices that are at the heart of every major NZC framework.
This means three simple things:
- Follow the energy hierarchy. The primary, most effective way to be net zero carbon is to reduce consumption. While some strategies are losing and will continue to lose credibility (purchasing renewables but not reducing energy, overly relying on offsets), the tried-and-true method of reducing carbon by lowering consumption will always be reliable. It has the added benefit of reducing operating costs and futureproofing for any standards or rating based on energy, not just carbon.
- Remember that credentials are not for life. Net zero carbon and ESG are different and require sustainability performance day in and day out, year after year. It is no longer good enough to get the badge and move on, or not share data, or assume carbon is someone else’s problem. With net zero carbon, everybody at some point is going to be reporting impacts, publicly, for a long time.
- Understand that you will “be seen.” The “be seen” is the latest element to the London Plan and it represents, writ large, the direction we are all heading (prior elements of the plan are “be lean,” “be clean,” etc). What makes the “be seen” category so important is that it is a fundamental acknowledgement that naming (and shaming) is the next step in the sustainability game. The London Plan now requires developers and owners to capture actual emissions and compare these to what they design projected. Occupiers in high carbon buildings will be known because the London Plan is preparing a public database. The idea is simple and effective – the environmental, financial and reputational will all be tied together through disclosure requirements. Companies that understand and act on this idea will be the eventual winners.
We hope you’ve enjoyed our carbon strategy series so far. If you have any questions or would like to get in touch to discuss the carbon strategy for your development, contact the team today.