Over the last couple of years, there were times when barely a fortnight went by without a real estate company somewhere in Europe announcing a strategy to cut its carbon footprint.

Investors, developers, fund and asset managers all launched plans to reduce their C02 emissions, and collectively they appeared to paint a picture of a sector well on its way to decarbonising its operations in line with targets set out under the Paris Agreement.

But a closer look reveals major differences in the scope, level of disclosure and speed of decarbonisation targeted by all these strategies, raising the question: how far is the industry really on its journey towards net zero?

A recent study conducted by the real assets team at investment manager Van Lanschot Kempen sheds some light on the progress being made – and concludes there is still much to be done by an industry that is responsible for the now well-known metrics of 39% of total CO2 emissions and 36% of energy consumption worldwide.

The global analysis, covering listed real estate companies only, finds European firms moving faster on decarbonisation than their counterparts in other parts of the world, yet even here more action is needed to improve performance.

Data provided exclusively to PropertyEU by Van Lanschot Kempen reveals that although more than three quarters (76.6%) of European listed firms (representing a total market capitalisation of almost 86%) have a decarbonisation strategy, only 29.7% have set comprehensive targets to achieve net zero greenhouse gas (GHG) emissions by 2050 in line with Paris climate change goals. 

Full-scope targets
By ‘comprehensive’, the researchers mean targets for all three GHG scopes (see box) and, importantly, ones that have been externally verified.

At a global level, the findings are even more disconcerting: only 10% of companies (equating to a market cap of 92%) have set comprehensive targets, while a massive 60% are still researching their commitment to achieving net zero emissions by 2050. 

Of the firms which have taken action, 13% have publicly stated their alignment to the Paris Agreement, but give no detail on how this will be achieved. Moreover, while 17% have publicly stated an aim to achieve carbon neutrality, this does not apply to all material greenhouse gas emissions.

Lars Dijkstra, chief sustainability officer at Van Lanschot Kempen, says the data shows the real estate industry ‘still has a long way to go’.

‘While three quarters of listed real estate companies have some sort of decarbonisation or climate change strategy in place, if you scratch the surface, you will find that many are very light on detail and should become more front-end loaded.’

As a large real assets investment manager, Van Lanschot Kempen believes it has a role to play in galvanising the sector to scale up its net zero ambitions. Although real estate accounts for ‘just’ €3.5 bn of its almost €100 bn in total assets under management, the Dutch group also has a large fiduciary management business, and therefore a lot of clout when advising institutions on where to invest.

The real estate sector, as the largest emitter of greenhouse gases, faces a huge task to transition to net zero. But Dijkstra stresses that the way this is done is crucial to achieving results.  ‘Setting greenhouse gas emissions targets – and measuring progress – is critical for companies seeking to decarbonise, but these metrics are only helpful if they are comprehensive.

‘Externally verified measurement of Scope 1-3 emissions is the best way a company can get a true picture of its environmental impact and, therefore, understand where it needs to adapt its business model.’

Engaging with tenants
Scope 3 emissions are considered important because they constitute the majority (as much as 85% according to some estimates) of total emissions in real estate. Often they relate to leased assets, where emissions are beyond a company’s operational control, such as those associated with tenant energy consumption. This means landlords have to engage with tenants and suppliers to successfully achieve their net zero ambitions.

Tackling Scope 3 emissions is hard even for large and mid-cap firms, says Egbert Nijmeijer, co-head of real assets at Van Lanschot Kempen who was closely involved with the research.

‘If you talk to people, you hear that a lot of management teams find it tricky to commit to Scope 3 because it involves a lot of carbon emissions they don’t fully control,’ he explains. ‘It can be tenant behaviour with regard to energy use such as the heating and lighting of buildings, but it is also the embodied carbon within real estate development – so all the materials and equipment used during the construction phase which can account for as much as 50% of the carbon emissions generated over the full life cycle of the building.’

In its dialogue with real estate firms, the asset manager senses ‘a lot of willingness’ amongst management teams throughout the world to decarbonise. ‘Many teams are doing their homework, but a lot of people are fearful of committing to something they cannot fully act on or make happen in their assets,’ says Nijmeijer. Decarbonisation of the construction process, for example, is complicated, he notes. ‘If you want to fully decarbonise the production of concrete without using offsets – that is something a lot of people struggle with technically.’

Full-scope reporting of GHG emissions also presents challenges. Van Lanschot Kempen's researchers found that only 15% of listed real estate companies globally have externally verified reporting across all three scopes. European firms fare slightly better, with 21.9% taking a complete approach.

This is likely to change in response to stringent new reporting standards, set to come into force in 2023. Following a ‘unanimous decision’ by the International Sustainability Standards Board (ISSB) last October, disclosure of Scope 3 emissions will now become mandatory for companies (in addition to Scope 1 & 2), something which had up to now been voluntary under most reporting frameworks.  

Europe leads
European companies’ relative outperformance on decarbonisation can be explained by a number of factors, summed up by Nijmeijer as an earlier embrace of ESG strategies, a greater interest in climate-related issues, and regulation.

‘Europe is ahead of the curve because I think they started earlier in comparison to places such as the US or Hong Kong. We’ve also always noticed that, if we raised issues such as governance quality or social impact or any other type of non-financial return, it’s easier to do that with a European company than with a Hong Kong or US firm,’ he says.

Regulation is another important driver, he points out: ‘Regulation in Europe is leading the rest of the world, EU regulators are pushing us in a direction where companies are being asked to give more clarity on their decarbonisation plans and report accurately on their progress.’ The Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, both of which are continuing to evolve, have been pivotal to this end.

Europe’s lead versus other world regions did not surprise Van Lanschot Kempen’s researchers. ‘Europe has always been seen as being further along [on decarbonisation] so I guess we kind of expected it, but the numbers also back it up now,’ says Nijmeijer. Nonetheless, the extent of the gap is ‘astonishing’, he notes.

Reacting to the findings, Dominique Moerenhout, CEO of the European Public Real Estate Association (EPRA), said Europe’s listed real estate sector had made ‘significant efforts’ in sustainability and sustainability reporting, supported by EPRA sustainability best practice recommendations. ‘We are also pleased to see this important research by Van Lanschot Kempen and congratulate them on raising this topic, as it highlights the fact that there is still much to do, especially when financing the transition to sustainable real estate.’

He added: ‘The underlying data shows that the companies that have set their net zero targets are heavily weighted to Europe. Either through investor pressure or the desire to be seen as best in class. What is still missing are well-adapted regulations (to work on closing the investment gap).’

Regulation wave
With more ESG regulation set to sweep across the industry globally this year, many market watchers expect 2023 to be a watershed year in sustainability reporting and disclosure.

‘The SFDR in the EU, the Monetary Authority of Singapore (MAS) Guidelines on Environmental Risk Management (EnRM) for asset managers, the Securities and Exchange Commission’s proposed climate disclosure requirements in the US and the forthcoming Sustainable Disclosure Regulations in the UK all set out stringent transparency requirements,’ says Abigail Dean, global head of strategic insights at Nuveen Real Estate. ‘This combines with a raft of building regulations across the US, Europe and Asia Pacific that ramp up the energy efficiency requirements for buildings in the coming decade.’

In the UK, the Net Zero Buildings Standard will provide a benchmark for decarbonising the built environment. A single methodology will apply to new and existing buildings including homes, offices and retail, bringing clarity and sector-wide consensus on net zero.

Incentivising managers
Another element of Van Lanschot Kempen’s research into the listed sector was assessing the extent to which senior managers are dedicated to achieving ESG goals. Here too, the study found European companies faring better than their counterparts elsewhere: 47% of those analysed have effective board-level oversight compared with 20% of firms globally. And, 22% of European firms were found to have GHG targets reflected in their annual board-level bonuses, against just 7% globally.

Says Nijmeijer: ‘What we mean by effective board oversight is that the entire board, not just one person, is responsible for reaching ESG targets and that long-term incentive plans (LTIPs) and bonus plans are effectively tied into those targets.’

‘When assessing the investment case for a company, investors need to be able to evidence the board’s dedication to combatting the climate crisis. The introduction of non-financial compensation metrics is accelerating and it’s likely we will see the number of companies including ESG in their LTIPs and bonus schemes accelerate over the coming years.’

Nijmeijer suggests bonuses and incentive programmes should be structured so that a larger chunk – up to 60% rather than the current norm of 5-10% - is dependent on achieving ESG targets.

‘Board members need to be fully incentivised financially, they need to feel the pain in their own wallets if ESG targets are not met on time, both in the medium and the long term.’

Collaboration is key
The scale of the net zero challenge facing real estate companies has spawned a realisation that regulation and government pressure alone may not be enough to stimulate faster action on targets.

Increasingly, the new industry messaging promotes collaboration rather than competition in the push to make sustainable and climate-proof buildings both a priority and a reality.

‘Climate disclosure mandates are irreversibly transforming the whole real estate sector. Regulation and government initiatives have set the ball rolling but investors now have a crucial role in helping the sector meet 2050 net zero targets,’ says Van Lanschot Kempen’s Dijkstra.

The idea is that larger companies with ample financial and ESG resources help smaller businesses that are struggling to meet their targets – ‘share best practices’ in the jargon.

Remarks Nijmeijer: ‘Larger companies have their own dedicated ESG teams of 10-15 people and obviously they can move faster. But this is not a matter of outsmarting the competition – being faster than your rivals – but about doing things jointly and doing them as fast as possible.’

This collaborative approach is also advocated by industry bodies such as the Urban Land Institute (ULI), with which Van Lanschot Kempen works closely together on climate-related issues to inform and educate the sector. At its inaugural summit on climate change last October, ULI Europe CEO Lisette van Doorn urged real estate companies to join forces to accelerate progress on cutting carbon emissions. ‘All buildings have transition risks and we know that some leading market players have started to consider the costs of decarbonisation and started to act on it. However, we need to bring the wider industry on board, and spread the knowledge to speed up the process,‘ she said.

Also addressing the summit, Sophie van Oosterom, global head of real estate at Schroders Capital, stressed the need for cross-industry collaboration to drive change. ‘We need to not compete for a change, but to work together to protect long-term financial performance,’ she said.

In the same way, Van Lanschot Kempen sees its study as a ‘call to action’ for the industry. With only 10% of listed real estate companies worldwide fully committed to decarbonisation, the sector is way off target - and the performance of unlisted companies, which the asset manager is also researching, is expected to be similar.

Says Nijmeijer: ‘Our research sends out a strong signal that companies need to step up, that things are going too slowly. Progress can be speeded up if large cap firms help smaller caps by sharing best practices, whether that be on measuring and reporting emissions, or things like stakeholder engagement. Excluding others in addressing this massive challenge is the worst option, it doesn’t help the planet at all.’

Counting the carbon: Scope 1, 2 and 3
To measure greenhouse gas (GHG) emissions, three scopes, or categories, of emissions have been defined under the GHG Protocol, a joint initiative of the World Resources Institute (WRI) and World Business Council for Sustainable Development (WBCSD).  Scope 1 covers the direct emissions from a building (power, heating etc), Scope 2 covers the indirect emissions (e.g. electricity purchased and used) and Scope 3 covers all other indirect emissions from the value chain, including embodied carbon.

Scope 3 emissions are important within real estate because they include the emissions generated to create, maintain and demolish buildings. Although Scope 3 emissions are the dominant source of emission, only 10% of listed real estate companies worldwide have set full-scope reduction targets and only 15% have verified reporting on all three scopes, according to research by Van Lanschot Kempen. While reporting of Scope 3 emissions has up to now been optional, it will become mandatory under a new ISSB reporting standard set to be introduced in 2023.

The full ESG Special Report appears in the March-April edition of PropertyEU magazine