The rise and rise of green buildings

No longer merely an environmental issue, sustainability has become an investment fundamental.

Human health, livelihoods, food and water security – not to mention economic growth - are all underpinned by the common goal of keeping global warming under 1.5 degrees. Hence, more investors are factoring in the environmental and social impact they can bring to the world through their investment decisions. Since investing in environmental, social, and governance (ESG) initiatives also reduces operational expenditure and lowers risk in business, a better return-on-investment can also be expected.

Without downplaying the human toll, the United Nations Environment Program clearly demonstrates how climate risk can impact investments all the way from income (reduced rental yield and falling occupancy), to expenses such as higher insurance premiums and eventual exit price, flowing on to impact liquidity and even availability of finance.

As demonstrated by supporting data, growing market demand for sustainability in the commercial property sector is a quantifiable trend.  Underscoring the value of green, evidence suggests buildings with green certifications bring in a rent premium of 6%, and a sales premium of 7.6%.

Meanwhile, green leases – an agreement between the landlord and tenant which aims to ensure that the ongoing use and operation of the building minimises environmental impacts – are growing in momentum. Globally, some 34 percent of occupiers already have green lease clauses, while a further 40 percent plan to sign them by 2025, according to JLL’s Decarbonizing the Built Environment report.

Investors, too, are taking action, with 42 percent now having green lease clauses in place and an additional 37 percent looking to adopt them by 2025.

Among 1,000 executive leaders, investors and corporate occupiers surveyed by JLL in April 2021, 83% of occupiers and 78% of investors said they believe climate risk is financial risk.  Some 79% of occupiers anticipate that carbon emissions reduction will be part of their corporate sustainability strategy by 2025, and 42% of occupiers believe that their employees will increasingly demand green and healthy spaces.

Clearly, landlords need to consider the sustainability of their property in order to attract quality tenants and indeed investors in the future.

Although corporates are willing to pay the premium, JLL’s research shows that the supply of green buildings is currently not enough to meet the ambitious net-zero targets set by occupiers. However, various frameworks are in place enabling investors to put their capital to work in a way that positively influences society, so that we move towards a more sustainable future.

A collaborative global initiative, Science Based Targets (SBTi) provides a clearly-defined pathway for companies to reduce greenhouse gas (GHG) emissions via a five-step process, helping prevent the worst impacts of climate change and future-proof business growth. Other net zero-related initiatives inviting signatories include the United Nations Race to Zero Campaign, The Climate Pledge, the Glasgow Financial Alliance for Net Zero, Net Zero Asset Managers Initiative and the Net Zero Carbon Buildings Commitment.

There is a wealth of opportunity for investors to tap into the potential of green buildings. The IFC reports that Asia-Pacific, which will house half the world’s population by 2030, is particularly promising, with an estimated US$17.8 trillion worth of property investment opportunities.

The application of property technology (PropTech) to improve the environmental performance of existing buildings is another area being widely adopted in support of cities’ transition to a low carbon economy, China and the EU are both looking to take a lead from a regulation and market-incentive perspective.

This also aligns with a broader global trend. Regionally, the governments of Hong Kong, Japan and Korea have all committed to net zero targets by 2050, and mainland China by 2060.  Many European countries have adopted national programs aimed at reducing emissions.

Private capital has high interest in meeting the net zero target, evidenced by BlackRock’s raising US$673 million for a climate-focused infrastructure fund.  China has developed its own Green Definitions tool to help investors measure environmentally sustainable economic activities, along the lines of the EU Taxonomy classification system. Once these standards are set up globally, investors will be able to gauge their investment portfolio and facilitate the transition to a low-carbon economy.

The Intergovernmental Panel on Climate Change (IPCC) has just recently stated that stabilising the planet at 1.5°C warming is still possible, but immediate and drastic global action is required. Many positive mechanisms have been set up, however, challenges remain in the form of human behavioural change.

One of the most cost-effective solution to tackle is through the building sectors, since building contributes approximately 39% of the annual global CO2. We have the technology and financial means immediately available; Act Now and this ambitious goal is not too far to reach!

This article was originally published on South China Morning Post on 16th March, 2022.