In the absence of government regulation, the private sector takes the lead in promoting environmentally friendly practices within the real estate industry.
In the world of commercial real estate (CRE), the focus on sustainability and decarbonisation has become a strategic value driver, offering verifiable returns on investment (ROI) through cost savings, increased asset value, and long-term resilience. This shift is being led by industry leaders such as Dr. Chris Pyke, an environmental scientist and the Chief Innovation Officer for GRESB, who has previously served at Arc Skoru, Aclima, and the U.S. Environmental Protection Agency, and is also on the faculty of the Urban and Regional Planning Program at Georgetown University.
The value of voluntary action and transparent, data-driven strategies is highlighted as uncertainty in public policy persists. True progress in climate reporting will be made by the asset managers and investors themselves who prioritise data-driven strategies. In this context, data in the built environment is crucial for determining an asset's performance, cost of operation, and emissions.
Climate disclosures for financial institutions with real estate investments will continue to play a role in ensuring sound investment strategies due to evolving regulatory frameworks. For instance, the US Green Building Council's LEED v5, New York City's Local Law 97, Boston's Building Emissions Reduction and Disclosure Ordinance (BERDO), and Denver's "Energize Denver" are key state and industry-led initiatives on climate action and risk management.
As extreme weather events and environmental pressures increase, real estate stakeholders rely on performance metrics like energy efficiency, water conservation, and emissions to evaluate assets' risks and opportunities. River floods and flash floods were the most frequently reported acute hazards globally in the 2024 GRESB Real Estate Benchmark. In 2024, there were 27 individual weather and climate disasters with at least $1bn in damages.
Incorrect or missing data can alter an investment strategy, potentially reducing property value or miscalculating risk. Therefore, data has become the bridge between sustainability performance and financial strategy, with investors and fund managers increasingly relying on third-party validated data to inform decision-making. Asset managers and investors prioritising climate reporting initiatives can impact their bottom line.
Energy Efficiency and Sustainability as Financial Priorities
Rising energy prices and stricter sustainability regulations have made energy efficiency a priority to reduce operating costs and attract eco-conscious tenants. Buildings with outdated systems risk becoming obsolete or facing penalties, while energy-efficient properties command higher rents and valuations. For example, environmentally friendly Grade A office spaces in the U.S. can charge rents up to 31% higher annually than their less efficient counterparts.
Water Usage and Resource Management
Efficient water use, such as gray water recycling, reduces utility costs and supports sustainability mandates, enhancing a building’s attractiveness to investors looking to mitigate resource-related risks.
Risk from Extreme Weather and Climate Resilience
The increasing frequency of extreme weather events tied to climate change has compelled investors to factor in physical risk assessments and resilience planning within their risk management frameworks. This is part of the broader ESG integration to future-proof portfolios against climate impacts.
Regulatory and Compliance Drivers
Cities increasingly require environmental assessments, such as energy consumption limits, before approving new developments. Non-compliance risks fines, operational difficulties, and asset obsolescence, which investors must factor into their financial strategies.
ESG Integration Becoming Strategic, Not Peripheral
ESG considerations have shifted from being optional or reputational concerns to core components of investment and management strategies. Stakeholders now embed ESG in decision-making, with technology (smart sensors, analytics) enabling real-time performance monitoring that supports ESG goals and improves asset performance.
Market Demand and Tenant Expectations
Investors respond to growing tenant and societal demand for sustainable, healthy, and socially responsible buildings. This affects lease terms, occupancy rates, and asset desirability, reshaping the commercial real estate landscape.
Investment Risk and Portfolio Impact
According to a Deloitte study cited, lack of readiness in ESG compliance could render approximately 76% of European office spaces obsolete by 2030, highlighting substantial financial risks for failing to upgrade and comply.
In summary, energy efficiency, water usage, and climate risk have become integral to the assessment of financial risk and value creation in commercial real estate. Investors and fund managers increasingly view these factors as essential for compliance, cost control, competitive positioning, tenant attraction, and portfolio resilience amid evolving market, societal, and regulatory pressures.
Reference:
[1] Deloitte (2021) Sustainability in real estate: Achieving net zero carbon. [Online] Available at: https://www2.deloitte.com/us/en/pages/about-deloitte/articles/sustainability-in-real-estate-achieving-net-zero-carbon.html
[2] McKinsey & Company (2021) Climate change and the built environment. [Online] Available at: https://www.mckinsey.com/industries/real-estate/our-insights/climate-change-and-the-built-environment
[3] World Green Building Council (2021) Net Zero Carbon Buildings Commitment. [Online] Available at: https://www.worldgbc.org/initiatives/net-zero-carbon-buildings-commitment
[4] Urban Land Institute (2021) The Future of Green Buildings: 2021 Global Outlook. [Online] Available at: https://www.uli.org/research/the-future-of-green-buildings-2021-global-outlook
- In the commercial real estate sector, the focus on energy efficiency and sustainability has become a significant financial priority, as rising energy prices and stricter regulations aim to reduce operating costs and attract eco-conscious tenants.
- Efficient water use, such as gray water recycling, is crucial for reducing utility costs and supporting sustainability mandates, thereby enhancing a building's attractiveness to investors seeking to mitigate resource-related risks.
- With the increasing frequency of extreme weather events linked to climate change, investors are integrating physical risk assessments and resilience planning into their risk management strategies, as part of the broader ESG (Environmental, Social, Governance) integration to future-proof portfolios against climate impacts.
