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Carbon Risk Real Estate Monitor - Framework for science based decarbonisation pathways, toolkit to identify stranded assets and push sustainable investments

Periodic Reporting for period 1 - CRREM (Carbon Risk Real Estate Monitor - Framework for science based decarbonisation pathways, toolkit to identify stranded assets and push sustainable investments)

Reporting period: 2018-02-01 to 2019-07-31

The real estate sector is accountable for about one third of all greenhouse gas (GHG) emissions in the EU and will play a crucial role in the achievement of the global climate pledges as agreed to in the Paris Agreement to keep global warming down to below 2°C and pursuing efforts to limit it to 1.5°C. One of the biggest challenges for the reduction of GHG emissions results from the poor energy efficiency of existing buildings and still too low refurbishment rates in virtually all member states of the European Union. The reduction of the EU carbon footprint requires a significant increase of energetic retrofits in the existing property stock. Tightening legislation on GHG emissions in the building sector and a decreased market demand for buildings with poor energy efficiency and high GHG emissions poses the risk of write-downs and premature obsolescence for such assets. Economic risks emerging from the shift towards a low-carbon economy are generally denoted as ‘transition risks’ and the term ‘carbon risk’ focusses especially on the potential negative economic impact of high GHG / carbon emission.

The derivation of decarbonisation target pathways on property level is one key objective of the CRREM project. We follow a transparent methodology that starts with the global carbon budget and emission pathway that is compatible with reaching the Paris targets of limiting global warming to 2°C or even 1.5°C. These emissions are broken down in several steps to the budget share of the EU, the EU commercial real estate sector, individual countries and finally different types of building use such as office, retail or hotel. The derived decarbonisation pathways serve as the basis to benchmark the performance of buildings and identify so-called ‘stranded assets’.

Stranded assets are properties that will be increasingly exposed to the risk of early economic obsolescence due to climate change because they will not meet future regulatory efficiency standards or market expectations. These buildings will become less marketable and may require costly refurbishment measures. The overall objective of the Carbon Risk Real Estate Monitor Project (CRREM) is to accelerate the decarbonisation
and climate change resilience of the EU real estate sector. This target shall be achieved by making ‘stranding risks’ transparent to investors and managers, pushing investments in retrofit measures to improve the carbon performance of buildings. The CRREM project will development a complete framework that can be applied to benchmark the carbon performance on asset, portfolio and company level against transparent decarbonisation targets enabling to derive meaningful risk indicators that are aligned with the requirements of the upcoming EU Taxonomy for sustainable activities and the disclosure requirements as defined by the Task Force on Climate-related Financial Disclosures (TCFD). The CRREM Tool will enable a standardised assessment of GHG emissions aligned with industry standards like EPRA or GRESB. The ‘carbon performance’ of individual buildings or large portfolios will be projected until 2050 and compared with the derived decarbonisation target pathways derived in accordance with the requirements of the Paris Climate Agreement and the EU National Determined Contribution (NDC). ‘Stranding’ occurs if buildings do no longer meet the required rate of decarbonisation measured in terms of their so-called carbon intensity (annual GHG emissions per floor area). Owners of such stranded assets face potential penalties and significant value depreciation due to the costly refurbishment measures that become necessary to meet the targets. The CRREM Tool will enable investors and managers to simulate the financial and ecological impact of different retrofit strategies, helping to find a cost-efficient timeline of individual actions optimising overall performance on portfolio and company level.
We derived country and property specific decarbonisation pathways based on individual buildings GHG intensity, in alignment with the EU NDC Paris targets of limiting global warming to 2°C or even 1.5°C. The pathways have been identified as a potential new industry standard by key real estate investors. Especially long-term oriented investors like large pension funds support an adoption of the pathways by Green building certificates and legislation such as the upcoming EU Taxonomy for sustainable activities. This important project achievement was supported by the establishment of a high-level steering committee of key industry stakeholders – the European Investor Committee EIC– as well as by publishing a comprehensive report on the objective and future results of the project (‘Carbon Risk & Stranding’). Project visibility was further improved by the project homepage and a range of press releases, publication and presentations for different stakeholder groups.

The CRREM consortium has developed a comprehensive framework enabling to assess the potential risks of poor carbon performance alongside with the potential benefits of ‘green retrofits’ targeting at measures to reduce the carbon footprint of assets. We developed a standardised assessment methodology to measure the present and future carbon performance of buildings and portfolios in alignment with industry standards like EPRA and GRESB. The CRREM tool prototype has been successfully tested by the EIC and already enables users to assess GHG emissions and derive basic carbon risk indicators based on the benchmarking against CRREM decarbonisation targets. We further developed a comprehensive guide on the integration of carbon risk in real estate strategies. The corresponding report provides meaningful insight on the assessment, management and mitigation of carbon risks on asset and portfolio level.
The developed decarbonisation targets are much more granulate than previously existing approaches and focus on the specific requirements of the real estate industry. Pathways will be further developed to cover even more asset classes, which will further increase the applicability and industry acceptance. The final CRREM risk assessment tool will include the possibility to model the costs and benefits of retrofit measures including an estimation of associated carbon emissions occurring due to the manufacturing, transport and installation of new as well as the disposal of existing equipment (‘embodied carbon’). The decarbonisation pathways shall be integrated in the annual GRESB benchmarking, maximising project impact and visibility. It is expected the increased transparency of carbon risk in case of an industry-wide adoption of the pathways and CRREM risk indicators, would results in a large increase of private capital flows into low-carbon real estate activities including the retrofitting of existing buildings. The CRREM tool will enable stakeholders to perform well-informed decisions based on quantitative carbon risk indicators, enabling to align individual economic decision and entire real estate portfolios with the targets of the Paris Climate Agreement.
The CRREM Policy Analysis Matrix will enable stakeholders to easily assess, and therefore finally improce, the effectiveness of regulatory measures aiming at decarbonisation.
General CRREM concept of stranding assets ('stranding diagram')
CRREM Climate Benchmarking: Combining decarbonisation pathways with GRESB industry benchmarks
Portfolio level results of CRREM Stranding Risk Analysis: Share of stranded assets
'Stranding diagram' from the CRREM Risk Assessment Tool with excess emissions