The U.S. Returns to the Paris Agreement: What Does it Mean for Real Estate?

Sun, 07 Feb 2021 17:58:24 -0500

As you probably know, Biden recently announced that the U.S. would rejoin the Paris Climate Agreement. This news has been all the rage lately, especially after the outrage because of Trump's administration exiting.

Opinions aren't one-sided, however. Lots of people, including the international community, have expressed relief over the news. Still, the separation also had plenty of supporters, particularly in the traditional energy industry (i.e., coal and oil).

You probably can infer what the agreement proposes: renewable energy and ecological measures. But what does that mean for the real estate sector? Do we need to change the way we build homes? Let's find out.

What Does this Agreement Entail?

The Paris Agreement was a monumental achievement. Almost 200 countries banded together to reduce greenhouse gas levels. The main goal is to create standards for ecological strategies and transparency from the participating governments.

An example is a goal to lower global temperature increases under 2° Celsius, but that's not the end. It also works as a stimulus for the private sector to move towards cleaner practices via innovation.

This article from The White House explains the agreement in detail. We'll summarize the most important sections.

The General Visiona

The agreement aims to strengthen expectations, with the main effort to cut down temperature increases to 1.5° Celsius. It seeks to do so by establishing a standard methodology for all nations. That includes constant communication while developing plans individually.

Every country submits its target report every five years. These targets need to follow a sequence: each one building on the previous one. The collective process will go through evaluation as well to provide insight on future strategies.

Finally, the agreement doesn't look to regulate industries strictly. It prioritizes market innovation, particularly in technologies that aid toward the main objective.

Transparency & Accountability

Of course, the agreement won't work if its participants fail to live up to their responsibilities. It doubles as an incentive for the private sector, evidencing the countries' commitment to the targets.

The agreement's transparency framework looks to level the field for all countries. That means that both the U.S. and developing countries can deliver. These standards also enable an efficient review process. Assessing every country's performance becomes more effortless.

Finally, all countries need to provide critical insight from their markets. Firstly, emission inventories are mandatory reports, along with their sources. The same is true for their mitigation achievements. It enables progress tracking to evaluate whether or not all countries meet their targets.

Low-Carbon Goals

Our dependence on carbon derivatives for energy is the main reason behind air pollution and global warming. That means global investment needs to shift towards clean energy technology and environmental protection.

First, the targets spanning five years means that investors can find out about these changes with enough time to re-focus their investments. They signal that the world is moving towards cleaner energy, thus driving investment towards these technologies.

However, it's vital to show evidence that this effort is real. Particularly for poorer countries, meeting the targets can be a challenge. Investors need reassurance that the goals are possible, and that's why the agreement created standards. Additionally, funding has been mobilized towards problematic areas.

The article also details a couple of steps for showing the commitment to aid developing countries. The first one is known as "Mission Innovation." The goal behind it is to double research and development efforts and investments to define sustainable energy around the world.

Additionally, the agreement stated that the U.S. would double public finance for the climate in 2020. With Trump's actions, this goal is yet to be reviewed. However, there are good chances that Biden's administration will work toward it.

Cooperation from Multiple Sectors

Finally, the Paris Agreement seeks to nurture the same ambition from its founders in other sectors. Such a noticeable effort requires lots of help, and that means including state governments, companies, and entrepreneurs.

For instance, over 100 US mayors make up the Compact of Mayors; it establishes a way to compile individual cities' efforts toward the goal. The Under-2 MOU also includes numerous states, like California, Washington, and New York. It strives to lower greenhouse gas levels under their presence in 1990.

We also have the Act on Climate Pledge from over 150 companies and 300 colleges. These entities are committed to reducing their emissions while increasing their efforts to aid ecological change.

Bernie Sanders' Climate Plan: Early Look into Biden's Politics?

Some sources also reported that Biden's alleged support for Bernie Sanders' environmental proposals shed light on what we could expect from the current president. As The Guardian reports, this plan is quite ambitious, to say the least.

Sanders made the news because of the aggression behind its plan. It proposes a $16tn mobilization against climate change. The chance of double the losses was cited as the reason for such a hefty investment.

The proposal became a trending topic back in 2019 because of its expectations rising way above other candidates'.

2050 Expectations Summarized

In essence, the plan was to eliminate carbon emissions in the country by 2050. This target was a proposal from the U.N.'s panel. The goal was to rally other nations and create new jobs.

In other words, the plan aimed for full decarbonization. That's not the end; both transportation and electricity were aimed for 100% renewable energy. Other goals included expanding public ownership for power firms to provide free electricity toward 2035.

Is this Biden's Approach?

The same article points out that Biden's proposal was a mere $1.7tn. Similarly, he proposed to turn the U.S. into carbon neutrality by 2050, but they don't reach as far as to complete decarbonization.

Therefore, Biden's administration will likely be much less strict than Sanders' proposal. Biden has been reported as a critic of Sanders' plan. Notably, the Washington Examiner reported that the president has called the program "unrealistic."

Therefore, it's relatively safe to say that it won't be the same approach. The chances are that the Paris Agreement will dictate most of the targets for the current administration.

Real Estate & the Agreement

Now, is that good or bad news for the real estate sector? Most likely, it will be neither. It'll probably become one of the many industries making the switch. Whether or not it'll impact revenue is still unknown.

Thankfully, the U.N.'s Environment Program Finance Initiative (UNEPFI) has a detailed report on how the real estate industry can implement the agreement.

The document presents a framework for real estate investors and companies to identify the agreement's primary drivers and barriers. Let's go through the strategies detailed for different entities.

Asset Owners

A vital priority is to create a strategy detailing climate risks and opportunities. Doing so enables owners to find the best approach for managing material risks. It's also important to ensure that said management stays in-line with fiduciary duties and the funds' beneficiaries' interests.

The regulatory landscape is also a vital consideration. Environmental regulations will likely play significant roles in ensuring different industries comply with the agreement. Understanding all these risks and chances are critical for setting targets.

However, said targets also require evaluation. Not all of them will be appropriate for investments, and not all of them have to be made public. These targets must be reasonable, achievable, and sustainable.

Property Managers

The recommendations for investment managers and property companies are mostly similar to those for asset owners. The first step is to create an environmental, social, and governance strategy to adapt to climate protection regulations.

That includes evaluating different opportunities and risks to translate them into an actionable approach. Executing this strategy should include detailed reports. Advisors and consultants will likely be necessary for compliance, and selecting them is also essential.

In the end, keeping reports of all efforts toward environmental protection should be second nature.

Bonds & Advisors

Finally, equities, debt investors, and financial advisors have a different set of tips. Investors should tackle climate and management risks according to the initial strategy, keeping investment returns in mind.

Again, it's vital to understand how every risk and chance can change, benefit, or harm investments. Targets should be transparent and actionable, always considering possible regulatory measures. Stakeholders should also play a role in deciding the most appropriate targets.

When setting targets, understand what they are, who measures them and how, and the reports' frequency. All targets should provide enough incentive and outcome expectations.

Aligning the Industry

In the end, the real estate industry will need to find a way to adapt to the Paris Agreement's goals. Sustainability experts state that the construction sector is among the largest climate change drivers.

The article states that new floor space developments are more frequent than ever. However, most of these projects take place in countries without energy regulation. Therefore, the industry will need to adapt to these new expectations if real change is desired.

Luckily, the report mentions a couple of considerations that can help streamline the entire process.

Carbon Emissions

As mentioned, real estate is responsible for significant carbon emission levels. The industry is in noticeable need of innovation, and the potential for improvements is considerably larger than other industries. Spending on energy efficiency is virtually negligible.

That's why it's one of the main climate change targets in many countries, and pollution regulations are more common for this sector.

The ideal approach is to create a detailed climate strategy according to the Paris Agreement. Working with experts makes it possible to assess transition difficulties and opportunities. Policies are likely to change soon, especially after Biden's declarations.

Stranded Assets Risks

Stranded asset risks are common when the annual baseline for a building is larger than a maximum allowance. Retrofitting actions when it comes to energy is a vital approach to avoid this issue and ensure the asset's longevity.

The article also mentions that properties lacking retrofitting efforts are more likely to become stranded for 2050, especially given the agreement's expectations. Therefore, working towards the Paris Agreement's sustainable targets is a vital investment, regardless of a company's stance on the subject.

Using Energy Audits Effectively

Now, energy audits may seem like a good idea to reduce energy costs. However, it goes a long way beyond that. You could use a drone, for instance, to map whole buildings through a heat sync camera. The data is then fed to A.I., which can help you know all relevant issues with the building – things like which solar cells are not working, which windows are broken, or detect costly leaks.

You can hire an energy audits service that can help you understand the amount of energy you're losing out on your property.

Is Decarbonization Possible?

We've already mentioned that decarbonization was part of Sanders' plan, the same one called implausible by Biden. However, saying that achieving this by 2050 is unrealistic isn't the same as saying that the goal as a whole is impossible.

Experts, such as Deloitte, agree that decarbonization in real estate plays a vital role in achieving the Paris Agreement's goals. Besides, it also enables significant financial and health benefits for both property management companies and consumers.

That Said, how can the Real Estate Sector Move Toward Decarbonization?

The key lies in energy usage. Buildings require energy for temperature control and lighting. Construction materials are also responsible for significant carbon footprints from their production and installation.

The first step is to measure the footprint's extension across the company's operations. Climate risks that could impact the business in multiple scenarios are also worthy considerations.

Developing a decarbonization strategy requires comprehension of the entire climate spectrum. That includes how a company impacts the environment and vice-versa.

In the end, combating greenhouse gas emissions requires significant efforts. That includes carbon abatement and driving investment into key innovative technologies, like renewable energy and sustainable building materials.

Eco-Friendly Construction: an Emerging Trend

Finally, we can't ignore the growing eco-friendly trend in the construction sector. The market for green buildings has been growing exponentially in recent decades. Between 2005 and 2014, the market grew over 20 times, from $3 billion to $81 billion.

Interestingly, most of the growth occurred in the commercial real estate sector, particularly in office space. However, the trend has been taking over several sectors.

"Green buildings" are beneficial for more than the environment. Financial savings are also considerable, both for homeowners, tenants, and property managers. The same holds for residential and commercial real estate alike.

How does LEED Certification Work?

Before closing, we want to touch on a common question we receive from our clients: LEED certification. For buildings to be considered eco-friendly, LEED certification is vital. Different building types face different requirements when it comes to obtaining this certification.

In general, extensive measures should go into reducing resource consumption. That includes energy, water, and more. Non-LEED-certified buildings use significant amounts of resources, thus generating more waste. Maintaining is also more expensive.

LEED certification is an excellent way to ensure a company is compliant with the Paris Agreement. In the end, the real extent of this news on the real estate market depends on how effectively different companies adapt to new regulations and opportunities.

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