Could we fall out of love with Net Zero?

COP27 has once again focused minds on combatting climate change and here Phil Winckles, Partner and Head of Professional Services, North at Matthews & Goodman looks at how the property industry can help in plotting a Net Zero pathway.

Finding out that half of the world’s population is exposed to life threatening heat and humidity is one of those ‘stop-what-you’re-doing-facts’ for me.

I guess that’s why, leaders from over 200 countries have converged on Egypt to discuss what many believe is the most critical issue in our corporate, personal and collective lives – climate change.

I say many because a recent KPMG survey of over 1,300 Chief Executives worldwide concluded that almost 66% of respondents admitted that ESG will be one of the first priorities to be culled as part of their cost cutting measures to prepare for an anticipated (sustained) recession.

In the face of spiralling inflation, high gilt and interest rates, runaway energy costs, escalating supply chain and operational costs, economic and political uncertainty, should we be surprised by the survey results?

As a member of the built environment community, I am conscious that we (collectively) contribute almost 40% of the world’s greenhouse gases. In my private life, I do not live in a home heated by either solar panels, or a heat/ground source pump. I don’t drive an EV, although I do travel by public transport whenever possible and, I don’t consume only what I cultivate.

So what can we do.

I know that the UK was the first major economy to legislate for Net Zero, but how can we translate politicians’ rhetoric into a realistic Net Zero pathway for property professionals.

There is an emerging conversation centred around the ‘carbon bubble’ ie the costs to investors and owners to decarbonise portfolios in order to meet Net Zero targets. More specifically, the cost of not decarbonising buildings is not consistently factored into all property valuations and, as a result (the arguments goes), current valuations could be considered as too high – resulting in the ‘carbon bubble’.

More specifically, if investors and owners do not make provision for (decarbonisation) transition risk costs now, the seeds for a major (decarbonisation) crisis will be sown, because the costs of retrofitting buildings to meet future regulatory and/or economic catalysts, have not been allowed for. When circumstances force investors and owners to grasp that nettle, the ‘bubble’ will burst and property values will/could be impacted.

The current energy price crisis is a test case for this assertion ie the price hike could have a significant impact on tenants’ ability to manage their operational costs, especially their rent – usually their second highest outgoing.

The solution? Perhaps, as a sector, we should start considering what these (decarbonisation) transition costs are and how they will be met.

May be the driver for this paradigm change will be purchasers ie undertaking increased pre-purchase due diligence, or even demanding vendors to be more transparent about how much of their decarbonisation strategy has been implemented and what the subsequent transition costs are/will be.

But it’s not all doom and gloom. Some owners have already started implementing a decarbonisation strategy, but it appears that this activity tends to be focused on higher-value assets, in prime CBD and residential locations. Understandable, if you consider the fact that the cost-to-value ratio is lower for these properties.

If this continues, this could result in a two tier-market with retrofitting focussed on higher value properties and owners/landlords of lower-value buildings struggling to fill them.

Having reviewed some of the commentary on the issue, there would appear to be a potential route map we could adopt to address this issue, viz:

• Determine the true cost of decarbonisation of your asset or portfolio
• Ensure the investor/owner has the resources (in terms of talent, expertise and funding) to implement a validated and measurable decarbonisation programme
• Factor in current and future energy prices – a problematical issue in the current climate
• Determine what the ‘carbon price’ will be – from carbon offsetting costs, to holistic retrofitting, to designing Net Zero buildings
• Review embodied carbon strategies – an issue which we recently addressed  (https://www.matthews-goodman.co.uk/market-insights/blog/embodied-carbon-new-build-vs-rebuild/)
• Review our financial reporting protocols ie is the cost of decarbonisation factored into  depreciation, rental income and asset value.

I guess we, the built environment, have two choices: wait until our hand is forced by regulators to address the ‘carbon bubble’ issue or, collaborate on a decarbonisation strategy which proves equitable for investors and owners of all assets – not just high value assets.