Why CRE And PERE Investors Should Reconsider Their Roles In The Climate Tech Development Process

Real Estate

CEO and Co-Founder of Green Generation, which engineers and implements comprehensive integrated energy efficiency solutions.

After a year’s postponement, anticipation over the outcomes of the 26th annual UN Climate Change Conference (COP26) in November is palpable among businesses and investors across all industries — and for good reason. Just as evidence continues to mount of the material risks that climate change presents to human well-being and real property, so too does the evidence that governments’ efforts to curtail these risks will disrupt business models and impact financial returns.

We know that virtually no industry, asset class or business will be exempt from government-backed and corporate-led efforts to mobilize the upwards of $92 trillion in investment needed to achieve net-zero carbon by 2050. And for the typically conservative, slow-to-adapt commercial real estate (CRE) and private equity real estate (PERE) sectors, whose more than $228 trillion in building assets in 2020 were responsible for over 30% of total annual global carbon emissions, COP26 will be a reckoning.

Clues are everywhere. COP organizers are for the first time designating a full day for high-level negotiations on how to address problems in the built environment. In Brussels, the E.U.’s recently unveiled “Fit for 55” package of 13 policy proposals to achieve the legally binding emissions reduction goals of the European Green Deal makes a noteworthy target of the buildings sector. The package reinforces the E.U. Renovation Wave strategy and includes plans to establish a new carbon market for buildings, strengthen the building emissions-related regulations of the Energy Efficiency Directive (EED) and reveal by year’s end a revision to the Energy Performance of Buildings Directive (EPBD). In the U.S., state and local building energy performance standards (BEPS) are growing more ubiquitous, while at the national level, the Biden-Harris administration is undertaking various initiatives to improve the efficiency of federal, commercial and residential buildings.

Emerging government intervention aside, the root of CRE and PERE investors’ failure to address the building emissions problem isn’t as much the availability of proven decarbonization solutions as it is the rate and extent to which they deploy financial resources to developing, improving and adopting these solutions.

This is especially true of these investors’ approaches to climate technologies — including PropTech — for building energy efficiency and emissions reduction. In short, neither the rate of environmental and climate technology adoption nor scale of investment by CRE and PERE investors is where it needs to be to decarbonize the buildings sector in line with Paris Agreement goals. As revealed in a recent global survey from Ernst & Young and CRETech, the wedges between interest and adoption among prospective end-users of PropTech — regardless of its solution type — come down to high upfront costs, uncertainty over ROI and inadequate skillsets of intra-organizational staff. And respondents in a separate CREtech survey of real estate professionals representing more than 7.9 billion square feet of space cited these and other barriers as their reasons for not directly investing in climate technology development. As I’ve written in a previous Forbes article, for too many real estate investors, particularly in the private equity and venture capital industries, considerations for climate-aligned technology investments are further complicated by a lack of universal net-zero standards and frameworks and consistent regulatory environments. This can make internal buy-in for climate technology investing — as 75% of CREtech survey respondents indicated they plan to accelerate over the next five years — more difficult to secure.

There are two proactive, future returns-oriented strategies, then, that CRE and PERE investors can incorporate to overcome the barriers to climate technology adoption and maximize energy and emissions savings while minimizing their portfolios’ exposure to regulatory and even reputational risk.

CRE and PERE investors must reconsider both their stances on investing in climate technology research, development and demonstration (RD&D) and at which stage in the technology evolution they should be engaged.

Instead of relying on climate technology entrepreneurs to perfect solutions and commercialize mature products, CRE and PERE investors should invest in early- and growth-stage climate technology startups to have a say — leverage — in the development of promising decarbonization solutions, enabling them to influence the development of products that address their specific, portfolio-wide needs. This will help to mitigate a product’s technical risk and otherwise help to eliminate barriers to adoption and implementation while affording climate tech innovators a much-needed pathway from solution development to commercialization.

The potential ROI of early engagement is enormous, not least because of the venture capital industry’s relative neglect of climate technology for the built environment. Indeed, a recent PwC analysis of global VC investment trends over the period 2013-2019 found that, of the $60 billion invested in climate tech, only $3.7 billion went toward solutions for the built environment — the smallest sum of the five categories studied. But the landscape is changing quickly and the ROI opportunity window is narrowing, as the litany of sustainable infrastructure fund announcements these last few months show.

At the same time, CRE and PERE investors must lend their expertise and resources to the development of sustainable investment and disclosure frameworks for their industries. Similar to the major global investment banks, pension funds and other institutional investors who’ve acceded to the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD), Partnership for Carbon Accounting Financials (PCAF) and other voluntary, non-governmental collaboratives, CRE and PERE investors who coordinate their efforts to develop and adhere to sustainable investment guidelines for their industries will have a better chance of shaping the future regulatory environments for which these groups’ non-binding frameworks are ostensibly designed to be a proxy. Moreover, these guidelines will help CRE and PERE investors develop better measures of ROI on climate tech-related investments, helping to secure internal buy-in and validate sustainability claims to external stakeholders.

Clearly, momentum is moving beyond government-led climate action in the buildings sector. Rather than wait for the right climate technology to reach maturity and achieve commercial scale, investors should seize the opportunity to support the development of solutions of their own, regardless of their asset type, lease structure or location.


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