Real Estate Owners Drag Heels On Decarbonization ‘At Their Peril’
May 23, 2023 6 Minute Read
Real estate owners who fail to take ESG seriously and don’t have a robust ESG reporting system in place are “quickly becoming dinosaurs,” Paul Morassutti says.
“And whether the owners of those buildings believe in climate change or not is entirely irrelevant,” says CBRE Canada’s Chairman, “because the rest of the world has moved on. So you ignore these things at your own peril.”
Morassutti recently joined CBRE Client Solutions Director Amy Bugg on a panel discussion hosted by the Toronto Region Board of Trade as part of TRBOT’s ESG Immersive Learning Series.
Building owners who do nothing about ESG will find their access to capital dwindling, Morassutti told the TRBOT audience.
“Lenders who lend on these properties will likely charge a higher interest rate for buildings that are not green, and in time they might not even lend to them at all.
“Because when emissions are counted for a bank, it includes the emissions of the properties they have loans on. So if a bank loans to the owner of a building and its loan to value ratio is 70%, the bank is responsible for 70% of the emissions from the building. So they won’t lend if you have bad credentials.”
And it goes both ways, Morrassutti noted. “Tenants with strong credentials will not occupy a building that isn’t green, so you won’t be able to fill it. And ultimately if all that happens you won’t be able to sell the building.
“So it becomes this trifecta in which you can’t find occupiers, lending or finding debt is going to be hard, and selling the building could be impossible.
“That’s a trifecta for a death spiral and property owners need to focus on this right now for any asset class.”
Luigi Ferrara, Paul Morassutti and Amy Bugg
Morassutti pointed to billionaire Larry Fink, head of BlackRock – the largest money management firm in the world ($11 trillion in assets under management) – as a reason for ESG skeptics to reconsider.
Fink has demanded the companies his firm invests in outline the risks to their organizations as they transition to net zero. Those seeking his firm’s capital are told, “’If you’re not ready for net zero, that’s a red flag, and maybe we shouldn’t give you money,’” Morassutti said.
Fink’s efforts have done much to spur the slow-moving commercial real estate industry into taking action on ESG.
“It isn’t that Larry Fink woke up one morning concerned about polar bears,” said Morassutti. “It’s more about having a holistic approach to business. The same way we review financial metrics for a business or a building, we need to understand the environmental metrics, social impact, and governance issues.
“All of that is part of running a successful business these days.”
Real Estate Industry ‘Has to Act’
With 40% of global greenhouse gas emissions coming from buildings, the real estate industry bears a fair share of responsibility for tackling the problem.
“We have to act,” Morassutti said, noting that 80% of the buildings that will be standing in 2050 have already been built.
“The response to ESG can’t simply be that we’ll build net zero buildings,” he added. “We have to refurbish an entire built form. And right now we’re de-carbonizing 1% of the real estate inventory a year.
“At that trajectory we won’t hit any net zero targets until 2070, which is 20 years too late. So there’s a lot the real estate industry has to do.”
Shifting ESG Beyond Office
While office accounts for the bulk of commercial space, the industrial market has been shifting its focus to ESG in recent years.
“We’re seeing more and more large occupiers of industrial buildings saying, ESG is important and we want to be in a building that reflects that,” Morassutti said. “That kind discussion didn’t happen even two or three years ago. It’s moving into every sector now.”
Hotel owners are also incorporating ESG into their business models in order to attract and retain business.
“If you’re a company and you’re going to hold a conference and you have three big hotels that can facilitate you in the same area, and one of them is net zero and other two aren’t, you’ll go to the one that is because it aligns with what you’re doing as a corporation,” said Morassutti.
He cited the $30 million invested by the owners of Toronto’s Fairmont Royal York to make it Canada’s first carbon-neutral hotel.
A Global Effort
CBRE’s Amy Bugg told the TRBOT crowd – which included business leaders from across Toronto hoping to learn about ESG implementation strategies – that the company has made bold commitments to address ESG, aiming to become net zero by 2040, a decade ahead of the deadline.
“My first thought when I heard that was, 2040 isn’t that far away and how are we going to achieve these big goals?” she said.
It can be challenging to align on goals across such a large company like CBRE. “So we have to dig in and make sure we’re not thinking in silos.”
Fortunately, CBRE’s global partners are able to share their experiences and expertise across geographies. The UK has made some particularly notable progress, “and we can benefit from lessons learned there and have partners we can brainstorm with, and can hold one another accountable,” Bugg said.
For its part, CBRE Canada has hired a team of experts to build out a roadmap and will be tasked with tracking the company’s internal goals and objectives.
The global company has also established commitments to enhance supplier diversity, having awarded $1.2 billion to diverse suppliers in 2021 and pledging to grow this spend to $3 billion over the next four years.
Being a commercial real estate firm focused on the built form, it is easy to focus a majority of the conversation on the “E” piece of the ESG equation. But Bugg said CBRE is “seeing the importance of the S being carefully considered in corporate conversations.
“Our most valuable asset are our people and our internal stakeholders are demanding more from a sustainability perspective,” she said.
“This goes above and beyond, corporate donations. It involves more candid conversations around corporate culture, more diverse hiring practices, more women in senior leadership roles.”
Bugg also sees a real benefit to using ESG as a means of reconnecting with employees and building a roadmap for the future.
“The pandemic disconnected so many people and workplaces. We have an opportunity to use ESG as another reason to band together, reconnect, reestablish our corporate culture and values. That connection and communication is going to be critical if we are to overcome the challenges presented by ESG commitments.”
Pension Funds = ESG Stars
While Canada lags the EU, UK and Australia on ESG action, Morassutti said he’s been impressed with the progress being made by the Canadian commercial real estate industry, pension funds in particular.
“They are all over this and doing a job we can all be proud of,” he said. “Today almost any pension fund in Canada is among the world leaders in ESG.”
Some greenwashing of corporate reports “is to be expected,” Morassutti said, “but that strategy won’t last long. Unlike with the LEED standard, which is a snapshot taken when the building was built, ESG is all about here’s our target, timeframe, how we’ll get there, and every year we’ll be measured on that.
“So if your corporate strategy is to check off boxes, you’ll be found out quickly and I don’t think that will last.”
The prediction offered by CIBC World Markets’ Benjamin Tal during a one-on-one conversation with CBRE Canada President & CEO Jon Ramscar at CBRE’s Market Outlook Breakfast in Toronto on Feb. 26.
CBRE’s new Canada Real Estate Market Outlook forecasts that commercial real estate investment activity will recover in 2024 as credit conditions return to normal.
Morguard Corp. just closed on the sale of a portfolio of 14 hotel properties in Ontario and Halifax to InnVest Hotels and Manga Hotel Group for $410 million.
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