02 Nov 2023
Real estate funds and the challenge of science-based targets
Paul Sutcliffe, founder and chief operating officer of sustainability consultancy Evora, shares his thoughts on the importance of investors taking early action to mitigate future risks and how to overcome the data challenge.
Science-based targets provide clearly-defined pathways for companies and real estate investment funds to reduce greenhouse gas (GHG) emissions and meet the goals of the Paris Agreement – limiting global warming to 1.5°C (or 2C) above pre-industrial levels.
The SBTi offers real-estate funds a framework for governing their efforts to decarbonise. But gathering accurate building data is hindering SBT adoption. Paul Sutcliffe, founder and chief operating officer at sustainability consultancy Evora, underscores the importance of investors taking early action to mitigate future risks and how to overcome the data challenge.
Real estate is subject to intense scrutiny over its environmental impact and, as the sector grapples with the pressures to decarbonise, investors are seeking ways to monitor and measure the climate impact of real assets and cut emissions.
The sector contributes approximately 39%  of total global emissions. As a highly visible asset class, it has made significant progress towards net zero through a raft of real estate-specific frameworks and green standards, including the Global ESG Benchmark for Real Assets (GRESB).
“Because of the physical nature of the asset class, real estate is ahead of some other sectors,” says Paul.
Even so, there is room for improvement in the metrics used to assess sustainability, particularly for investors. Science-based targets (SBTs) offer direct and indirect real estate investors a framework with which to set robust, measurable sustainability targets, and to demonstrate their progress.
As our survey of alternative investment funds (AIFs) showed earlier this year, funds from all sectors are committed to or working towards SBTs. But they face many challenges in adopting them, and real estate funds are no exception.
Data collection challenges
Three out of ten AIFs we surveyed in early 2023 identified difficulty in measuring performance as a barrier to SBT adoption. This is a particular concern for real-estate funds, Paul explains, as energy and water consumption typically fall under the control of tenants, not investors.
“Operators and investors out there are struggling to understand [building] performance,” he says. “If they can't understand performance, how can they then set SBTs?”
Proxy measures exist but they may be insufficient given the complexities of the sector. When a real estate fund’s assets are held on a triple net lease, or fully repairing and insuring lease arrangements, the tenant is not obliged to disclose performance data to the asset owners.
Legal concerns are another common barrier to SBT adoption, with 32% of AIFs saying they are unclear or worried about the regulatory implications. For real estate funds, this concern is compounded by the difficulty in establishing accurate and meaningful data, says Paul.
“There's a fear that when [investors] make a commitment…it's written into the investment memoranda, it’s incorporated into sustainable finance disclosure regulation (SFDR) disclosures, and then they might find that the quality of data that they've supplied is wrong.”
Real estate debt funds are further removed from performance data, given that the assets sit outside of their direct control. “I’ve worked with debt funds that simply wanted to disclose their carbon footprint,” says Paul. “We estimated 40% of the data.”
Multi-asset class funds with real estate holdings are subject to the same challenges and complexity of setting and verifying carbon reduction targets. “If you’re an AIF that operates a real estate function as well as private equity investment, how do you combine the two to create a single, science-based target?”
Accessing tenant data
One approach is for investors to mandate tenants to supply data as part of lease agreements, and for the industry to agree a standardisation at the asset and fund level as to the data that should be supplied.
While firms such as Evora have developed software to help funds build their decarbonisation strategies, they rely on quality data input.
“If you can’t get the information, it's not going to fix the problem,” says Paul. “You have still got to get the input so there needs to be a strategic approach to accessing data from buildings.”
Investor pressure is one of the chief motivations of SBT adoption, our survey found, with 23% of AIFs identifying it as their most significant driver.
But some investors may be satisfied with a demonstrable commitment to decarbonisation and a plan for how it will be achieved, Paul explains. This, along with the measurement challenges, means that some real estate firms are aligning with SBTs but have stopped short of having their targets verified by the SBTi.
The impact of regulation
Regulators may force the adoption of SBTs in the future, Paul explains. In Europe, the language of science-based targets is filtering into the SFDR and other regulation. This means that it will be in funds’ interest to align with the principles of the SBTi framework, even if they can’t yet collect the requisite data.
“We tell our clients that if access and confidence in data is the element slowing you down, it shouldn't stop action altogether…so prepare, work on plans to collect that data and where you can implement changes in buildings, but don't have the data, there are potentially other measures that you can use especially in Europe and the UK.”
Some fund managers combine the SBTi framework with other methodologies such as CRREM to build their decarbonisation pathways, for example.
What is certain is that real estate managers need to demonstrate that they are taking the sustainability performance of their assets seriously — and share their progress with landlords and investors. “If managers are not taking action or at least starting to understand the issues, then one could argue that they're failing in their fiduciary duty to understand future risks,” Paul warns.
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Paul Sutcliffe, founder and Chief Operating Officer sustainability consultancy Evora, shares his thoughts on the importance of investors talking early action to mitigate future risks and how to overcome the challenges.