Earlier this month, I had the opportunity to partake in two panel discussions at COP26 in Glasgow. The discussion was rich as it pertains to our industry and the consensus around the necessity to go faster, was clear. Decarbonizing our economy and mitigating the imminent threats of climate change and its negative impacts on the planet, and the obsolescence of our assets, is a priority for our industry. Being the largest asset class globally and responsible for 40% of global carbon emissions, we need to develop sustainable properties and build a resilient business model. We are engaged in a true race against the clock, a race we all need to win.
Mitigating the double-threat: obsolete buildings and eroded value
Up until recently, it was widely recognized that climate change would impact real estate either physically – through the increasing frequency and intensity of natural catastrophes affecting buildings – or from a financial and a policy perspective through carbon regulations. Let’s be realistic: the impact on our sector will come from both sides, representing risks as well as opportunities for long term investors like us. At Ivanhoé Cambridge, we have already taken bold steps to strongly reduce our carbon emissions and have committed to become carbon neutral from an operational perspective by 2040.
Fix or build: redefining the value chain and why capex can no longer be a bad word
In addition to sustainable approaches to new construction, achieving these goals is dependent on our ability to finance and realize the low-carbon transition of existing buildings. This requires a huge amount of investment but how can this “green CAPEX” find its place in the traditional valuation process? This implies a profound paradigm shift to the entire real estate community. Real estate asset valuation models are not suited to account for extra-financial performance nor reflect future carbon costs. CAPEX weighs on the valuation of assets, however we firmly believe that green investments should, on the contrary, have a positive impact on valuation. I’m calling on our industry peers to seriously consider the way we could really take into account ESG performance in the numbers and tie financial performance to carbon performance over the whole life cycle of a property. Assigning the true value to assets would lower the risk of making sustainable choices and help investment to find their way to these projects.
Greening the money trail and tying people to performance… and planet
To achieve this monumental transition to a low-carbon economy we need to align the economic interests of all players of the value chain. At Ivanhoé Cambridge, we have already agreed with 12 of our lenders to adjust upwards or downwards the cost of our corporate loans and credits, depending on our progress against our ESG and carbon goals, for a total of C$8.5 billion. We have also applied a similar concept to our own employees with an incentive plan tied to the progress we make against our carbon targets. Company performance on carbon must be tied to people’s compensation if we want individual actions to align with ESG targets.
As asset and property managers are key to driving sustainable value, we started to set up green incentives clauses in property management agreements to reward improvements in buildings’ operational efficiency, including on carbon. We’d like to see a similar concept being applied to asset management. Incentivizing our ecosystem of partners and the entirety of our supply chain will be the key in creating a transformational industry movement and the required shift in our real estate culture. Creating ‘green promote’ structures that integrate ESG and carbon targets alongside financial ones will thus create a positive correlation between ESG and financial performance objectives.
Ushering in the era of green coopetition: no one is a (green) island
I’m convinced that sustainable investments are profitable investments, and we can move the needle and have a positive impact if we well choose our priorities. To get there, it will require more than an industry effort. As members of the real estate industry, it will require we think about these issues as a community. We must garner deep alignment on purpose, value chain redefinition, valuation philosophies, risk mitigation practices and tolerance, and finally carbon pricing and financial levers. It will require we compete together, for the planet. I invite you all to join us.