Asset owners are managing their portfolios with horizons that often exceed decades or even longer. While a long horizon make it possible to withstand short-term volatility, portfolios are likely to be exposed to higher levels of long-term risks such as the climate risk, which is usually not being accounted for in asset prices yet. To evaluate those factors, metrics beyond traditional financial ones must be considered.
Take an office property in Berlin, built in 1980 with a gross floor area of 2,000 square meters. This building could incur additional costs of over 172,000 EUR by 2050 unless adequate decarbonization measures are implemented to reduce or avoid emissions’ penalties. This “climate change penalty” corresponds to just under 2.9% of the market value (6 million EUR) of the property used in this example. The penalty imposed on the building is based on the scope of the fines contained in the recently enacted New York Climate Mobilization Act. Even if you only apply the penalty for fossil fuel emissions set out in the Fuel Emissions Trading Act, the building still faces additional costs of around 1.1% of its market value. Anyone who has a rough idea of the current returns that can be generated by our sample property will probably break out in a cold sweat when they read this.
Reducing CO2 emissions from existing buildings requires investment – and it needs to happen quickly. Depending on which scenario you apply, the Berlin office building cited above is at risk of becoming a stranded asset as early as 2024 – unless suitable countermeasures are implemented. Without action, the buildings’ greenhouse gas emissions will exceed the levels permitted by a decarbonization target of 1.5°C by 2050. If we assume a decarbonization target of 2.0°C, the stranding moment will not occur until 2030. But even in this case, the costs of the building’s excess emissions would still be enormous: the net present value of the costs of the property’s surplus emissions would total almost 99,000 EUR, equivalent to almost 1.7% of its market value.
Buildings are responsible for around 39% of global energy-related carbon emissions, according to the World Green Building Council (GBC) and many others. While about a fourth of these building-related emissions are linked to materials and construction (embodied carbon), the remaining three fourths—the lion's share—is linked to operational emissions (operational carbon) from the day-to-day activities of a building. Reducing this footprint must be at the core for both, economic and ecological reasons.
According to the EU Commission, 80% of all buildings in 2050 already exist today, resulting in a renovation wave requiring the renovation of 35 million inefficient buildings by 2030. (Source EU Green deal pdf). While new buildings can be built smart, existing buildings have to be made smart. Defining the outliers based on intelligent analytics (data-driven insights?) builds the foundation of an intelligent retrofitting strategy.
The BuildingMinds solution puts relevant data at the portfolio managers’ fingertips. By leveraging data-driven insights, consumption reduction can be effectively implemented, holding periods and insurance coverage scenarios can be calculated based on risk exposure levels, and retrofit potentials, resell value as well as acquisition risk scenarios can be calculated.
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