How CRREM mitigates risk for real estate portfolios

Devastating storms, conflicts over reduced resources, failing crops, drought, decreased snowfall, melting glaciers, increasing temperatures, and rising sea levels all have one thing in common: climate change.

Climate change is negatively impacting businesses, cities, and communities around the world and poses a serious threat to sustained economic growth, poverty reduction, improved quality of life, and political stability. Unfortunately, this issue is expected to become increasingly disruptive across all sectors important to society such as human health, agriculture and food security, water supply, transportation, energy, ecosystems, and real estate in the coming decades.

Sea level rise and frequent natural disasters will have a direct impact on the quality and maintenance of buildings and infrastructures in particular, causing increased regulation and ramifications on investment decisions. If no measures are taken to address these risks, property stocks under management may not meet market expectation and be exposed to write-downs.

To manage these risks, real estate investment strategies are aligning with global and national environmental goals such as the Paris Agreement and European Union (EU) targets to mitigate CO2 within portfolios. Property owners and investors are being increasingly pressured as research by the European Public Real Estate Association (EPRA) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) indicates that the property industry is accountable for about 38% of energy consumption and 29% of all greenhouse gas (GHG) emissions in the EU.

In order to improve the energy consumption of properties, the real estate industry must reduce the direct and indirect emissions that result from the construction of new buildings or refurbishments, as well as from dismantling buildings. The first step investors and property owners can take in this process is assessing the exposure of their assets to stranding risks based on energy and emission data and the analysis of regulatory requirements.

Gathering this data requires specific tools such as those provided by the Carbon Risk Real Estate Monitor (CRREM) project. The CRREM project and CRREM Risk Assessment Tool were designed to estimate the risk and uncertainty associated with commercial real estate decarbonization, build a collection of asset data, and quantify different climate risk scenarios and their impact on investor portfolios.

How CRREM supports EU decarbonization goals

With the world currently focused on reaching the Paris Agreement goal of net-zero emissions by 2050, environmental management and sustainability reporting have become critical to companies, investors, and governments around the world. To support the Paris Agreement goals, the European Union intends to decarbonize the building sector within the next 30 years.

Reducing GHG emissions in the EU real estate sector is a significant challenge due to the poor energy efficiency of existing buildings and low refurbishment rates in nearly all of the EU member states. Reaching a net-zero emissions target will require a significant increase of deep energy retrofitting in the existing property stock, an investment that could benefit the EU by up to 175 billion euros per year.

The EU-funded research project CRREM aims to reduce the carbon-risk factors associated with product failure and depreciation due to climate change, changing market expectations, and legal regulations. To help the real estate sector tackle these risks, CRREM fosters investments in energy efficiency to accelerate decarbonization and support climate change resilience. CRREM also provides information on the financial risks associated with poor energy performance and helps quantify the financial implications of climate change on portfolios.

The CRREM Risk Assessment Tool

CRREM aims to provide the real estate industry with cost-effective, science-based carbon reduction pathways and mitigation strategies at the building, portfolio, and company levels through financial risk assessment tools. The CRREM Risk Assessment Tool helps users:

• Monitor the energy performance of single properties, portfolios, and entire companies
• Benchmark performance and assess ‘stranding risk’ due to regulatory changes
• Assess potential shifts in energy costs and refurbishment measures
• Analyze specific real estate assets and portfolios of these assets against the decarbonization and energy pathways derived by the CRREM project

While the tool is currently limited to countries in the European Union and the United Kingdom, CRREM is expanding its scope to include other major markets including the Americas and Asia Pacific, as well as the residential real estate sector.

CRREM integration into GRESB

One of the key benefits of the CRREM is its alignment with the information GRESB collects on real estate assets. Investors use GRESB data and analytical tools to monitor ESG (Environmental, Social, Governance) opportunities, risks, and impacts. GRESB validates, scores, and benchmarks ESG performance data that provides business insights and engagement tools to investors and managers.

The GRESB 2020 Real Estate benchmark covered more than 1,200 property companies, real estate investment trusts (REITs), funds, and developers. Its coverage for infrastructure includes 540 infrastructure funds and assets. More than 100 institutional investors constituting over USD 22 trillion in assets under management use GRESB data to monitor their investments, engage with their managers, and make decisions that lead to a more sustainable real asset industry.

GRESB is an active member of the CRREM consortium and has automated the process of filling in the CRREM Tool with the asset data uploaded into the GRESB Asset Portal. This process helps participant members assess their assets and portfolios against the CRREM pathways. CRREM outputs will also align with the Asset Analytics tab of the GRESB Asset Portal and allows participant members to see aggregated graphics and information, such as how much of their combined portfolios are in compliance with the CRREM pathways.

Reach net-zero by 2050

Across the world, regulatory bodies and the financial industry are influencing a global drive toward a more sustainable future, and the ability to measure and control emissions is critical to success.

To support these efforts, CRREM continues to grow in scope and partnerships that are positioned to guide investors and mitigate real estate portfolio risk. As stated in a recent CRREM report, “...the decarbonisation of the asset class will render conventional real estate models obsolete and as such change is the only option for ensuring business survival—putting carbon risk high on the agenda.”

ESG materiality assessments

With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.

An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.

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Michelle Winters

Michelle Winters is our VP of Sales. Previous to this role she oversaw the account management & consulting teams. Michelle's roles have allowed her to successfully ensure that our clients see increased value, optimization of their strategies, and the right solutions to position them for growth and success.

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