Building owners have traditionally focused on improving energy efficiency first because energy bills hit the building’s bottom line. The savings are tangible. In other words, energy use is financially material to both the building owners’ operating expenses and their capital investments. As the cost of solar dropped from $378 MWh (megawatt per hour) in 2000 to $68 MWh in 2019, building owners started to explore onsite energy production. Their focus was still primarily on reducing energy costs. The economics of solar are feasible for some projects, but not all, in particular buildings without much roof space relative to their energy consumption.

LEED (Leadership in Energy and Environmental Design) is a green building certification founded in 1998. It originally rewarded building performance and energy efficiency. Fast forward 25 years, there are now LEED Zero certifications for projects which address net-zero carbon, energy, water and waste. LEEDv4 incorporated added credits for renewable energy and the first time the certification incorporated greenhouse gas emissions. In 2023, LEEDv5 now asks building owners about their carbon reduction plans.

In 2000, the CDP (formerly known as the Carbon Disclosure Project) started asking companies to report their greenhouse gas emissions also known as their carbon footprint. Today, over 18,700 companies globally voluntarily report corporate emissions to CDP. Once firms started reporting their emissions, they started looking for ways to reduce them. As more solar and other renewable energy was built to scale into the existing grid, building owners started to seek ways to procure that green energy.

Since the Paris Agreement was signed in 2015, building owners, tenants, and investors have expanded their focus from pure cost reduction to emission reduction. The Agreement has 198 signatories to date and was ratified by both the US and China, together the largest contributors to pollution globally. The Agreement was the impetus for the public and private sector to put capital investment to work to limit global warming to 1.5 degrees Celsius above pre-industrial levels to mitigate the worst effects of climate change.¹

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Decarbonization Strategies for REITs

As buildings are responsible for 40% of CO2 emissions as the by-product of their energy use and energy source, they are a critical component of the efforts to reduce climate change.²And, roughly 80% of the buildings you see today will still be standing in 2050. Building owners need to take action on energy efficiency and renewable energy procurement to reduce their overall emissions.

One way that REITs can translate their decarbonization aspirations into action is through science-based targets. Science-based targets are emissions reductions targets that companies are setting to reduce greenhouse gas emissions in their corporate operations and supply chain. There can be a lot of variance in the way companies set climate targets. To create more consistency, the Science-Based Targets Initiative (SBTi) reviews and validates public and private sector targets. SBTi validates targets using models based on the Intergovernmental Panel on Climate Change (IPCC) scenarios and the International Energy Agency. The SBTi is a collaboration between the CDP, the UN Global Compact, World Resources Institute and the World Wide Fund for Nature (WWF – formerly the World Wildlife Fund).³

The guidance aims to establish a global pathway for buildings’ in-use emissions and embodied emissions aligned with 1.5°C. A company first indicates their commitment SBTi to set either a near-term or long-term target. Near-term targets are 5 to 10 years. Long-term targets that are 10 years or more require the company to set a net-zero target.⁴

Companies then have 24 months to develop their targets using the tools provided by SBTi and submits targets to the SBTi for validation. SBTi is the third-party that reviews a company’s proposed strategy to approve their action plan.

What does the SBTi look like in practice? There are few common strategies that REITs pursue when they set emissions reduction targets, including:

1)  Conduct an energy audit of the property to assess building specific challenges and opportunities. 

2)  Make improvements to the energy efficiency of building systems such as lighting, insulation, heating and cooling. 

3)  Electrify buildings. One example is to replace gas powered boilers with heat pumps.

4)  Procure renewable energy either on-site and/or off-site for a building’s electricity needs. 

5)  Include design specifications to reduce energy-intensive materials in retrofits or new construction.

Here are how three REITs from the office real estate sector across the globe are tackling their science-based targets:

In 2017, Gecina^5,6 validated its 1.5°C aligned Emissions and Reduction Targets with SBTi. The company is targeting 42% emissions reduction in the entire commercial portfolio by 2030. The company’s strategy for reducing carbon across its portfolio includes: 

• Setting a carbon intensity reduction goal of 25%
• Identifying decarbonization solutions (i.e. thermo-regulating paint, electric water heating, etc.)
• Adding emissions reduction targets to renovation projects
• Tenant engagement – reduction of operational emissions through building energy efficiency work.

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In 2022, Empire State Realty^7,8 validated its 1.5°C aligned Emissions and Reduction Targets with SBTi. The company is targeting 80% emissions reduction in the entire commercial portfolio by 2035. To date, ESRT has reduced emissions by 43% portfolio wide. The company’s strategy for reducing carbon across its portfolio includes: 

• Whole-building energy use and life cycle analysis to assess upgrades
• Reduce operational emissions through building energy efficiency work
• Green leases – addressing split incentives for investment in energy upgrades
• Tenant engagement – detailed and actionable sustainability guidelines for tenants
• Purchase of wind renewable energy credits (RECs) for 100% of the commercial portfolio’s electrical usage.

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In 2022, Japan Real Estate Investment Corporation^9,10 validated its 1.5°C aligned Emissions and Reduction Targets with SBTi. The firm is targeting 80% emissions reduction in the entire commercial portfolio by 2030. The company’s strategy for reducing carbon across its portfolio includes: 

• Joined RE100 to procure renewable energy at 90% of properties by 2030
• Analyzing the portfolio to reduce energy intensity at existing and new properties
• Added sustainability considerations of green building certifications and emissions performance to its acquisition evaluations.¹¹