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Beyond the Green Halo: What is really needed to unlock the true value of sustainability

Monday 15 July 2024

In this Thought Leadership piece written by Anna Emmison, Partner, Knight Frank Valuation & Advisory, ESG Lead, following the World Green Building Council (WorldGBC) Leadership Summit, 2024, Knight Frank, sponsors of our event, explore a key theme of the Summit – finance.

We know the built environment is one of the largest contributors to global carbon emissions. We know sustainability is an issue that affects every property owner, developer and occupier and we know we must all play a part in securing a just and timely transition to net zero.  

Yet despite these acknowledgements, there remains a lack of alignment within our industry as to the definition of a net zero status or a strategy to achieve it and the clock is ticking. Loudly.

Due to the time value of carbon, 75% of emission cuts required to achieve net zero by 2050 must take place in the next ten years. The scale of investment needed in the global real estate sector to achieve that is huge, with McKinsey estimating an investment of $1.7 trillion every year between now and 2050 is required.

Optimistically, in pioneering markets, we have seen significant investments being made.  Many investors, operating in the core “sustainable” markets have priced in carbon related risks and opportunities over longer horizons while looking to decarbonise their portfolios. This is supported by the findings from the Knight Frank Investor Survey. Of the investors who stated their company’s net zero target, the majority (41%) are committed to 2030.  These ambitious short-term goals will drive the premium being paid for core assets and the relative maturity of this market means we have some clarity on the value of action. 

Beyond these early adopters, nearly all buildings currently face, or will face, transition risks, and decarbonisation strategies will underpin the long-term value of these real estate assets. Yet this (significant) proportion of the market remains in a stubborn period of ongoing price discovery as to the cost of inaction.    

Without a rigorous, market accepted framework to follow, and in the knowledge that no two decarbonisation pathways will be the same, valuers are really struggling to draw meaningful comparisons between assets.  

Yet there is hope. The challenge of what our industry needs to achieve in the next ten years can seem intimidating, but is not insurmountable.  There are a number of peer-to-peer industry steering groups working on sustainability reporting harmonisation. Furthermore, the RICS Europe Leaders Forum published a twelve-point data list reference document for valuers and financial clients in the EU in February 2024, demonstrating that progress is being made. 

The history books show that market transformation will be driven by incentives when the economic incentive aligns with the moral incentiveand that inaction will no longer be an option. The hope is that rapid transformation should be possible, if clear financial incentives for action are in place. 

So how do we go about establishing these incentives? The responsibility does not lie with the valuer – valuations have always been and will continue to be based on transactional evidence. We do, however, have a critical part to play. 

If the transactional evidence we use to determine value can be referenced against a robust, credible  and harmonised standard, all players in the market will be able to truly differentiate between assets. This differentiation should unlock the economic viability for decarbonisation pathways right across the industry.  

Valuers are embracing the new considerations that have come into play – as they have always done. But what we are seeing is the language evolve as the market moves to more sophisticated methodologies, in the form of Discounted Cashflow. As well as considering rental growth prospects, this approach requires us to think explicitly about the impact of obsolescence and ageing buildings. 

To conclude, to “de-risk” the sustainable transition in the building and construction sector, we need to remove the unknowns. The key to that process will be peer-to-peer collaboration, right across the industry. 

Advisors will need to work above traditional and often entrenched competitive and intellectual silos to unlock the economic imperative for action. This is why it was so fantastic to see Caroline Bathgate, Global Head of Valuations and Advisory at Knight Frank represent the valuers of Commercial Real Estate by joining the ‘Connecting global finance flows with local solutions’ panel at the WorldGBC Leadership Summit.  

The Global Solutions Forum, this year held on 25 June in London, is the flagship event of WorldGBC’s biennial Leadership Summit and is an example of the peer-to-peer collaboration and knowledge exchange that is so needed – and from which we can learn so much. The debate centred on the role of finance; how all stakeholders can bring about real change. By doing so, they can accelerate a sustainable transition in the building and construction sector. Over the coming months and years, we will be working with stakeholders around the world to build on the momentum we have seen during this incredible week at the Summit, and to leverage the built environment as a key solution to the climate challenge.

A huge thank you from WorldGBC to Knight Frank for sponsoring the 2024 WorldGBC Leadership Summit and Global Solutions Forum, ‘Building the Transition’, which took place in London, UK, from 24–27 June 2024.