Opinion - 25/May/2021

All parties must be on board to decarbonise the retail building sector

Fulfilling the Paris Agreement’s climate-neutrality commitments by 2050 demands significant efforts from the building sector. All actors from across the entire buildings value chain need to increase decarbonisation efforts, say Caroline Milne and Zsolt Toth from the Buildings Performance Institute Europe

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy


EU proposals are a good start but tenants and owners also need to align their goals

Even after years of carbon pledges and strengthened policymaking, many developers and owners of large retail parks are still unsure how to prepare for a zero-carbon journey. Planning to achieve anything is impossible without clear specifications of the goal.

Terms such as zero-energy, net-zero, nearly zero, zero-carbon, net-zero carbon and carbon-neutral are already being integrated into public policy and industry practices. But they come with a great deal of uncertainty. Many of these definitions refer to different boundaries: site energy, source energy, cost, or emissions. Moreover, there may be further variations in the requirements of these standards depending on the building type: new or existing, office, retail user or other.

Many owners or developers of retail spaces are still asking fundamental questions: what do all these climate-neutral terms actually mean? What are the climate-neutral boundaries for retail real estate, particularly considering the high number of retail tenants and their unique energy consumption patterns of retail spaces?

A vast number of emerging market tools to track Paris Agreement compliance adds to the noise: carbon accounting protocols, ESG reporting frameworks, carbon risk assessment tools, and green building rating and certification systems. Many of these tools are time-consuming and costly, and developers have to ask themselves if they are worth the investment.

While the lack of certainty around metrics makes it difficult to draw up carbon budgets and identify reliable targets and actions, retail real estate managers and practitioners cannot wait until a consensus is reached among these frameworks. Reputational risk, potential loss of profitability, increased exposure to legal liability for failing to manage or report material financial risks, as well as exposure of retail assets and portfolios to physical damage from climate change are all very real risk threats in the medium term.

Ultimately, the proliferation and diversification of these frameworks and methodologies mean we need better alignment and harmonisation on both national and international levels as well as among the various governmental and industry-led programmes.

FINANCIAL VALUE

The challenge to define and disclose carbon spend is closely linked to the question of data, and how data can help—or hinder—the valuation of an asset. Easy access to transparent, reliable data is essential to help real estate valuers accurately assess the sustainability performance of property holdings, bringing the value of energy efficiency out of the shadows and translating it into actionable and meaningful financial information. To date, this is not the case—energy consumption data is not easily shared; valuation remains a cumbersome exercise based on patchy information at best.

In its Renovation Wave strategy, the European Commission has proposed several items which should incentivise and mainstream the real value of energy-efficient buildings. The proposed introduction of Minimum Energy Performance Standards (MEPS) in the Energy Performance of Buildings Directive (EPBD) is expected to be a strong incentive to retail real estate developers to renovate their portfolios. Properties in prime locations are less likely to be affected negatively in value terms. But all properties of poor specification and energy or carbon performance, which are expensive to upgrade, may reduce in value in case of inaction. This can result in price differentiation and instigate market players to take strong action.

Improving and harmonising Energy Performance Certificates (EPCs), another Renovation Wave action point is another positive step in the right direction. To date, the reliability of EPCs as an indicator of energy or carbon performance varies widely across the individual EU Member States.

While operational energy use is typically measured through utility bills, some EPCs, like in Sweden, are based on real energy consumption taking into account smart meter data. Ongoing research into the development of specific EPC metrics, such as comfort and smartness, shows clear potential to transform EPCs into a market-enhancing tool enabling companies to derive emissions intensity performance thresholds and zero-carbon trajectories.

To achieve this level of value, certification regimes must first be properly implemented and endorsed, supported by well-functioning management, control and monitoring mechanisms. Access to transparent and reliable data is a fundamental prerequisite to making EPCs valuable to market players. The European Commission needs to carefully consider how access to data should be improved in its upcoming EPBD revision and within the broader Fit-or-55 package.

SPLIT INCENTIVES

Even with tools like MEPS and improved EPCs, challenges of definitions, disclosure, or data will remain unsolved without addressing the elephant in the room. Split incentives, or the better known “landlord-tenant dilemma”, is a very real barrier to climate-neutral buildings. Decarbonisation will remain an uphill battle if building owners and tenants are misaligned in their objectives and if tenants do not have the incentive, knowledge and skills to step up their own energy efficiency game.

Ultimately, commercial retail tenants do not have the same level of responsibility or interest in energy efficiency as building owners, yet they represent the most important energy users—and carbon emitters—in shopping centres. While the retail developer builds the core and shell structure of a shopping centre, tenants have a high degree of control over their in-store energy use and usually build out their leased spaces independently. In many jurisdictions, tenants have access to cheap energy contracts, leaving little incentive for change.

This is especially true since the outbreak of the covid-19 pandemic, which hit commercial retail hard. Even if forcing tenants to change their energy strategy was easy, doing it would mean stepping into tenants’ energy supply contracts. Not only does this sound like an administrative nightmare, but it is also often contractually impossible.

Against this backdrop, the revised Fit-for-55 and the EPBD packages offer an important opportunity to assess the broader needs of the building sector to successfully decarbonise and give a clear definition of what a building stock aligned with climate-neutrality by 2050 means. If all actors along the value chain must increase efforts by a factor of five, then all actors must equally prioritise decarbonisation with clarity on who is responsible for doing what.

Retail real estate is an important segment of the building stock where adequate action will lead to a significant reduction of energy consumption and carbon emissions. It also serves as a strong example of the challenges policymakers and industry must address, requiring unprecedented levels of collaboration. Lawmakers must provide clear expectations for all actors who contribute to a building’s energy consumption. These same actors in turn must align their own goals and frameworks to enable decisive strategic action on the ground.


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