Managing Transition Risk in Real Estate: Aligning to the Paris Climate Accord

The report "Managing Transition Risk in Real Estate: Aligning to the Paris Climate Accord" is published by the United Nations Environment Programme Finance Initiative (UNEP FI) and the Institute for Real Estate Economics (IIÖ) in Austria. It addresses the critical role the real estate sector plays in achieving global climate goals, particularly in relation to the Paris Agreement, which calls for limiting global warming to 1.5°C. The authors, including Julia Wein and Sven Bienert, emphasize the need for proactive management of transition risks in the real estate sector.

The real estate sector is responsible for nearly 40% of global CO2 emissions. As countries move towards decarbonization, real estate faces significant transition risks. These risks could arise from carbon pricing, enhanced regulations, and shifts in market expectations. The report outlines how properties that do not comply with new energy efficiency standards may become "stranded assets," leading to financial losses for investors.

The report features the CRREM (Carbon Risk Real Estate Monitor) tool, which assists real estate stakeholders in identifying and managing transition risks. The tool provides decarbonization pathways that align with the targets set by the Paris Agreement, helping firms understand how their properties stack up against these goals. Over 340 assets were analyzed using CRREM, revealing that only a small fraction were compliant with Paris-aligned targets.

The findings indicate that most real estate assets have high energy consumption, averaging around 300 kWh/m²/year. The report highlights the importance of retrofitting existing properties to improve energy efficiency. It also notes that properties with robust data on energy consumption and emissions tend to perform better in terms of compliance with decarbonization pathways.

The report provides actionable recommendations, urging real estate investors to adopt a "whole-building" approach to energy management. It emphasizes the need for transparency in data collection and the importance of collaboration between landlords and tenants in capturing energy consumption data. Additionally, it encourages the use of renewable energy sources and suggests that properties should focus on energy efficiency before considering carbon offsetting measures.

As regulatory frameworks tighten and market expectations evolve, the report stresses the urgency for the real estate sector to adopt proactive strategies for managing transition risks. It underscores that failure to act may result in financial losses, including increasing vacancies and declining asset values. The report serves as a guide for industry stakeholders to navigate the complexities of climate-related risks while aligning with global decarbonization goals.

The report concludes that the decarbonization of real estate is essential for achieving both climate and financial goals. It provides a framework for understanding and managing transition risks in a sector that is pivotal for sustainable urban development across Europe.