By Nidhi DhullReviewed by Susha Cheriyedath, M.Sc.Aug 27 2024A recent news article about the World Green Building Council's Leadership Summit 2024 explored an important subject discussed at the Summit: finance. The article discussed the current status of investments and possible incentives to promote sustainable building projects.
Study: Beyond the Green Halo: What is really needed to unlock the true value of sustainability. Image Credit: dee karen/Shutterstock.com
Backgrounds
The constructed environment is recognized as a major contributor to carbon emissions globally. Sustainability impacts all property owners, developers, and residents, necessitating efforts from everyone to secure a fair and well-timed transition to net zero emissions.
Despite these acknowledgements, the construction industry lacks consensus regarding the meaning of a net zero level or a methodology to attain it while the clock is ticking vociferously.
According to the temporal value of carbon, 75% of emission reductions necessary to reach net zero by 2050 must be made over the next 10 years. The investment scale required in the worldwide building industry to achieve this is enormous. McKinsey estimated the need for an investment of $1.7 trillion annually from now to 2050.
Current Investment Status
Significant investments are being made in pioneering markets with several investors in the main sustainable markets, accounting for carbon-linked threats and prospects in the long term. They aim to decarbonize their portfolios, as is evident in the findings of the Knight Frank Investor Survey.
Among the investors aiming for their corporation’s net zero targets, most (41%) have pledged to 2030. These impressive immediate objectives will increase the premium costs for basic assets. Notably, the value of actions is quite quantifiable in the construction industry due to the high maturity of this market.
Apart from such early adopters, most buildings presently face or will encounter transition risks. Moreover, the value of such real estate possessions in the long term will depend on the decarbonization strategies. However, a considerable size of the building market remains stubborn in constant price discovery relative to the cost of inaction.
The valuers find it difficult to compare assets meaningfully due to the lack of a meticulous market-recognized framework. Factually, no two decarbonization pathways will be identical, further exaggerating the problems of the asset valuers.
Incentivizing Sustainable Construction
The next 10-year transition targets for the construction industry are challenging but attainable. Several peer-to-peer industry navigation groups working on sustainability have reported harmonization between various stakeholders.
The Royal Institution of Chartered Surveyors (RICS) Europe Leaders Forum’s 12-point data list published in February 2024 is a reference record for valuers and financial clients on the current transition progress in the European Union.
Historical observations highlight that significant market transformation requires incentives, aligning the economic incentives with the moral ones. In such a scenario, inaction will no more be an alternative. Thus, well-defined financial incentives for action should facilitate rapid transformation toward sustainability.
Establishing financial incentives is not only the valuer’s responsibility, as valuations are always and will continue to be based on transactional substantiation. Thus, the transactional proof used to conclude value should be referenced against a robust, reliable, and harmonized standard.
This will help all market players effectively distinguish between assets. Such differentiation can unravel the economic viability of decarbonization pathways across the construction industry.
Valuers always embrace new emerging considerations, but the language has evolved into more sophisticated market methodologies such as discounted cashflow. Moreover, the impact of outdated and aging buildings on rental growth opportunities needs careful consideration while incentivizing sustainable transformation of the construction industry.
Conclusion and Future Prospects
Overall, de-risking the sustainable transition in the construction sector requires removing the unknowns. This is possible through peer-to-peer cooperation throughout the industry.
Financial advisors should work beyond conventional and prominent competitive and intellectual silos to unravel the crucial economics for action. For example, Caroline Bathgate, Global Head of Valuations and Advisory at Knight Frank, represented the commercial real estate valuers through the ‘Connecting global finance flows with local solutions’ board at the World Green Building Council’s Leadership Summit.
The Global Solutions Forum 2024, held in London as a part of this Summit, exhibited a great sample of the required peer-to-peer cooperation and knowledge exchange. This debate on the role of finance demonstrated how all stakeholders can help realize real transformation.
Effective collaboration can facilitate a rapid sustainable transition in the construction industry. Thus, Knight Frank plans to work with stakeholders globally in the coming years, building on the momentum observed during this remarkable Summit and leveraging the built environment as a primary solution to the climate challenge.
Journal Reference
Emmison, A. (2024). Beyond the Green Halo: What is really needed to unlock the true value of sustainability. World Green Building Council. https://worldgbc.org/article/beyond-the-green-halo/
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