In 2024, managing the financial risks associated with the transition to a low-carbon economy in the building sector continued to be a key area of focus for global leaders, local communities, and financial market participants. Nareit and its members have engaged with industry stakeholders throughout the year to advocate for REITs in climate risk frameworks and regulations.
Last week, the CRREM North America Project (N.A. Project), which was started based on industry feedback and with the support of U.S. commercial real estate companies, to create more granular decarbonization curves for the U.S. and Canada, released its final recommendations. CRREM, which stands for the Carbon Real Estate Risk Monitor, began as part of the European Commission’s Horizon 2020 initiative, attempts to calculate the “GHG budget” that the global building sector could emit between now and 2050 while still doing its part to achieve the Paris Agreement goals.
The N.A. Project final deliverables provide updates to the framework’s carbon and energy pathways in the U.S. and Canada, which previously only covered a few major markets, with annual average building performance benchmarks through 2050. The framework covers most commercial real estate sectors subdivided by geography based on electric grid region and climate zone. While the project was successful in improving the regional granularity of the decarbonization curves by utilizing U.S. building and electricity grid data, many of the concerns regarding the CRREM methodology and governance that were communicated in a letter from Nareit to CRREM Global, in addition to concerns raised by the Real Estate Roundtable (RER), were out of scope for the project.
Also announced last week was the establishment of a new non-profit, the CRREM Foundation, which intends to address concerns regarding the governance of the framework and its appropriate use in the market as a measure of transition risk. Meanwhile, CRREM is currently embedded in Science Based Targets Initiative (SBTi) guidance for the Building Sector and GRESB Benchmark reports and Data Explorer tool, tools that many global REIT investors have use in the evaluation of REITs.
U.S. REITs who are actively seeking tools to manage transition risk and set carbon reduction targets may find the memo from ULI, Emerging Best Practices for Using CRREM Curves and Decarbonization Pathways, helpful in understanding the use cases and limitations of CRREM as an asset-level planning and risk measurement tool. The project team points out that building owners in the U.S. and Canada have access to the U.S. Environmental Protection Agency’s (EPA) ENERGY STAR program, which is considered to be the “gold standard” for benchmarking buildings' energy use and, therefore, one of the most sophisticated measures of energy-use-related transition risk. In addition to the ENERGY STAR 1-100 score, which ENERGY STAR Certification is based on, the EPA recently announced the launch of its new ENERGY STAR NextGen certification, which is intended to recognize energy-efficiency, low-carbon buildings that are on the path to achieving the U.S. Department of Energy’s National Definition for a Zero Emissions Building.
“The industry has recognized the utility of decarbonization pathways for their ability to support transition risk assessments used in investment decision-making. This project has benefitted from wide industry engagement, leading to more accurate inputs and broader geographic coverage in the CRREM pathways, and informing our thinking about how to effectively use U.S. Federal tools and standards to benchmark decarbonization progress and assess transition risk,” shares Elena Alschuler, Americas Head of Sustainability, LaSalle Investment Management and the chair of the NA Project Working Group.
The NA Project Final Deliverables also includes an analysis of CRREM targets compared to local building performance standards (BPS) regulations which are in various phases of implementation in cities, states, and counties across the U.S. and are a vital part of assessing transition risk for CRE. Recently, with the support of Nareit and our joint members, RER published a 20-point Primer, Lessons Learned to Shape Fair and Reasonable Building Performance Standards (BPS), which recommends key considerations from the building owner perspective for jurisdictions implementing these regulations and points of the benefits of aligning with federal resources.
Nareit and its members are actively engaged in discussions with investors globally, the U.S. federal government, and NGO’s promoting regional and global decarbonization strategies on the approach to decarbonization of the built environment and the ability to measure and manage low-carbon transition risk to REITs and commercial real estate portfolios.
Through the Nareit Real Estate Sustainability Council and educational programming, Nareit members have the opportunity to stay abreast on the ever-evolving standards and guidelines available for setting climate goals and assessing climate-related financial risk. Learn more here.