Vinson & Elkins Report Highlights Climate Risk and Opportunities for Sustainable Real Estate in the Energy Transition

The amount of capital needed to fund the energy transition during the next 30 years is estimated by forecasts from UBS and Credit Suisse to be in the range of $100 trillion. While public and private investing has built momentum in areas such as renewable energy, electric vehicle production and battery technology, investors have been turning more of their focus to real estate. Vinson & Elkins analyzed sustainability opportunities in the commercial real estate space and found the following key takeaways:

• The buildings and construction sector accounted for more than a third of the final energy use and energy- and process-related carbon dioxide emissions in 2018. As the global building construction market continues its rapid growth, the need for innovative solutions to meet net zero targets in both new buildings and through renovation of existing buildings intensifies. However, many buildings remain “off track” to achieve carbon neutrality by 2050 and meet the goals laid out in the Paris accord on climate change.
• Real estate doesn’t just contribute to climate change; it’s impacted by it. Physical risks include damage to buildings from changing weather patterns and extreme weather events caused by climate change, business disruption due to shutdowns of buildings, increasing insurance costs and even a total loss of property. Additionally, risks arising from efforts to transition to a low-carbon economy also must be taken into account.
• In many cities, buildings account for the majority of greenhouse gas emissions, and regulatory requirements to decarbonize buildings come with significant costs. While there may be government-sponsored financial assistance available to owners of real estate to help them bring their assets into compliance with certain laws and requirements, private owners and operators of real estate will likely pick up most of the tab.
• Although reducing the carbon footprint of real estate will require significant amounts of investment from public and private players, empirical evidence suggests that early movers in the space have already achieved significant economic benefits.

“Supporting the pursuit of decarbonization is an interdisciplinary effort reaching far beyond the energy industry. This analysis brings to light the significant ways in which players in the real estate industry can work to deliver on net-zero pledges and effect real change,” said Margaret Peloso, lead sustainability partner at Vinson & Elkins.

“As real estate operators and investors move to integrate sustainability considerations into their investment and operational processes, much will be said about the associated risks and costs to the real estate industry. However, proactive industry participants have already realized significant cost savings and sales and rent premiums from taking steps to decarbonize their real estate portfolios. This indicates that there are opportunities across the real estate and in real estate adjacent industries to address the social and moral impacts of climate change in a profitable way,” noted Zach Swartz, capital markets and REITs counsel at Vinson & Elkins.

“Real estate increasingly attracts attention from sustainability-minded investors amid a wider push for ESG considerations in bond and loan markets. As this analysis states, decarbonizing the real estate industry will likely require trillions of dollars of capital, but there is vast opportunity for environmentally friendly projects to access additional financing sources, often on favorable terms,” said Caitlin Snelson, sustainable finance senior associate, Vinson & Elkins.

For more insights and to see the full report go to: https://www.velaw.com/insights/real-estate-opportunities-in-the-energy-transition/