Commercial real estate firms are expected to face increasing pressure from investors and regulators to improve their performance from a climate perspective. This is partly because the industry faces significant exposure to climate change impacts. Insurance rate hikes in areas with frequent natural disasters are already influencing the price of mortgages, leading to changes in property valuations. The industry also remains one of the biggest contributors to climate change. Nearly 40% of global emissions stem from real estate, with 28% from building operations related to direct and indirect electricity, heating and air conditioning and 11% from construction materials.
The Global Real Estate Sustainability Benchmark (GRESB) estimates that only 15% of global real estate assets are on track to reach the Paris Agreement target of limiting average global temperatures to an 1.5°C increase versus pre-industrial temperatures. An estimated 37% of global assets need to be decarbonized by 2030 to achieve the Paris target, presenting a huge challenge for the commercial real estate industry to address.
Apart from the short timespan, the industry has unique carbon accounting complexities that require stronger management solutions. In spite of a long history of green building initiatives such as LEED certification, the commercial real estate industry struggles with reporting Scope 3 emissions. Technology is solving these reporting challenges with advanced features that streamline data management and carbon emissions reporting.
Scope 1, 2, and 3 emissions in Real Estate
In an evaluation of the largest 200 real estate companies worldwide, financial services firm Robeco found that 81% reported their Scope 1 and 2 emissions, but just 56% reported Scope 3 emissions. Moreover, their Scope 3 emissions reporting was piecemeal and inconsistent. Only 10% of reporting firms had Scope 3 targets, compared to 71% for Scope 1 and 2.
The Greenhouse Gas Protocol (GHG) Protocol defines Scope 1 emissions as those from the operation of owned assets, including fuel combustion. Scope 2 emissions come from purchased energy or fuel mostly from utilities. Finally, Scope 3 emissions come from 15 categories of value chain emissions. The scope 3 emissions categories that are relevant for commercial real estate depend on whether you’re a building developer, owner, or real estate investment trust (REIT).
Developers evaluate multiple categories for calculating the life cycle emissions associated with a building’s material composition. Building owners, on the other hand, will mostly concentrate on downstream leased assets and use of sold products, while REITs will quantify building emissions under the investment category of Scope 3 emissions reporting. For building owners, unique considerations must be made before establishing accurate Scope 3 emissions reporting.
Since most commercial real estate assets are leased to tenants, financial control over a building does not imply operational control of a leased space. Reporting firms need to choose whether they are reporting emissions based on a “financial control or equity share approach” or a “operational control approach.” For an “operational” approach, which is most common, building managers would typically classify the purchased energy emissions in leased space as Scope 3, while those from common areas would fall under Scope 2.
Leases can likewise be structured as finance or operating leases, which will affect the reporting boundaries for Scope 3 emissions. Finance leases pass on the risk of ownership, while operating leases do not. Both the lease structure and the control approach affect how Scope 1, 2 and 3 emissions are distributed between the lessor and the lessee, as you can see from the table below.
|Lessor with Finance Lease||Finance Lessee||Lessor with Operating Lease||Operating Lessee|
|Financial Control Reporting Approach||Building fuel combustion and purchased energy are Scope 3 (downstream lease) emissions||Building fuel combustion is Scope 1 emissions and purchased energy is Scope 2 emissions||Building fuel combustion is Scope 1 emissions and purchased energy is Scope 2 emissions||Building fuel combustion and purchased energy are Scope 3 (upstream lease) emissions|
|Operational Control Reporting Approach||Building fuel combustion and purchased energy are Scope 3 (downstream lease) emissions||Building fuel combustion is Scope 1 emissions and purchased energy is Scope 2 emissions||Building fuel combustion and purchased energy are Scope 3 (downstream lease) emissions||Building fuel combustion is Scope 1 emissions and purchased energy is Scope 2 emissions|
To add to the complexity, other parties such as building managers may have the responsibility for operating the building and purchasing energy for heating and electricity. These entities will also need to be factored into boundary setting.
Leased assets and metering
After defining boundaries, commercial real estate firms need to evaluate the metering infrastructure of their commercial space. If there are not submeters for every lessee, the owner will need to define an approach to estimating which part to attribute to their leased spaces from the metered area. One way to do this is to divide the total floor area into tenanted space versus common areas.
In commercial real estate, the concept of “embodied carbon” has been developed by the World Green Building Council to refer to the total carbon emissions associated with the life cycle of the materials used in a building. It includes “upfront carbon,” materials and products used in construction and development, “use stage carbon,” from repair, refurbishment, or maintenance during building ownership, and “end of life carbon” from demolition or other outcomes.
While most of these categories fall under Scope 3 emissions, different commercial real estate companies will need to classify them under different Scope 3 categories. This depends on whether the activities are “upstream” or “downstream” from their operations. The important detail from a carbon emissions reporting perspective is assigning the correct carbon emissions factor to a given source of emissions.
Collecting Scope 3 Emissions Data
Collecting building data from tenants or building managers who operate a space is one of the main challenges for commercial real estate firms to accurately report their Scope 3 emissions.
Oftentimes they need to use energy estimates for certain regions in the absence of data provided directly from their tenants. Yet, energy estimations lack credibility unless they use data sources that assurance providers approve.
Technology-assisted Real Estate Carbon Emissions Reporting
Instead of customizing a reporting environment, commercial real estate teams can onboard a system that already embeds standards-aligned methodologies in its system.
With Atrius, customers can significantly cut down on the time it takes to report their emissions. Here are some of the key benefits of our platform for commercial real estate users:
- Our software includes sustainability and energy management expertise for reporting energy use at the meter and sub-meter levels, as well as leveraging resource usage data to accelerate ESG success.
- We use Commercial Buildings Energy Consumption Survey (CBECS) data, to enable accurate, efficient data estimates for hard to access Scope 3 emissions.
- Third party users of the platform can enter their own reported data, or this data can be automatically uploaded directly from utilities. This significantly simplifies data collection by real estate owners from tenants or building managers.
- Atrius supports first-year reporting baselines, target setting, and carbon emissions reduction projects that combine energy and building management expertise.
- Our platform provides templated dashboards that align with ESG reporting benchmarks and standards used in the commercial real estate space, such as GRESB, CDP, GRI, SASB, and TCFD. This way, users can flexibly report according to different approaches, whether they need to report with a building asset-level focus or a portfolio-wide lens.
- Atrius includes over 85,000 carbon emissions factors over 15,000 Scope 1, 2 and 3 data types in our Sustainability Emissions Library, enabling accurate reporting of embodied carbon Scope 3 emissions.
- Users can simulate energy optimization project outcomes to choose the most effective strategy for achieving their emissions and energy use reduction targets.
Using Atrius sustainability software makes sense for real estate industry carbon management, because it shortens the time between analysis and impact. Energy efficiency and energy reduction activities not only reduce environmental impacts, but also lower operating costs.
Atrius award-winning platform and supportive customer representatives help commercial real estate firms get through the hardest part of carbon emissions reporting: implementing a management system.
Schedule a demo to see how each of these features works.