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CRE retains ESG adherents as U.S. politics turn

CRE retains ESG adherents as U.S. politics turn

Market forces flagged to drive climate adaptation and energy/water efficiency
Thursday, January 16, 2025

Resilience and energy/water efficiency are projected to remain highly relevant for commercial real estate in the United States, while some other concepts linked to ESG are tapped to lose momentum. Newly released trends analysis from the U.S. Commercial Real Estate Finance Council (CREFC) foresees a diminishing emphasis on reducing greenhouse gas (GHG) emissions and a pullback on environmental policymaking as a new federal administration assumes office, yet identifies market forces that will keep energy performance and climate risk on the agenda.

The report, prepared by Oxford Analytica, monitors incumbent and emerging sustainability issues expected to be pertinent to commercial real estate over the coming three years, and is used to inform CREFC’s advocacy and education efforts on behalf of its 420+ member companies in the U.S. finance industry. The inaugural edition, in June 2023, set out 16 baseline trends, which have subsequently been reexamined and updated at six-month intervals.

Five of those trends are now seen to have shifted in strength or staying power since last assessed in June 2024. On the slippage side, analysts anticipate:

  • lapsed attention to Scope 3 emissions;
  • the arrest of progressively stricter energy efficiency standards;
  • potential abandonment of the U.S. Securities and Exchange Commission’s (SEC) proposed requirements for climate-related disclosure; and,
  • declining likelihood that biodiversity will evolve into a mainstream sustainability issue.

The one trend that’s gaining momentum is not an optimistic one, although it is perhaps validating for U.S. trade partners. Analysts hypothesize there is now more potential for a crisis-level shortage of affordable housing — to which, elevated tariffs are expected to contribute. The report also cites U.S. reliance on imports for about one-third of its construction materials and notes that Canada is one of the five top suppliers of those products.

“Tariffs on imported construction materials will be an immediate concern for the commercial real estate sector,” it states. “These would raise costs and could fracture supply chains. Higher construction costs imply a slowdown in the initiation of new projects, delays in existing project timelines and reduced profitability for developers.”

New administration and extreme weather set backdrop

Donald Trump’s return for a second, non-consecutive term as U.S. President and the complementary Republican majority in Congress are ranked as major influences on the hardiness of sustainability measures, but, so too, is a barrage of extreme weather events striking throughout the country. Climate change adaptation and responsible water management are categorized as strong trends that will become more prominent over the next three years, but with different players conveying the message.

“The increased intensity and frequency of climate-change-induced severe weather events should support a continued focus on the resilience of the built environment,” the report states. “Pressure on private commercial real estate developers not to build in areas at high risk of climate-related physical damage — and to build in climate resiliency if they do decide to build — is more likely to be financial (i.e., ‘un-insurability’ and more expensive capital) than political or regulatory.”

Similarly, MSCI’s executive directors of research, Will Robson and Tom Leahy, rank physical climate risk as a trend demanding real estate investors’ attention in 2025. In a recent analysis, they maintain that vulnerably situated assets are not yet accurately priced — using the U.S. southeast as an example of where multifamily properties deemed to be at high or very high risk of weather-related damage are still trading at roughly the same values as those at lower risk.

“The current market imbalance — where high-risk assets offer yields on par with lower-risk properties in a region susceptible to physical hazards — will likely not last indefinitely, especially as insurance costs continue to rise for higher-risk assets,” Robson and Leahy observe.

Other recent MSCI research highlights the generally more widespread risk from intense rainfall, related to extreme weather events, than from geographically specific fluvial and coastal flooding, related to overflowing rivers and storm surge. Drawing on a database of 50,000 properties worldwide and applying a 3-degree Celsius global warming scenario, researchers found that nearly 10 per cent faced at least a moderate risk of damage (pegged at 0.5 to 5 per cent of capital value) from pluvial flooding.

Fewer than 4 per cent were vulnerable to coastal flooding and fewer than 2 per cent faced risk of fluvial flooding. However, a higher quotient of properties vulnerable to coastal flooding were deemed at significant (5 to 25 per cent of capital value) or severe risk (25+ per cent of capital value).

“While individual assets can be more severely affected by fluvial and coastal flooding, the impact is often limited to specific floodplains or coastal areas,” the research notes. “Assets don’t need to be near rivers or coasts to be affected by pluvial flooding, which can affect broader expanses of urban areas, leading to more widespread damage.”

Looking for bipartisan buy-in

CREFC’s trends report notes the “self-sustaining momentum” of renewable energy and expected ongoing private sector investment in the green economy and decarbonization. It’s considered unlikely that funds already committed for energy and climate adaptation projects through the outgoing Biden administration’s Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BLA) will be clawed back.

“In terms of the IRA, not a single Republican voted for it, but many of the components of the bill were bipartisan to begin with,” Heather Reams, president of the Republican-sympathetic non-governmental organization, Citizens for Responsible Energy Solutions, said earlier this week as she spoke alongside Canada’s Minister of Energy and Natural Resources, Jonathan Wilkinson, at an event in Washington. “Its genealogy is bipartisan, while the process was partisan.”

“U.S. clean energy investment, including projects related to grid improvement and expansion, overtook that of fossil fuels in 2020, and has increased each year despite recent headwinds from higher rates raising financing costs,” the CREFC report advises. “There is a robust construction pipeline for renewables projects for the next few years, particularly for wind and solar. These would be difficult to cut, especially as some of the private investment that Biden’s tax credits have attracted comes from Trump supporters.”

Additionally, about 50 per cent of IRA funds earmarked for energy efficiency upgrades have been distributed to the states and are characterized as “difficult to retrieve” from those partners to agreements with the Biden administration. On the regulatory side, states and municipalities may continue to hold sway even if the federal administration steps back. Analysts point to California’s pending law that will require large public and private companies doing business in the state to disclose their GHG emissions and climate-related financial risks beginning in 2026. As well, some states and cities have building performance standards in place.

CREFC’s trends analysis ties rising utility costs to support for energy and water efficiency. Notably, dramatic growth in the data centre sector comes with massive electricity and cooling loads, which align with a push for operational efficiency and cost savings. Existing appliance/equipment energy performance standards are also framed as “a non-tariff barrier to imports” that benefits U.S. manufacturers.

Looking at lobbyists with the potential to make inroads at the White House and Congress, Reams sketched out her organization’s mission during a discussion of the Canada-U.S. energy dynamic hosted by the Wilson Center, a non-partisan think tank on global affairs and U.S. foreign policy — describing it as “right-of-centre climate and policy advocacy” that draws on a historical legacy of supporting conservation that stretches back to President Theodore Roosevelt.

“We recognize the need for natural gas; we’re very excited by new technologies; we’re motivated by innovation. We work mostly with Republicans, but our goal is bipartisanship,” she said. “The engagement that you’re seeing by Republicans on environmental issues and energy may be different than that of Democrats. It doesn’t mean they’re not interested in lowering emissions. We’re just getting there in a different way.”

Still, that’s not necessarily the signal many investors and corporate players are picking up on. Earlier this week, the Net Zero Asset Managers (NZAM) — a coalition of 325 signatories that had committed to align their investments with the Paris Agreement goal of limiting global warming to 1.5⁰ C — announced a review of its mandate and removed details of its signatories and their progress toward their targets from its website. That follows the previous week’s defection of the prominent signatory, BlackRock.

“Recent developments in the U.S. and different regulatory and client expectations in investors’ respective jurisdictions have led to NZAM launching a review of the initiative to ensure NZAM remains fit for purpose in the new global context,” a statement on the initiative’s website explains. “As a voluntary initiative, NZAM has successfully supported investors globally as they have sought to navigate their own individual paths in the energy transition in line with their fiduciary duties and clients’ long-term financial objectives. NZAM looks forward to continuing to play this constructive role with investors around the world.”

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