Rasmus Grosen Olsen
Head of Sustainable Finance, Urban Partners

Financing to shape the future of real estate: the de-risking decarbonization circle of investors, banks and tenants

In the ever-evolving landscape of environmental sustainability, the real estate industry finds itself at the forefront of a crucial paradigm shift. As climate action evolves from a choice to an imperative, we find ourselves thinking even more about how we can ensure that capital is used as a constructive mechanism. Making sure we are supporting the solutions, not continuing to be a part of the problem.
Rasmus Grosen Olsen
Head of Sustainable Finance, Urban Partners
Thought Leadership piece
In this context, directing capital and financing toward low-emitting real estate is a powerful tool in the fight against climate change. We've begun witnessing tangible commercial benefits from optimized financing tied to measurable ESG performance in the decarbonization of assets, and this measurable transparency at the asset level is crucial for unlocking progressive financing and thus, accelerating a sustainable transition.
So, what is needed to create winning decarbonizing circles of investors, banks and tenants?
Real estate, the biggest asset class on earth represents 6 trillion in investment each year1. To put the capital at work for the planet, and not only for profit. We see three major possibilities at hand:
  • Carbon insights to enable real impact

  • Decarbonizing real estate for mutual gains

  • Cities leading the action

Understanding the basics: carbon footprint disclosure
At the core of the decarbonization movement is a concentrated effort to take actionable steps that truly propel the needle towards sustainable practices. The standards for real estate assets should start focusing more on disclosing the carbon footprint of individual buildings. This entails a comprehensive assessment, covering both the embodied side, materials within the building and operational emissions, and the energy used in the building over a 50-year span.
Instead of reporting our emissions only in thousands of kilos, we are moving towards measures that provides clear comparable numbers - the Lifecycle Assessment (LCA) provides a key figure reflecting emissions, dividing the emissions to a yearly base for each square meter used. Certifications like DGNB, BREEAM, and LEED have incorporated LCA as part of the certification scheme. These certifications, which initially focused on holistic sustainability, are now transitioning into communicating carbon measures in the form of LCA targets prominently, creating synergies for world-leading frameworks, such as the Science-Based Targets initiative (SBTi).
A holistic certification approach over the asset’s life span, incorporating both LCA design before the construction phase and CRREM pathway forecast of the operational emissions from the building, becomes a powerful disclosure tool for standing assets, and makes comparison between different assets more visible on both embodied and operational carbon emissions across the building life span. As CRREM's visibility allows entities to track their progress in operational emissions for standing assets, the approach not only supports sustainable practices but also aids in de-risking assets, enhancing their attractiveness in the market.
Climate finance gap: bridging the divide - decarbonizing real estate for mutual gains
The urgency for climate action is shared, yet a notable gap in climate finance persists. Legislative tailwinds, acting as a " stick," are gaining prominence, pressuring both banks and investors to report ESG data. Fear of stranded assets and a legislative tsunami in the European real estate space underscore the need to align investments with a 1.5-degree future outlined in the Paris Agreement.
McKinsey estimated that in the US, many real estate players may face a significant devaluation risk of their assets if climate mitigation is undermined in their asset portfolios.2 In the UK, there is already an increasing demand for buildings with higher Energy Performance Certification (EPC) after the legislation changed, and it is unlawful to let residential and commercial buildings with an Energy Performance Certificate (EPC) rating below “E” since 2018. Estimation is that 87% of the UK’s office stock will be “B” by 20303
Every stride to reduce a property's carbon footprint is an opportunity. Transparently disclosing the investments needed to bolster renewable energy supply and energy efficiency de-risks assets, offering a path to long-term sustainability and value retention. The international real estate investor and advisor CBRE did a market study on the value of sustainable office buildings resulting in the conclusion that we can already see 6-8 % green premium in office rents and around 14-16 % in capital values.
Investors and banks share a common aversion to risk, and carbon is a shared liability. The symbiotic relationship between investors and banks becomes apparent as the de-risking of assets through decarbonization aligns with mutual interests. It does not only safeguard against stranded assets but also enhances the attractiveness of the asset in the market.
Expanding the equation to include tenants, the upfront investment in decarbonization not only benefits the environment, but also creates a more attractive space for tenants. Reduced utility bills and increased energy efficiency translate to a solid tenant base, further de-risking the asset and contributing to stability and retention.
This is where the call for constructive capital emerges. Investments made to de-risk assets from both financial and decarbonization perspectives should be met with favourable financing terms. This creates a winning circle where banks gain de-risked assets, tenants enjoy lower utility bills, and investors secure more attractive financing terms – a structure that caters to mutual benefits, and importantly, incentivises the sector’s crucial decarbonization journey.
In the dynamic landscape of real estate, the winners are those who actively engage in future-proofing their assets, aligning with evolving climate-conscious finance, and participating in the broader sustainability discourse. The future beckons a swift evolution, demanding agility, innovation, and a steadfast commitment to a greener, more sustainable tomorrow.
Cities leading the action: proactive solutions and constructive capital: shaping the future of finance
Even though the pace of governments moving to stricter regulatory schemes varies between countries, there are no limitations to cities being proactive players in shaping their investment landscape. In Denmark, the government has been boosting the decarbonization pathway - Denmark has set a target to cut emissions by 70% from 1990 levels and achieve carbon neutrality by 2050.4 The National Strategy for Sustainable Construction constitutes the government's action plan for the construction sector and builds on a number of policy agreements. Since the beginning of 2023, all new buildings have mandatory requirements for LCA calculation and a 12 kg CO2-e/m2/year threshold limit for emissions with the aim to be tightened to 7,5 kg CO2-e/m2/year in 2029.5 These transparent frame conditions with a clear direction have created new possibilities to attract decarbonizing investments, and thus, accelerating the capabilities of the entire nation.
At the same time, cities don’t have to wait for the governments to act, but speed past potential complex, delaying and tied political powerplays. Cities don’t need to wait for governments to enact change; they can be proactive players in shaping their investment landscape. In Finland, the government has already decided on legislation that demands mandatory LCA, but the work for carbon limits is still in progress. Its capital, Helsinki, however, decided to act in advance and introduced carbon thresholds for new development in June 2023.
We advocate for city-inspired frameworks worldwide to optimize real estate conditions in the fight against climate change.
In both cases, it would have been impossible to set up the targets without intense collaboration with the entire value chain. Setting targets requires unified measures, and collaboration with local stakeholders, construction companies, real estate owners and NGO’s working on the topic. In an ideal world, this would be rolled out with data coverage from all the possible real estate, tracked for years back. But make no mistake – a smaller data pool is no reason to hold back ambitions; to lead action, you need framework that is supported by a holistic approach and science backing it up. For example, the Danish model was based on data covering 60 assets. The targets serve as a model for future building code benchmarks, fostering knowledge and ESG expertise across the construction and real estate value chain.
The transparent ESG framework, rooted in international standards, offers a common understanding. Certifications at the building level, verified by third parties, ensure international ESG transparency for banks, investors, and tenants. This enhances framework conditions, de-risks outcomes, and supports a win-win scenario for stakeholders, accelerating the sustainable transition.
We advocate for city-inspired frameworks worldwide to optimize real estate conditions in the fight against climate change.