Nuveen aims to cut climate risk for $133 billion in property assets

Property investors and their investment managers are starting to commit to net-zero emissions targets for buildings, such as urban office buildings, to beat a net-zero policy wave.

Nuveen Real Estate, an investment manager that is part of the $1.1 trillion Teachers Insurance and Annuity Association of America (TIAA) financial services behemoth, in March announced it would reach net-zero emission operations across its $133 billion property portfolio by 2040. It follows an announcement by The British Land Company, the developer behind London's Leadenhall Building skyscraper, that it would target net-zero for its £14.8 billion ($20.38 billion) portfolio by 2030.

Nuveen's emissions and offsets targets for real estate vary across its array of debt and equity investments, whether they are new developments, corporate buildings, standing assets, or borrower assets. The investment manager says its net-zero targets will bring Nuveen into Paris Agreement alignment a decade ahead of the accord's 2050 net-zero target.

Nuveen said voluntary measures such as these will prevent more "disruptive" financial headwinds foreseen if governments enact stricter energy performance laws or carbon taxes, or if its buildings' occupants come to expect efficient lighting and heating and this leads to "obsolescence."

It is also syncing up with clients' demand for more sustainable, greener, more profitable building investments: buildings with lower void rates, higher rents, and improved operating profit, with capital values and liquidity. The director of sustainability for Nuveen's real assets and private markets team, Allison Spector, has said it's also fielded inquiries over environmental, social and corporate governance (ESG) issues for its large agricultural and timber portfolios.

The move is raising the bar on Nuveen's prior emissions targets. Energy efficiency investments have allowed Nuveen to advance its 2030 target to reach 30% energy intensity cuts across its portfolio, which it has brought forward to 2025. "The energy efficiency strategies that have delivered great success so far are LED lighting, tech-enabled energy management systems and sensors that enable us to continually optimize heating, cooling, and ventilation, and solar PV panels. We will be continuing to roll out these technologies across our portfolio and expect to see a particular uplift in onsite solar PV panels," Abigail Dean, Nuveen's global head of strategic insights, told IHS Markit.

Likewise, London-headquartered British Land aims to reduce its emissions both through retrofits and offsets. These are being financed by an internal carbon levy of £60/st of embodied carbon applied to new developments.

Nuveen does not use an internal price on carbon, though it might in the future, Dean said. "We do think that a regulated carbon price or carbon tax is inevitable as we move towards the low carbon economy, and we already see this in countries such as Germany and Japan. Our net-zero carbon transition pathway will enable us to minimize our exposure to carbon taxation," said Dean.

Building emissions codes on the rise

Nuveen's net-zero goal seeks to align the firm's portfolio with dramatic changes in energy efficiency legislation, including where most of its property portfolio by value is located: the US.

Many US states and cities already have laws, or codes, governing the energy performance of buildings. Hundreds of cities already enforce a buildings performance standard, the Leadership in Energy and Environmental Design (LEED). Recently, however, cities like Boston, Austin, Texas, San Francisco, and Los Angeles have proposed far more ambitious standards as they target net-zero emissions.

New York, Washington DC, and St. Louis have enacted energy performance standards for larger buildings, with New York requiring, among other things, that solar panels are installed for all new construction. Accordingly, Nuveen recently retrofitted its New York headquarters with "smart glass" windows in line with The New York Climate Mobilization Act. The act is one of the ways the city is implementing its Paris Agreement-aligned target of 80% GHG cuts by 2050.

Nuveen also foresees an uptick in buildings-related regulations in the Asia-Pacific region after Japan and South Korea set national goals to reach net-zero carbon emissions by 2050, with China setting a similar target for 2060.

"Japan will also be introducing a carbon tax, which is seen as a key enabler for the achievement of its net-zero goal," said Dean. Tokyo's emissions trading system, in place since 2010 and gradually tightened over the years, already targets emissions from office buildings.

Europe is leading Nuveen's portfolio regions in decarbonizing buildings, and many other businesses in real estate there aim for net-zero carbon by 2030 or 2035. "Europe has been considerably ahead of the other regions on policy and regulation, with many European countries introducing net-zero carbon targets and supporting this with net-zero carbon building regulations, minimum energy efficiency standards, and the European-wide Sustainable Finance Reporting directive, designed to encourage transparency," said Dean.

The European Commission's review of the EU's Non-Financial Reporting Directive, which will create a legislated green standard for investments and impact existing assets' value, is set to be made public this year.

A "2040 global deadline allows portfolios to move much more quickly. Some of our European strategies have already decided that a 2030 deadline will deliver better performance for investors, due to the conditions in those markets," said Nuveen in its net-zero pathway document.

European carbon price

In the EU, where buildings account for 36% of the energy consumed, building performance has been targeted over the years by both national energy performance standards and by national subsidies for building retrofits, thanks to the EU's Energy Efficiency Directive (2012) and the Energy Performance of Buildings Directive (2002).

But the EU's current rate of retrofitting will need to double to reach its net-zero deadline of 2050, according to Deloitte. The EU is working on a "fit for 55%" package to extend its regulations for buildings to align with its net-zero goals.

The European Commission hopes to reach these targets by passing even stricter laws. It will propose a carbon price on fuel for heating buildings, bringing them for the first time under the EU's Emission Trading Scheme (EU ETS), in June, EU Energy Commissioner Kadri Simson said in a speech on 25 March.

The German government is racing ahead of the rest of the EU by enacting a carbon tax on heating fuel for buildings in January. While the country is also covered by the EU ETS, the government made independent changes to a fuel emissions law to introduce a price on the carbon dioxide emissions of various heating and transport fuels including fuel oil, LPG, natural gas, gasoline, and diesel, according to the International Carbon Action Partnership.

The carbon price proposal is controversial. While corporate buildings are typically targeted by national energy efficiency laws, casting the net wider to residential buildings is tricky. Extending the carbon price to residential buildings could risk causing energy poverty for occupants if energy efficiency subsidies are not included, according to a recent paper by the European Alliance to Save Energy.

Posted 31 March 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability