_Committing to World Environment Day, every day

Today, 5 June 2023, we once again mark the United Nations-designated World Environment Day, commemorating the commencement of the Stockholm Conference on the Human Environment. This year, in 2023, we proudly mark the 50th anniversary of the significant event. Over the past five decades, World Environment Day has been the clarion call for a more purposeful focus on the state of our natural environment.

Climate change has become the defining test of our time. To keep global warming below 1.5°C this century, greenhouse gas emissions need to be halved by 2030. Without determined and coordinated action, the world will endure extreme weather events with increasing frequency and intensity – many in remote parts of the world least able to deal with the consequences.

40% of energy-related carbon emissions globally can be attributed to the built environment – a statistic that is well-cited. But to cap temperature rises within 1.5°C, the World Bank has estimated that the real estate industry will need to reduce CO2 emissions by 36% by the end of the decade. Clearly, given its substantial impact on the environment, the real estate industry has a critical role in mitigating climate risks.

Net zero carbon commitments remain a central tenet of ESG initiatives and key to future-proofing our assets. While there are diverse investment strategies to drive returns, investors and financial markets are increasingly demanding a compelling ESG plan and net-zero pathway.

Our insights into private investor objectives, via our flagship Wealth Report, reveals that more than half of HNWIs place decarbonisation at the top of their sustainability objectives. As occupiers increasingly view their real estate footprint as an extension of their corporate identity and values, ESG compliance will dictate rental levels and thus, the investment value of buildings.

At Knight Frank, we have committed to the race to decarbonise, setting science-based targets to achieve net zero by 2030 globally. As the largest privately-owned real estate advisory business in the world, we have a responsibility to make a difference, both through our own actions and the advice we provide to our clients.

What is the monetary benefit from green-rated buildings and if so, how much? It is a key question for investors and developers and something we felt had to be answered to advance the conversation on climate change. Groundbreaking research undertaken by Knight Frank highlights that green premiums, using BREEAM ratings, can reach 12.3% for the best green-rated buildings in London. This gap widens for NABERS rated buildings in Australia, commanding premiums at up to 18% higher on average than an equivalent ‘brown’ building.

What constitutes a truly green building has also become more holistic. Energy performance is now focusing on actual energy consumption and greater importance is being attached to embodied carbon. At Knight Frank, we have devised the Building Lifecycle which tracks carbon neutrality at every stage of the process, from site selection to construction through its operations and ultimately end-of-life.

With tangible financial incentives and regulations, there is no reason for the industry not to start acting. We possess the necessary tools and capabilities to mitigate global warming effectively. Protecting our future shouldn't require compensation, the financial consequences of inaction alone are significant. Green premiums will dissipate over time, and rightly so, as the climate change narrative will continue to resonate. However, as the weight of transition risks shifts to non-compliant assets, brown discounts will become more punitive.

No doubt, there are urgent macro issues at hand today – from the surge in interest rates, stuttering economic growth as well as shifting occupational trends – all of which risk deprioritising sustainability targets. However, industry leaders cannot afford to slip into “incomplete” analytics which overvalue short term “internal” returns without considering longer-term implications and externalities – part of which has contributed to the position we find ourselves in today. 

We are already living through a climate crisis. While market conditions can correct with time, climate change will not without determined and coordinated action. As we reflect on our actions on World Environment Day, it is a timely reminder that we stay the course.