Insights / 16 November 2021

Deal or no deal? What next following COP26?

Deal or no deal? What next following COP26?

After weeks of negotiations, arm twisting, social media outrage, activist rallies, and political wrangling, a deal aimed at staving off the impacts of climate change was struck at the COP26 summit in Glasgow. The Glasgow Climate Pact is the first ever climate deal to explicitly plan to reduce coal, the worst fossil fuel for greenhouse gases.

The negotiations led to more pleas for urgent emission cuts while there were promises for more money helping developing countries adapt to climate impacts. A commitment to phase out coal was ultimately changed to a commitment to "phase down" coal, which led to expressions of disappointment. 

Only time will tell if the conference delivers outcomes or a roadmap that helps to avoid or mitigate the worst effects of climate change but there will be much for CEOs, COOs and Finance Directors of corporate enterprises, funds, and investors to reflect upon once the dust settles on the deal. 

An Opportunity Missed for Property?

There was some talk at the conference that the property industry was conspicuous by its absence, with this being an opportunity missed by the sector, however, there were some senior property industry figures at COP26. An article in Property Week reported that Savills, BNP Paribas Real Estate, Colliers, Iceni Projects, FORE Partnership and other companies were hosting and attending events.

The real estate magazine also pointed out that the industry is doing a lot of work behind the scenes – such as helping UKGBC to put together its Whole Life Carbon Roadmap, outlining how built environment businesses can reach net zero emissions by 2050 across operational and embodied carbon.

However, leading property investors were underwhelmed by the government’s Green Finance Roadmap, warning that smaller companies won’t be able to afford to comply or may even simply ignore it. 

Investor Criticism

The criticism came after UK chancellor Rishi Sunak unveiled new sustainability disclosure guidance to “increase the UK’s competitiveness as a global financial centre” in his speech at COP26. Investors bemoaned a lack of incentives. When all the additional costs are added up it means that many smaller companies will struggle to comply.

According to Property Week, Gregor Bamert, head of real estate debt at Aviva Investors, said: “[The roadmap is feasible for] investors that have access to very large pools of capital, but for those at the smaller end, the guidance relies on quite a lot of impetus [from government]. While larger investors, property owners and property occupiers have the scale and resource to really shape and ensure that properties not only meet these requirements but redefine standards, SMEs may not be in this position.”

Moving from Target Setting, to Action

An EG Property Podcast that summarised the main real estate takeaways, examined the important role that business must play, particularly the built environment, given that it generates 40% of carbon.  JLL Global head of sustainability services and ESG Guy Grainger said: “There has been a real shift from target setting, which is definitely yesterday's news. So, if you are setting targets now, or signing up to targets, you have missed the boat. 
The takeaway for the real estate industry is to show real examples of what we are doing now. Not what we will do, but what we're doing. There are investors doing audits, measuring, setting targets, for us in the real estate industry,” 

What Next?

There are pointers towards this future of action in the built environment virtual pavilion, which UKGBC launched, which is by no means just a UK play. There are real examples of sustainable buildings around the world or nature-based solutions. Anything to do with real assets, whether in housing, repurposing, or circularity are real examples of sustainable solutions that have happened and can be scaled up. 

Some examples on the UKGBC website include the first school in Wales designed to be net zero carbon for operational energy when in-use. Or a smart local energy system that aims to reduce carbon emissions and tackle fuel poverty across the London Borough of Islington. Even a tool to assess the impact of land-use and management changes on natural capital with the aim of achieving net gains for the environment.

These examples show that the future really is now, however, the other present reality is that only two buildings in Glasgow currently reach net zero. That is where the statements tend not to match the reality although at Crestbridge we certainly see both funds and their investors actively looking to establish  a net zero strategy into the  full life cycle of their portfolios and the entire supply line. 

New Investor Criteria

The way that the investment industry has traditionally measured return on investment or return on capital investment has not  in some cases changed over decades.. It is a linear model, income that is capitalised. That may have to change. When you throw in an environmental or a social impact, they are new criteria that must be costed up and measured in a new way of looking at return on sustainability. 

This is a new concept that investors are only now getting their head around but the youthful activists, out in their tens of thousands, in Glasgow, will not be slow to remind the industry of its perceived obligations to assist in the fight against climate change.
Climate change concerns are defining a generation. As had been anticipated, COP26 was big on policy pledges to address climate change and promote sustainability but there remain concerns as to whether action will be taken or if the many thousands of words devoted to the subject in Glasgow amount to nothing more than greenwashing.

Resurrecting the Art of the Deal?

The real estate and wider investment funds industries, it would seem, need to ensure that best practices are implemented to minimise carbon footprints as the business world seeks to go back to a more physical bricks and mortar world of deal making. The art of the deal has been somewhat dormant of late so the M&A sector will also be on high alert in the run up to next year’s COP27, which is being hosted in Egypt.

Simon Todd, Group  head of Real Estate  at Crestbridge, points out that the Datasite research conducted targeted 400 UK and US dealmakers found 42% of UK dealmakers wanted to see unified commitment from COP26. What is more, 40% expected climate change concerns to be the biggest deal breaker in the next 12 months. Pricing in ESG is therefore not just something that has to be factored into decision making to save the planet long term, it could conceivably save the next deal!