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GHG Reduction Targets Reinforce Triple Bottom Line Voluntary Action Should Decrease Exposure to Carbon Pricing from Sweeping Legislation
November, 2008
By Darryl Neate
As one of the largest commercial real estate firms in Canada, Oxford Properties Group made the decision to take on a leadership role in addressing climate change. In the first half of 2008, Oxford calculated its corporate greenhouse gas (GHG) inventory in accordance with recognized international standards and best practices, and set an ambitious but achievable goal to reduce GHG emissions from properties directly owned and managed, on a per square foot basis, by 20% by the year 2012.
This covers direct and energy-indirect emissions and is measured from a 2005 base year. Working with building managers and tenants, Oxford will reduce GHG emissions by improving the energy efficiency of its buildings and by moving, in a targeted way, to using green power.
There are several reasons why a commercial real estate owner/manager may want to voluntarily set greenhouse gas (GHG) reduction targets.
Financial Exposure
While it will likely take many years before carbon is fairly or efficiently priced across global markets, it is not unreasonable to think that a price on carbon could apply to the Canadian real estate market in the not too distant future, either through a tax or cap-and-trade system. As a result, the earlier a company sets a clear GHG reduction target - and engages in coordinated, disciplined efforts to achieve it - the lower its exposure will be to carbon pricing.
Competitive Advantage
Competitive operations costs are important to tenants in a net lease environment. Setting a GHG reduction target is equivalent to making a commitment to more efficient buildings, which should, in turn, make buildings more competitive on operations/energy costs.
Stakeholders
Shareholders, employees, customers, partners, suppliers and/or the communities in which a company operates may have defined positions or expectations on the issue of climate change. For example, signatories to the Carbon Disclosure Project (more than 300 of the world's largest institutional investors) believe there are material risks pertaining to climate change from an investment perspective. If stakeholders aren't already asking about company efforts in the area of climate change, it's a pretty good bet that it won't be too long before they do.
Corporate Responsibility
Climate change has been called one of the greatest challenges of our time. Governments, companies, and individuals all have a role to play. While companies should understandably not engage in tasks that are rightly the job of government, they should be acutely aware of the risks that climate change poses and proactively develop strategies, cultures and solutions that help take action against the problem.
QUANTIFY INVENTORY, SET SCOPE
Arriving at a corporate GHG reduction target requires clear commitment from senior management, good data and consideration of several issues. The first step is to quantify the corporate GHG inventory - also known as carbon footprint. This is both the foundation and starting point for target setting.
Many organizations may have already done this or be on the way to doing so. For those that haven't, it is an exercise that could typically take between six to 12 months based on the size of the portfolio, quality and availability of data, and scope of the GHG inventory (e.g. will it include employee travel or waste in addition to fuels burned onsite and purchased electricity/steam?).
The scope of the GHG reduction target will be significantly linked to the scope of the GHG inventory. For example, whether the target addresses emissions from properties the company manages (operational control), has an ownership interest in (equity share) or both. Determining which emissions are relevant and material to the target audience is the most critical factor to address when setting the scope.
REDUCTION ALTERNATIVES AND OPPORTUNITIES
There are three primary ways that a commercial real estate organization can reduce its GHG emissions. The first is through internal reductions - making energy efficiency improvements to the portfolio of buildings. The second is by purchasing green power, thus displacing the emissions associated with regular power. The third is by purchasing offset credits to bring emission reductions from outside projects onto a company's books. Each alternative should be considered based on how it aligns with the company's GHG reduction objectives.
Internal reductions should be the starting point and primary focus for achieving the target. To evaluate the potential for reducing GHG's internally, first evaluate historical capital improvements and energy performance: How much is spent on capital improvements each year across the portfolio? How much of that is spent on projects that result in material energy reductions? What energy projects have already been completed across the portfolio? What is the average return on investment on these projects? What is an average return on investment that could be expected from new projects over the next thee to four years? What opportunities are there beyond capital improvements to reduce energy - for example, improving building management practices or engaging tenants? Considering each of these questions will help evaluate the full potential for internal reduction opportunities.
DEVELOP AND MODEL SCENARIOS
Developing scenarios based on a range of different assumptions will help to focus in on a potential GHG reduction target. Assuming different levels of capital expenditures, energy related capital expenditures, building management practice expenditures, and green power or offset purchases will be useful in shaping scenarios.
Once scenarios are developed, they should be modeled to project how each one will actually reduce emissions over time. The starting point of the model is the actual emissions - calculated from the GHG inventory - in a given year.
The earliest year of complete data for emissions will likely end up being the base year. Projected emissions for a period of three to four years out are then added, with one these future years selected as the target year.
Consider which GHG emission sources are the most material ones to find emissions reductions (likely electricity and natural gas). From there, translate investments across capital expenditures and improved building management practices into actual GHG reductions. Using total utility cost or utility cost/square foot can be helpful in this calculation. Adding up the emission reductions each year, and then carrying them forward on a cumulative basis, will give a range of GHG reduction target options.
ARRIVE AT THE TARGET
The final step is to choose a reduction target. Analysis from scenarios and modeling should provide input to the decision.
Evaluation criteria also come into play. For example: cost (the projected price tag to achieve a given level of reduction); achievability (how ambitious it is and how far does it stretch over historical performance?); flexibility (does it allow for flexibility for required business operations - e.g. intensity vs. absolute target?); and regulation (how closely does the target align with current or projected regulations?).
Darryl Neate is Manager, Sustainable Programs, at Oxford Properties Group, overseeing corporate sustainability strategy and performance management for a portfolio of more than 50 million square feet of office, retail, industrial, residential and hotel property. |