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How European Carbon Reduction Laws Are Affecting U.S. Real Estate

The European Union has committed to making all 27 countries that it governs carbon-free by 2050. That is obviously a lofty goal but the EU has a rather thorough plan on how to reach it. Central to that plan is the Sustainable Corporate Disclosure Regulation (SCDR). The legislation applies to organizations with more than 400 employees and more than €20 million on their balance sheets, which by some counts is around 5,000 companies. Starting in January, it will require these companies to report their carbon impact and will hold them accountable to reduce that impact. 

There are a lot of repercussions for the European property industry. Many of the companies that fall under the SCDR are real estate firms which will now need to show improvement of their carbon footprint. But the rule is also changing the way that property companies all over the world are thinking about decarbonization. The regulation states that if a non-European company has more than 500 employees in the EU, they will need to disclose as well. More importantly, though, large European investment groups will also have to disclose their carbon impact. Since European investment in property outside of Europe is rather large, that has put pressure on many buildings to track and reduce their carbon consumption.

“There are so many property companies that rely on European investment that they are starting to have to fall in line with the Sustainable Corporate Disclosure Regulation,” said Matt Ellis, co-founder and CEO of Measurabl, an ESG platform for real estate. The company, which has ridden the wave of increasing interest in the decarbonization of buildings, recently closed a $93 million funding round. “There are only so many institutions that are able to finance or buy large buildings and most of them, like sovereign wealth funds, have sustainability mandates,” Ellis said. 

This is only the beginning. More and more regulations are being written that will make it harder for property companies and even individual properties to ignore carbon reporting. California has also passed a law that requires companies with more than 500 employees to report on carbon impact. New York, Maryland, and Washington all have similar regulations being considered as well. Canada’s Greenhouse Gas Reporting Program requires companies that emit 10,000 tons or more of greenhouse gasses per year to report their emissions. All of these are starting to make real estate investors, even ones in places where no such reporting regulation exists, consider the merits of investing in sustainable solutions. 

As much as the reporting standards can help push buildings to be more sustainable, the investments that are needed to make many buildings greener are still too expensive for many owners. “Most buildings have already picked the low hanging fruit, things like LED lighting and energy reduction software,” Ellis said. “To hit our goals, we are going to need a lot more investment in things like renewable energy generation and procurement and those cost a lot of money.” More financing options are becoming available to help make these investments feasible but in the end it all comes down to the price of not decarbonizing. “If we see a carbon tax or the price of carbon goes up it will instantly make these investments have a faster payback period,” Ellis said. 

The U.S. is behind its peers like the EU and Canada when it comes to regulations on carbon use. But that doesn’t mean that regulations elsewhere don’t have an impact. We have seen other industries, like the automotive industry, capitulate to regulations from large, progressive states like California and New York before. No company wants to lose out on a large market, either of consumers or investors. Now we are seeing the same thing play out in the property industry. We might be a long way off from a federal decarbonization mandate in America, but we are not immune to global market forces. Right now, much of the world is finding ways to hold polluters accountable for their actions and it would be smart for the property industry to appeal to that sentiment rather than wait until it is forced to do so by regulators or a lack of investment capital. 

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