The International Panel on Climate Change (IPCC) has issued a recent report stipulating that without drastic measures to cut carbon emissions, reduce energy use and remove carbon already in the atmosphere, we are “extremely unlikely” to meet the Paris Agreement goal of keeping global warming below 1.5C. With this new paradigm, it’s quite obvious what the to-do list should be for the production companies and large energy intensive ones. But what should companies do when their portfolio or style of business does not allow for seemingly easily achievable change of processes or fuels? Case in point - the real estate industry. Where do you begin?
Reaching climate neutrality by mid-century is still possible - but only if companies step up climate action. A common place to begin is to understand what is currently in a business’ “carbon portfolio”, which includes understanding emissions and remits of its footprint. Ordinarily, this activity is known as a “snapshot” of organizational emissions over a course of a 12 month period. It can also be called “baseline footprint”, meaning a starting or business-as-usual spot from which the company will start its journey toward emission reduction and effectively carbon neutrality or zero fossil fuels.
What do companies face while measuring their carbon footprint? Here are four key challenges and the strategies real estate companies can use to tackle them to achieve carbon neutrality.
Challenge #1: Boundaries
Where is the line drawn between owners vs. tenant responsibilities?
Business operations, especially within commercial real estate (CRE), vary in legal structures and organizational setups, including wholly owned operations, incorporated and non-incorporated joint ventures, subsidiaries and various types of leased assets inside of these different structures. Following the GHG Protocol, when setting organizational boundaries, a company should select an approach for consolidating GHG emissions and then consistently apply the selected approach to define those businesses and operations that constitute the company for the purpose of accounting and reporting emissions.
For the purposes of creating a footprint, companies can use two distinct approaches to consolidate GHG emissions: equity share or control approaches. In an ideal and simple case where a reporting company wholly owns all its operations, its organizational boundary will be the same whichever approach is used. But for multilayered organizations and diverse companies with joint operations, the organizational boundary and the resulting emissions may differ depending on the approach used. This is even more challenging when it comes to the upstream and downstream emissions as it is important to include all categories of emissions (scope 1, 2 and 3) in a company’s footprint within its chosen boundaries.
Challenge #2: Data
Where should data come from and how is it obtained and stored? What kind of data is good enough?
Once a company understands what assets are included in its boundaries, the next step is to figure out how to collect the required information, where this information is stored and who owns it. In many cases, this poses problems, especially in the beginning, and even more for multinational and multilayered organizations. Once data and information are collected, it is critical to ensure that it’s comparable and stored in clearly defined places. Ideally, it should be a single database, either built in-house or outsourced, but practically, as long as the storage places are clearly defined, having multiple databases can suffice. Then, data needs to be manipulated to derive carbon dioxide equivalent (or tones of CO2e) which is a “common currency” for a corporate footprint.
Different conversion factors issued by international organizations as well as national regulatory authorities and bodies add to the challenge. Ensuring that correct conversion factors are chosen for a certain year, a certain geography and even a certain data set is crucial. Two methods for accounting for GHG emissions from power purchases are now required: “location-based” and “market-based”. Together, these methods are the current requirement for dual reporting. The two approaches can be summarized as location-based (or conventional reporting) and market-based, where companies use contractual or supplier/utility-specific factors allowing for additional credit for efforts in procuring low-carbon energy or sitting facilities in areas with fewer emissions.
Eight criteria have been developed for GHG Scope 2 Quality, and these should be met before adopting one or the other method. The purpose of introducing the quality criteria is to help companies navigate whether the information they have is usable for credible, accurate market-based claims. If a business wants to report using market-based methods, it will need to report both figures. Scope 2, for all intents and purposes, will now become two metrics for many reporting organizations.
Challenge #3: Credibility
How trustworthy is my footprint? Is it really accurate? What if the rules changed since I started the process?
Organizations are under ever-increasing pressure and scrutiny from various stakeholders, from local grassroots organizations to international rating agencies and investor groups. Previously, the conversation was “if my story is not perfect, I’d better not say anything”, but now companies that stay silent only get to tell half the story, and unfortunately in many cases, this will not be favorable. In the wake of the increased pressure to reduce emissions and collectively hit the 1.5C goal, stakeholders across the globe are expecting credibility coupled with transparency.
Regulations, such as Non-Financial Reporting Directive in the EU, whereby organizations are required to provide non-financial information in their financial reports, is the perfect example of governmental support of the idea of not only disclosure but credibility as well. By mandating companies to include their carbon data into the financial report they, de facto, require emissions information to be run past same checks as the financial data, meaning third-party independent verification of these numbers is a must.
Challenge #4: Assumptions & Goals
Having a footprint is just the beginning of the journey - where companies go with it is the main question. What assumptions will it make? What goals will it set?
Commitment from top-level executives ensures the strategic path of the sustainability journey and the possibility for the next steps. Those in charge of data collection and storage must understand what they are contributing to, and how their contribution is critical to the quality of data gathered and manipulated with. So, once a footprint is set, the next step is to ensure there are actions defined for the reduction of emissions. The reduction potential should be assigned to different areas and activities and the monitoring and feedback routes should be known and used. In short, this all defines a target setting mechanism as it’s the most natural way to improve. The most ambitious initiative to decrease emissions is to join the Science-Based Targets Initiative (SBTi) and have targets approved by them.