European investors urge EU to promote greater building energy efficiency

Taking into account their full life-cycle, buildings are responsible for 40% of final energy consumption and constitute 36% of all carbon emissions in the EU. It has been estimated that implementing existing technologies, such as better insulation, efficient lighting and heat recovery can reduce the total energy consumption of buildings by about 30%, which in turn would reduce the EU’s overall energy consumption by as much as 11% by 2020.

Energy efficiency in the property sector is a central issue for institutional investors who allocate an average of 5.5% of assets to property investments and whose investments in the property sector face significant long-term performance risks as a result of environmental issues.

With this in mind, the Institutional Investors Group on Climate Change (IIGCC), which boasts BBC Pension Trust London Pensions Fund Authority, BNP Paribas Investment Partners Mn Services, Church of Sweden PRUPIM and HSBC Investments, among its members, has released a paper ("Enhancing the real estate sustainability policy framework") making the following recommendations to address areas of weakness and improve the current regulatory framework regarding building energy efficiency:

• Complex management arrangements results in ‘split incentives,’ where the instigator of a measure or action is not necessarily its beneficiary. Those parties who pay for energy and utility costs should be responsible for energy efficiency of buildings and targeted appropriately through policy
• Regulation should exploit the most relevant opportunities for sustainability and carbon improvement during each stage of a building’s life. Building codes and minimum standards could contain requirements for the fit-out or refurbishment during each stage of a building’s lifecycle that would considerably impact the actual environmental efficiency of the building
• Regulation should also shift the focus to the operation and refurbishment of the existing built stock as much as it has historically focused on new construction. This could be achieved by Display Energy Certificates (DECs) which detail the actual energy consumption of a given building in operation
• Limited awareness amongst service providers such as property managers, surveyors, and letting agents prevents changes in behaviour. Fund and asset managers should be encouraged to report energy use and the regulatory framework should support the development of training amongst practitioners to improve sustainability skills
• The introduction of market and fiscal instruments such as a strong and sustained price signal on carbon, carbon taxes, or tax breaks would help integrate sustainability risks into the investment decision-making process and influence rents, yields and values

 “Buildings are responsible for 40% of energy consumption and 36% of carbon emissions in the EU and existing policy is not doing enough to encourage the changes in behaviour which would drive sustainability improvements. The EU has said that achieving its 20% energy efficiency target by 2020 could create up to 2 million new jobs, with savings in the annual energy bill across the EU of a potential € 200 billion. A regulatory framework which places sustainability issues at the centre of property investment and management decisions will be essential if these targets are to be met,” comments Stephanie Pfeifer, Executive Director of the IIGCC.

“The technology to significantly reduce the total energy consumption of buildings exist, however current policy and voluntary measures have failed to scale up capital investment in low carbon technologies in the real estate sector. A more effective regulatory framework should be more sensitive to the complex management arrangements in place and the long economic life-cycle of buildings, and target policy at those responsible at any given time for the energy and utility costs of a building. The paper published today provides examples which both illustrate these regulatory weaknesses and highlight successful policy in this area,” adds Tatiana Bosteels, Head of Responsible Property Investment at Hermes Real Estate, a member of IIGCC.

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IIGCC