(1) Tax and regulatory
Real estate companies can identify “carrots” (incentives and opportunities) and “sticks” (regulations and challenges) toward achieving sustainability goals. Carrots include international, domestic, or state and local tax incentives; credits; and deductions. Firms that are able to redirect capital flows to more sustainable activities could secure more favorable financing terms. These carrots should align with the sticks: building performance standards. These sticks could prevent companies from selling or leasing properties that don’t meet efficiency or emissions standards.
Opportunities to integrate: Early into the integrated sustainability journey, firms can conduct frequent regulatory scanning to identify the highest priority carrots and sticks, or which tax credits and incentives could result in the greatest ROI. In Deloitte’s 2024 Commercial Real Estate Outlook survey, only 32% of respondents said their firms were planning to leverage tax-savings options such as incentives and credits as a part of their sustainability strategies for 2024, which means the vast majority of respondent firms—nearly 70%—were not yet prioritizing opportunities to bolster their bottom lines.16
(2) Risk and financial modeling
Identifying physical and transition risk should be a priority, not just for regulatory disclosure and compliance, but also as part of the property acquisition and underwriting processes. In the 2024 Outlook survey, respondents said real estate valuations that do not appropriately consider climate-related risk was the greatest material risk to investing in sustainable real assets.17
Physical risk includes those associated with climate-related acute or chronic events: Acute are point-in-time extreme weather cases like hurricanes or wildfires; chronic are progressive, longer-term events, such as sea level rises or extreme heat. Transition risk involves risks companies face when they fail to adequately respond to social and economic shifts toward achieving a low-carbon future. These can include new policy and regulatory changes, along with technology, market, reputational, and legal shifts. Some real estate companies may only be beginning to incorporate these risks into due diligence and forecasting.
Opportunities to integrate: Conducting climate-risk assessments can help firms evaluate their level of understanding, management, and response to climate change and identify risks. Once leaders have achieved a higher level of understanding, they can develop their own climate risk strategy, prioritize improvements or upgrades, and consider how physical and transition risk can best be integrated into existing financial modeling. On a recent Deloitte webcast, Martin Howell, global energy skills leader at sustainable development company Arup, outlined how real estate firms can focus on both small-scale and large-scale improvements in the built environment:18
“There are opportunities for improvement across all building stock. These range from very small, low-cost interventions, such as adjusting set points in control systems to reducing the temperature of hot water. Even backing off a little from maximum temperature can lead to carbon savings. There are plenty of opportunities for energy efficiency in building controls: occupancy sensors, daylight sensors, and there has been a lot of progress made in LED lighting. Greater opportunities are linked to bigger, end-of-life equipment—for instance, older chillers that provide water for air-conditioning systems can be replaced with newer, more efficient, and dynamic models … Building owners are seeing an increase in the due diligence required for energy efficiency solutions. And that’s being driven by commitments made by their organizations.”
(3) Accounting and reporting
With the recent Securities and Exchange Commission climate rule requiring registrants to provide climate disclosures in their annual reports beginning in 2025,19 the European Union’s Corporate Sustainability Reporting Directive, and other recent international regulatory requirements, the ties between sustainability reporting and financial accounting are now more tangible than ever. Controllership should collaborate with sustainability function to help create and execute investor-grade sustainability accounting and reporting.20
Opportunities to integrate: Some firms may still need to identify and take an inventory of requirements and consider how different frameworks and standards could intersect. They’ll likely need to explore the data, processes, and internal controls they may have in place to support reporting. Firm leaders can also conduct regular materiality assessments, implement technologies that can assist with data sourcing and capture, and work with tenants to better collaborate on energy usage and emissions tracking.
But collaboration on sustainability initiatives between landlords and tenants is no simple feat; sustainability goals may not always be aligned. In a recent interview with the Deloitte Center for Financial Services, Tony Malkin, chair and CEO of Empire State Realty Trust, a New York City-based real estate investment trust, told Deloitte about how their company established a 10-step tenant energy optimization program, and made it publicly available for others to access, to help the industry shift that paradigm:21
“The program outlines how to design, build, monitor, and verify lower energy consumption in tenant spaces. There is a lifestyle piece and a consumption piece. The lifestyle piece is through your own actions—how you mitigate water consumption and waste disposal and have landfill diversion. The consumption piece is how we actually design spaces that perform at a higher level and provide the same service at the same quality at lower consumption. All these projects are then undertaken with tenant quality of life and productivity in mind. We also set up case studies for all of those invested in the life cycle of the space: engineers, architects, building managers, brokers, and tenants—all of the pieces of the value chain—to produce a lesser-impact occupancy.”
Empire State Realty Trust also regularly engages with existing tenants to aid in their energy usage reduction targets and reporting needs. In 2023, they partnered with over 200 tenants to produce space-usage sustainability reports for their own company reporting and disclosure.
(4) Strategy
More than 39% of carbon emissions come from the built environment.22 In the United States, the power grid is often complex and highly localized. How and where real estate companies choose to source that energy from can have an impact on individual asset and portfoliowide emissions, costs, and resiliency. In fact, when given several options for top sustainability initiatives for 2024, 40% of global real estate respondents to the 2024 Outlook survey said installing or procuring renewable energy sources such as wind or solar was their top priority.23 Real estate organizations like Toronto-headquartered Slate Asset Management24 and funds managed by CBRE Investment Management have made investments into renewable energy businesses including electric vehicle charging and solar power providers, respectively.25
Opportunities to integrate: Firms should consider aligning geographically specific energy sourcing needs with tax incentives and credits that are most likely to have the greatest impact on ROI. These efforts should align with the organization’s sustainability goals and targets. For many firms, operationalizing sustainability in these ways could require a delicate balance, especially for real estate investment trusts because the IRS has recently relaxed some of its restrictions.
(5) Technology
Developing a smart building often requires bringing multiple, often independent, buildingwide systems such as HVAC, lighting, or alarms together into a single information technology system that manages infrastructure. Smart building technologies can enhance tenant comfort while delivering cost savings by optimizing building energy efficiency and consumption. Some real estate leaders have taken notice: In our Outlook survey, investing in Internet of Things devices and smart technologies to track consumption was chosen as the top sustainability-related initiative by global real estate executives for 2024 (figure 3).26 Still, for some real estate leaders, the greatest challenge could be understanding the art of the possible and how to best integrate these systems within their enterprise.
