A conversation with Greg Smithies of Fifth Wall about the key industry takeaways from COP26
Taken from TheRealDeal
In real estate, green isn't the new black—not yet. But if capital markets continue to demand greater sustainability and increase pressure on high-carbon portfolios, it may soon be impossible for landlords to stay profitable without going green.
Last month, many of the drivers and agitators of the global economy met with heads of state and lawmakers at the United Nations climate change conference, known as COP26. Promises were made, speeches were given, and urgent statements were issued about the need to address the climate crisis. But did anything substantial emerge that the real estate industry, a major contributor to climate change, can act upon?
“In something like this, there will be a certain amount of rhetoric,” said Greg Smithies, who co-leads the climate technology team at the real estate-focused venture capital firm Fifth Wall and was in Glasgow for the conference. “However, there were significant, high-speed things that need to happen that were discussed and that are more relevant to our industry.”.
Fifth Wall has announced commitments of over $300 million to its climate technology fund from industry players including Invitation Homes, Equity Residential, Hudson Pacific Properties, and Ivanhoe Cambridge, as well as the New Zealand pension fund. It is looking to deploy that money to companies that develop and scale technologies that can decarbonize the industry.
I met with Smithies to understand what emerged from COP26 that could move the needle for the real estate sector, and what positives he found in a conference that was maligned as "all talk, no action.".
Did real estate have a real seat at the table this time? Did it send executives with the power to sign checks and the ability to influence decision-making?.
Traditionally, these conferences haven't had much industry representation. But of all the people I spoke with, about half were from industry, and their titles ranged from VP level and above, up to C level. So, overall, the industry exposure and presence here was much greater than we've seen in previous years.
¿How substantive were the discussions? Was it more "climate change is an existential threat" or more actionable, like, "Let's organize some meetings, let's talk to some companies?"«
Refrigerants in older HVAC and air conditioning systems are 10,000 times worse for global warming than CO2. Before COP26, we saw a lot of new global regulations on refrigerants. We've also seen regulations on methane, which is five to six times worse for global warming than CO2. Our buildings use a lot of natural gas for heating, so this is very important for us.
“Buildings are worth less if they are underwater or on fire.”.
Equally important is the cost of capital. When you think about how all the money flows into the real estate industry, it flows from sovereign wealth funds, from pension funds, into the fund of funds, and then into the capital markets and into REITs. But the tails that wag the dog are these massive global pension and sovereign wealth funds. And what we saw coming out of COP25 is the number of these organizations making ESG , making zero-carbon pledges, exploding . Ultimately, we're going to see an acceleration of the trend that if you have clean, green buildings, your cost of capital should come down.
In 2020, BlackRock's Larry Fink dropped a bombshell by saying his firm would avoid investments in companies that " present a high sustainability-related risk ." What's the latest iteration of that?
The latest figures show that around 40 percent of the world's total assets under management are now being invested under some type of ESG mandate. Essentially, one out of every three dollars is going toward clean and green projects. That's just on the cost of capital side.
At the same time, from a resilience standpoint, buildings are worth less if they are underwater or on fire. There are buildings worth $326 trillion, meaning they are typically the largest risk group for the insurance industry. The insurance industry is now also reformulating all its underlying actuarial models to account for climate risk.
And this is another key lesson from COP: it's very difficult to make money from a building if it can't be insured and therefore can't be leased. So, estimates from COP indicate that over the next 20 years, approximately $14 trillion worth of buildings worldwide will become uninsurable.
Another major discussion seems to have revolved around a global framework for carbon trading.
Ultimately, this is going to have the biggest impact on our industry. Trading in carbon offsets and carbon credits has been very isolated from certain markets: there's a market in California, and New York is considering establishing one; Europe has its own market. In capital markets, it's very difficult to have futures on anything if you have multiple disparate markets.
What happened right at the end of COP26 was that the 190 countries agreed on a basic framework that will establish the capacity for us to begin standardizing these assets so that we can have a global carbon market. Just like stock trading, you know, between the London Stock Exchange and the New York Stock Exchange.
