The World’s Biggest Sovereign Wealth Fund Warns Of The Real Estate Cost Of Not Cutting Carbon

With interest rates rising and building values dropping, real estate owners might be tempted to scrimp on investing to make their buildings more sustainable. But according to the world’s largest sovereign wealth fund, they’d be wrong. 

“Right now, with the cost of capital going up, it’s difficult to get the commitments to make investments in buildings,” Norges Bank Investment Management Senior Manager and Global Sustainability Lead Nina Galbiati said last week at Bisnow’s UK ESG Real Estate Agenda.

“But as a long-term investor, you have to think about the cost of doing nothing, and you have to consider the risk of obsolescence by not making investments long-term.”

Galbiati talked through how Norges' fund, one of the world’s largest real estate investors with a portfolio totalling around $60B (£47B), is innovating in its drive to both decarbonise and make a return for the people of Norway.

The event at Clearbell’s Kodak building, the former film company headquarters that Clearbell has retrofitted and repositioned, marked a rare public appearance for a senior Norges executive. 

Greater industry collaboration and data sharing, a carrot-and-stick approach from government and better definitions of what being a green building entails are all key factors in making sure real estate plays its part in the global battle against the climate crisis, she said.

Norges owns famous real estate assets in the UK, including a stake in Regent Street in the West End. Earlier this month, it bought a 45% stake in a Kendall Square life sciences project in Cambridge, Massachusetts, alongside Boston Properties, a development valued at $1.7B. 

For Norges to partner with an investor on a deal, attaining the highest sustainability credentials possible was a nonnegotiable starting point, Galbiati said. 

“If we are going to invest with someone that's going to operate an asset for us that doesn't have the same values or the same viewpoint for the future, I think that would be a deal-breaker from the get-go,” she said. 

“I think we are also careful about looking at greenwashing because the sustainability departments have been linked to the marketing departments of lots of firms. So we want to understand why it's important to them and make sure that we partner with someone where our values are aligned.”

Norges has been involved in industrywide initiatives to create tools helping real estate firms decarbonise, such as funding the creation of the Carbon Risk Real Estate Monitor, an online system that allows building owners to input data about their assets to see if they are on track to hit net-zero goals or risk becoming stranded assets. 

She said the industry needs more and better forums to share information about what works and what doesn’t when it comes to cutting emissions from buildings: It is no use one owner cutting emissions. Everyone needs to do it. 

Government can play a part in this, she said, citing a competition run by the New York State Energy Research and Development Authority, which funded a $50M prize and invited large developers to put forward their best examples of low-carbon retrofits.

“We worked in cohorts. We have actually submitted two projects with two different partners,” Galbiati said. “We really collaborate with our competitors in finding the most innovative solutions, and this becomes the blueprint for how you can do a low-carbon retrofit. Because it's open source, this is something also maybe smaller owners can take advantage of.”

Providing financial incentives is one thing, but such exercises also, crucially, encourage collaboration and the sharing of information as the government nudges private companies to come up with solutions for the common good. She also cited the U.S. Inflation Reduction Act as something that could be mirrored in Europe, providing subsidies for investment in green technology. 

On the stick side, speakers at the event said they anticipated tougher rules being put in place by governments and local authorities to minimise emissions from real estate, particularly when it comes to embodied carbon, the carbon emitted during the construction and demolition process of a building, including the highly carbon-intensive manufacturing of glass and steel. 

City of London Planning and Transportation Committee Chair Shravan Joshi said the local authority of London’s financial district is now requiring developers to submit data on how much embodied carbon their plans will emit, forcing them to consider retrofitting rather than simply knocking buildings down.

The feeling was that other authorities will follow suit. 

“We cannot do that alone. The regulator also needs to have an impact on what can be done,” Patron Capital Development Director and Chief Sustainability Officer Emilio Cereijo said. “We need to change the way we are building, and this, in my opinion, can only be achieved with a change of the rules. Maybe a miracle technology comes along, but I doubt that somebody else is going to solve our problem.”

Norges’ Galbiati said that something as unsexy as definitions of what constitutes a net-zero building or how embodied carbon is measured can have a huge accelerating role in decarbonising real estate. 

“I think our biggest achievement in 2023 might be something as simple as having a better definition of what we mean with net-zero,” she said. “We have a long-term target that includes both operational and embodied carbon, and by defining that, we have actually set KPIs that we can integrate into our both investment and asset management practices. And that's crucial because this integration allows the whole company to work towards the same goals, not just in a silo, looking at this separately.”