Navigating Transition Risks in the Pursuit of Net Zero: Strategies for Investors

Shifting towards sustainability is transforming the business landscape, leaving some buildings lagging behind.

As the global shift towards a low carbon economy gains momentum, investors face increasing transition risks associated with the sustainability transformation. These risks stem from tightening policies and regulations, evolving technologies, changing market expectations, and growing societal pressure. All of these factors have implications for the value of buildings and the reputation of companies.

A study by JLL, titled "Retrofitting Buildings to be Future-Fit," reveals that 90% of office stock in 10 major cities across Europe and North America is over 10 years old. Even buildings completed just five years ago may not comply with future energy efficiency standards. However, the demand for sustainable buildings from corporate occupiers is higher than ever, with demand exceeding supply by a factor of three to one in Europe, according to JLL data.

Emily Chadwick, Head of ESG & Risk, Valuation Advisory at JLL, emphasizes the window of opportunity for investors and owners to retrofit and future-proof their buildings ahead of the curve to meet the rising demand and achieve higher financial returns. The significant demand-supply imbalance suggests that operationally efficient offices in Europe can expect to outperform in terms of rents and leasing velocity until sufficient sustainable stock becomes available.

While green premiums are currently feasible, the risks associated with buildings that fail to keep up with legislation and sustainability standards will grow in the long run. To mitigate these risks, investors and building owners must move beyond mere commitments and take concrete action by implementing comprehensive action plans.

Chadwick highlights that transitioning existing assets to net zero will require significant capital expenditure, which is often underestimated in the current market. However, making these investments sooner rather than later will result in sustainable and resilient assets in the long term.

Assessing the "true transition risk" of an asset or portfolio involves considering factors such as impacts on rental value and growth, occupancy, yield, operational expenditure, and the capital required for retrofitting. With the right data and market insights, investors can model various scenarios to determine how to mitigate transition risks effectively and optimize returns.

By proactively managing transition risks and embracing sustainable practices, investors can navigate the changing landscape and position themselves for success in the transition to a net-zero future.