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The acceleration of decarbonization as an economic necessity for long-term value creation in future-oriented real estate.
In brief
- New and structured approaches to energy reduction and decarbonization are necessary to achieve the net-zero target (Paris Agreement).
- National laws have been harmonized with the Climate Agreement by the Federal Act on the Objectives of Climate Protection, Innovation and the Strengthening of Energy Security.
- EY takes a holistic approach to supporting the industry in its sustainability efforts with the EY Emission Control Tool.
The climate targets for 2050 (net zero target) and the current energy crisis call for new and structured approaches to energy reduction and decarbonization. According to our current customer survey (Trendbarometer Immobilien-Investmentmarkt Schweiz 2023), the majority of the companies surveyed (92%) indicate that high energy costs are driving forward energy transformation in their building inventory. They all analyze the CO2 footprint that their building portfolio generates and the measures they need to reach the defined lowering path most efficiently, so that corresponding energy savings can be generated. Climate change is considered by the majority of respondents in our study to be the most important megatrend.
The EY Real Estate and Sustainability team has developed a solution that enables a data-driven approach to decarbonization in the real estate sector and identifies the best measures at both the property and portfolio level. Through a partnership, EY also has access to a geo risk tool that quantifies the effects of climate change and the resulting physical risks and translates them into actionable metrics. This allows transparency in climate-related financial risks to be achieved, which supports strategic business planning and enables easier decision-making.
Current legislative situation in Switzerland
At the end of September 2022, the "Federal Act on Climate Protection Goals, Innovation and Strengthening Energy Security" (KlG) was passed by the Federal Assembly. The purpose of this act, in accordance with the Climate Agreement, is to establish the following objectives:
- The reduction of greenhouse gas emissions and the application of negative emission technologies
- Adaptation and protection against the effects of climate change
- Focusing financial flows on low-emission and climate-resilient development
Accordingly, the building sector will be required to reduce its greenhouse gas emissions by 82% before 2040, compared to 1990 levels, while the target for 2050 is a 100% reduction.
In addition, the Swiss Parliament agreed at the end of September 2022 on the details of the design of the solar offensive. This should lead to projects that have been blocked for years being taken up again, taking environmental protection into account, and a proportionate solar obligation for new buildings being introduced. Those cantons that apply at least the “Model Regulations of the Cantons in the Energy Sector” (MukEn) to new buildings' own-power supplies from 2023 onwards are not affected. The solar obligation is intended to only apply to buildings with an eligible floor area of more than 300 m2. However, the cantons can also provide for a solar obligation on smaller floor areas. Further parliamentary initiatives in the cantons of Geneva and Zurich call for a more comprehensive solar obligation, which would also affect owners of existing buildings with suitable roof areas.
In the Canton of Zurich, the 120,000 oil and natural gas heating systems alone cause about 40% of CO2 emissions. Nevertheless, more than half of all heating systems are currently being replaced by fossil-fuel heating systems. However, the new cantonal regulations now provide for the abolition of oil and gas heating. Thus, if it is technically possible and the life-cycle costs increase by a maximum of 5% exclusively renewable energies may be used when replacing a heating systems in existing buildings. The real estate sector in the Canton of Geneva is also affected by the amendment to the ordinance passed in spring 2022. This provides for a sharp reduction in the permitted energy limit values for buildings. This means that an energy refurbishment will be imposed within the next 3 years for buildings that exceed the new limit values. The refurbishment obligation is envisaged in stages, whereby those buildings with the highest energy consumption per unit floor area are prioritized. It should be noted that about 90% of the heating systems are currently still operated with oil or gas.
In order to achieve more transparency in terms of energy efficiency, further movements in the Canton of Vaud require that all rental apartment listings and rental contracts be accompanied by a building energy certificate. Furthermore, the energy consumption of all properties must be visible in the public land register.
There will also be stricter directives on decarbonization at European level in the future. The Corporate Sustainability Reporting Directive (CSRD) will make non-financial reporting for large companies within the European Union significantly more ambitious from the fiscal year 2024 onwards and subject to auditing. Companies must provide information on more than 100 cross-sectoral indicators in the areas of environmental, social and governance (ESG). Among other things, greenhouse gas emissions (Scopes 1 to 3) must be reported.
How we can support our clients
To support the industry in its sustainability efforts, EY's approach is to first collate and analyze existing building and energy data in the EY Emission Control Tool. While doing so, the data is validated and any data gaps are identified. One of the ways in which these gaps can be closed is the following step, namely the property inspection. This makes it possible to identify the CO2 footprint both at the individual property level and at the overall portfolio level. To define the path to lower emissions, a benchmarking analysis is carried out in close cooperation with the client that is tailored to their individual needs. For better measurability and transparency, the CO2 data is linked to the financial indicators. After the measurement of the current CO2 footprint, measures for reducing the CO2 footprint are determined on the basis of the existing database and a series of different implementation approaches are modeled. These approaches will be embedded in the existing ESG strategy or, if necessary, re-developed.
Summary
Decarbonization is of central importance for a company on its way to a climate-neutral future inventory. This means that accelerating decarbonization is an economic necessity for long-term value creation in future-oriented real estate. As a result, the industry is also the focus of political regulations. But the resulting challenges can become catalysts for decisive and pioneering changes.
Acknowledgements
We thank Valerie Riedo and Stefanie Michelberger for their valuable contribution to this article.