This is an ongoing conversation between José Ortiz, ExcelSense's Chief Research Officer, and Carlos Infantes, ExcelSense's founder and CEO, on the subject of carbon emissions and how the effort to achieve net zero targets will impact real estate asset managers and investors. It will be updated on a weekly basis, as we advance in our goal of creating a modeling tool to measure emissions inferring data from our financial modeling tool.
Understanding the methodology and getting a sense of the implications of pledging.
Hello again, José. Let’s get down to business. Last week’s conversation left a lot of questions in my mind, especially in relation to implementation and, most importantly, whether it would generate bias in terms of asset valuation.
In terms of basic methodologies, it seems we are going to measure and declare our emissions on a yearly basis, so when you purchase a newly built asset you would have to declare a lot of Scope 3 emissions derived from its construction. But then, the year after those emissions are no longer taken into account for that year’s declaration? Is this the right interpretation?
Hi Carlos, you are correct. In the second year of possession for the first buyer, the emissions associated with the construction of the building are something of the past and no one has any longer influence in the design and construction process. What matters from that point are the in-use (ongoing/annual) and the end-of-life treatment of the building’s emissions.
So, if this is the case, could I buy a group of assets in 2048, even if they created a great deal of emissions during its construction (and may create more when decommissioned), as long as during my tenure period they are emissions-neutral?. In other words, when companies pledge to be carbon neutral by 2050, how does it work in terms of impacting their modus operandi during this period?
If we are collectively achieving our targets, the construction process will be pretty decarbonized by 2048, including considerations related to end-of-life treatment of the buildings. We should also be running ultra efficient systems in 27 years so there shouldn’t be much difference between the scenarios you are considering.
Additionally, I understand it is the current lack of confidence in having an accurate whole-life-costing methodology that is driving the current system of carbon accounting for embodied emissions in existing buildings. We should overcome this in a few years which will enable a better accounting and transference of embodied emissions from owners of the asset. Possibly even allowing the decarbonization of the end-of-life treatment of the assets in advance...
The scenarios you suggest might be more relevant though in the short-term, next decade or so…
Ok, and during this period shouldn’t we be concerned about, not only each year’s emissions, but some type of emissions budget per organization, to avoid precisely these kinds of accounting tricks?
You’ve brought up an important issue there: the carbon budget. It doesn’t help much with our efforts to achieve Net Zero emissions by 2050 if by 2031 (as some calculations suggest) humanity has produced the remaining amount of GHG that would trigger the sort of climate change we are fighting to avoid with our 2050 goals… From that perspective, it would make sense to work on the basis of managing a (your) limited carbon budget… Distributing this around the world is not an easy task and there are numerous principles of equity to consider. This is hard enough to be done at an international level and could be literally impossible to explicitly do in a centralised way for individual organizations.
I would suggest we ought to focus on consolidating robust methodologies for carbon accounting that minimises opportunities to resort to such tricks. This is precisely what we are working hard to enable and accelerate within ExcelSense.
We should definitely work out some way to account for "latent emissions", or the emissions that are expected to be released when decommissioning the asset. Do you envision a scenario with metrics for emissions liability and its amortization over the lifetime of the asset across different owners?
Absolutely. Improved methodologies will allow for a more accurate accounting of the end-of-life treatment emissions that can be then amortized… But we shouldn’t need to wait until these methodologies are so refined.
Advancements in technology will be continuously (but unpredictably) disrupting the amount of emissions that such end-of-life treatment will actually generate. It would suffice, allow me the simplification, with creating a ledger to record the remaining emissions of all your assets (as estimated with current state of the art techniques). You would have a total that would go up and down as you implement measures (from offsetting to efficiency improvements and development of technology) or trading your assets.
Assume for a second that this becomes common practice and, instead of everyone keeping their own records, we resort to a distributed secured database to maintain that ‘immutable’ ledger… Transparency would encourage everyone to reduce their total carbon ‘liability’ and any excess on reducing it due to improvements on (end-of-life treatment) technology would provide opportunities for offsetting other carbon sources or trading with other portfolios or sectors. The technology we need for that is developing at a fast pace and readily available now with the second generation of blockchain in place…
That's a good point. Certainly, uncertainty is a big part of this equation. However, my impression is that to tackle this as fast as we need to do it, specially considering the worldwide carbon budget you mentioned before, we should be approaching the problem from a triple perspective:
The level of complexity is exponential as we move from assets, through stakeholders, to ultimately the world, and having to consider the past, present, and future emissions on a dynamic computation that takes into account the total budget (what we can afford as a planet) and the ever-evolving technology. So my last question for today is this: Can we actually tackle this complexity without the use of AI and other technological breakthroughs such as blockchain? And what should we be doing to prepare our portfolios to deploy these tools as fast as possible?
It is indeed not a simple task and we will need to resort to every tool in the box. AI is extraordinarily promising in the search for patterns that can help with the accurate assessment of Scope 3 emissions that are so relevant for CRE. We’ve talked earlier about blockchain and how it can enable decentralised but trusted ways of accounting and trading off carbon emissions at asset or portfolio levels. More traditional techniques will also keep evolving to define the underlying science needed to continue improving our approach.
All of the above ‘tools’ have a key element in common: they need data to provide value and insights.
At a portfolio level, this is what I would encourage the most, to ensure you have the mechanisms in place to capture relevant data. This is one of the key areas where, at ExcelSense, we are actively helping our clients.
I have to say I find myself looking forward to our weekend conversation. This is one of the most fascinating subjects I have encountered and we are actually actively contributing to its development. I love seeing your progress in terms of carbon modeling prototyping and can't wait to share it to the world.
In the meantime, how about if we talk next week about the relevant metrics?. I think it would be good to get familiarized with them and how we can calculate them.
Thank you again.
Looking forward to next week’s conversation. Have a good one.