Conversations about Net Zero

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.

4. Are you responsible for reporting emissions and what are your incentives?

Understanding the incentives for accurately reporting Scope 3 emissions

October 17, 2021


Hello José, Today I would like to better understand how and who should be responsible for reporting under different scenarios.

Let's start with an easy one: A typical situation would be one in which you have a General Partner acting as the Manager on behalf of one or more Limited Partners. The GP would be in charge of the Portfolio, but in terms of ownership, it may not even have any. So who should be reporting emissions here, the manager, who has all the data but does not have ownership, or the owners, who may have very limited data?


Hi Carlos, coming back to the understanding that scope 3 emissions are relevant in so far they allow stakeholders to take responsibility on the source of emissions, I would start by saying that these emissions will be important both for the GP and LP although in different ways. 

It is obvious that the emissions are ultimately linked to the assets even if indirectly (scope 3) and both the GP (through its management) and the LP (through its ownership) have a responsibility towards them. 

From the perspective of the reporting (and more generally), it’s my understanding that responsibility for addressing climate change issues and ensuring regulatory compliance lies ultimately with management. They are operating the assets and are the only ones with access to the data.

Transparent, regular monitoring will help in the assessment of portfolio-wide and systemic risks related to climate change. Reporting to LPs will allow the LP to assess the risks and opportunities in their portfolios and may assist in future asset allocation decisions. This way, both GPs and LPs can take responsibility for the climate impact of the assets. GPs by improving the performance of the asset and LPs by making informed investment decisions.

Monitoring and reporting is becoming more important as the regulatory landscape continues to evolve and investors, customers, suppliers and the public become more aware and concerned about the impacts of climate change.

[This document provides further insight into this issue:]


I think everything comes down to having the right incentive if we actually want to get this done. In that sense, what are the incentives to monitor and report emissions for Investors and Managers?


Well, let me start with the non-cynical answer: The biggest incentive is that, by monitoring and reporting your emissions, you know your impact on the environment and can act to reduce it, eventually zeroing your carbon footprint and adding your grain of sand to solving the climate crisis. 

The obvious is never enough though and we all need a push to act… That is coming in the form of increasing risk profiles (financial risks, I mean) to the CRE industry from carbon exposure as society and governments increase the pace in the race to net zero (for all we have discussed before). 

Investors’ management and mitigation of these risks will incentivise making informed decisions increasing demand for a thorough understanding of the carbon footprint potential impact of their portfolios. They will be (already are) demanding managers to have a robust strategy relating to carbon emissions and managers that want to remain relevant and in business in the next decade are more than incentivised to get their act together on this critical issue.


Ok, but as a Manager, let's say you are systematically increasing your AUM (that's what you are most probably supposed to do and how your incentives work). Even without taking in consideration extraordinary Scope 3 emissions from new construction projects, your emissions would be naturally growing as well. How are you supposed to measure your progress? Is there a unit metric that takes into consideration the relative size of your portfolio?


This is an important issue as you are correct in that these emissions are generally the largest in CRE. This is generally characterized as part of the downstream leased asset scope 3 emissions and needs to be factored in by the asset managers in the reporting of the portfolio emissions. This doesn’t mean tenants shouldn’t take co-responsibility for these emissions but, whilst they can take decisions conducive to a reduction of emissions, these would be primarily behavioural as they have limited influence over the asset configuration (HVAC, maintenance, ... ). Those depend on decisions made by the asset managers and the property owners.

So the responsibility lies on the asset managers to report these emissions. Ideally by accessing the data when they can, otherwise by estimating it through one of the accepted methodologies available. It is critical to be transparent about the methodology used.


As a manager, I understand you are reporting mostly Scope 3 emissions with the ultimate goal of pushing your supply chain or your tenants to become more efficient. This is where blockchain will come very handy, as we discussed in the last call. In the meantime, while you don't have numbers from them, you are talking about accepted methodologies. What are these established protocols or generally accepted methodologies to create a reasonable estimate?


The UKGBC provides an informative table of available methodologies for asset managers to consider:

However, estimating emissions might be problematic, and not all benchmarking and certification systems allow the use of estimations in their validated data models… The problem is that, if you don’t have access to the real data and the estimations are not accepted, the emissions tend to be unaccounted for and ignored, which is not good as there is a missing opportunity to understand and act on the potential for improvement of the relevant assets. 

Upstream/Supply chain emissions are where blockchain technology has a more immediate direct application and robust systems will steadily be rolled out to the market. In the meantime, BIM enhanced design approaches, for example, currently allow for the estimation of the construction embodied emissions. Standards and methodologies exist to measure this in a traditional way although the scale and universal applicability will depend on new technologies such as blockchain.


Well, I definitely see a problem here, as long as there is an open criteria to estimate with very loose parameters that could be changing year to year, I am concerned the incentives will be working against the ultimate goal. If you can't measure something you can't really act on it. So, is there in your opinion a horizon where we will have clear rules in terms of how to estimate third-party emissions? ...Otherwise and knowing the industry from within, I worry we would be doomed.


Let’s not be pessimistic here. Data is becoming pervasive and technology is evolving quickly. We still need leaders in the industry that take responsibility and a long-term view rather than seeking short-term ‘gains’. But this is not asking for heroes... We are currently in a low penalty context and this is the best time to act and become ready for when the regulatory stick becomes heavier in years to come. 

Let’s not miss the point either. Misleading in the reporting of emissions is a bad strategy, both long and also short term. Seeking to report lower emissions will only blind you from the nature of the challenge you are facing in your portfolio in the future when, inevitably, impacts will be measured or accurately calculated. And prospective buyers will do their due diligence to assess all this before acquiring your assets… So there will soon be nowhere to dump, nowhere to hide.

It’s not about what you report so much as what you learn from that and what you do to abate your emissions. Misleading in the reporting of emissions is a bad strategy, both long and also short term. Seeking to report dishonestly lower emissions will only blind you from the nature of the challenge you are facing in the future with your portfolio when, inevitably, impacts will be measured or accurately calculated. Prospective buyers will do their due diligence to assess all this before acquiring your assets… So there will soon be nowhere to dump, nowhere to hide.


Clearly, there is still much to do. Let me digest the implications of what we talked today and I am looking forward to seeing you next week.


Same here. Looking forward to talking next week.

Related posts:

Portfolio Lifecycle Management for CRE
© Copyright 2021 by ExcelSense, LLC. All rights reserved.