Operationalizing Real Estate Decarbonization – A Balanced Strategy Between Portfolio- and Building- Level

Afaf Azzouz, Senior Manager, Sustainability and Climate Change at Deloitte, discusses decarbonization in real estate, emphasizing the importance of balancing portfolio- and building-level strategies. Challenges arise in quantifying emissions, particularly Scope 3, and a lifecycle cost approach, along with tracking progress, is key to achieving net-zero targets effectively.

Context

In recent years, there has been a growing emphasis on decarbonization in the real estate sector. Many corporations and governments are aligning themselves with the net-zero ambitions set by the Government of Canada for 2050. Short-term targets, such as reducing greenhouse gas emissions (GHG) by 50% by 2030 from a specific baseline year, are being established. These targets, known as science-based targets, demonstrate progress towards net-zero and align with the Paris Agreement.

This article aims to provide insights into managing decarbonization in the build environment and will explore key challenges faced by entities, the importance of understanding emission profiles, and the key initiatives that contribute to achieving net-zero targets.

Portfolio-Level Versus Building-Level Challenge

Oftentimes, entities wonder where to start and what the benefits are of adopting a “top-down” (portfolio) versus a “bottom-up” (buildings) approach. I want to contrast those key differences, as I am fortunate enough to have worked on both sides: the engineering operations and the strategic side. I realized that there are clear differences between when you are an engineer trying to help your client retrofit one building at a time to net-zero carbon (operational and embodied), versus, when your client comes to you and says: “I have 4 warehouses, 10 data centers, 500 stores and 50 office buildings that all need to be decarbonized. How should I address my portfolio-wide strategy”?

Seeing clients only focus on their portfolio strategy oversimplifies the intricacies and complexities of building retrofit sequencing (e.g., if you upgrade a window’s thermal performance, then proceed with a higher efficiency boiler or a heat pump, then your boiler capacity and its cost will be smaller consequently). Also, on a portfolio strategy, your metrics are limited to GHG and financials. On a building-level your metrics are vast and long (e.g., peak demand management, energy efficiency, air quality, thermal comfort, replacing equipment at the end of their useful service life). 

A balanced approach, flipping between top-down and bottom-up, allows for harnessing the benefits of both strategies and ensuring effective capital allocation.

“Seeing clients only focus on their portfolio strategy oversimplifies the intricacies and complexities of building retrofit sequencing”

-Afaf Azzouz

Quantifying Baseline Emissions

Entities often face challenges in understanding their baseline emissions and collecting data, but most of them are now aligning themselves with the GHG Protocol and have an easier time collecting data for their Scope 1 and 2 emissions. Quantifying indirect emissions (Scope 3), such as those in the Purchased Goods and Services category, can be particularly challenging. Additionally, finding the most optimal and resilient projects within budget constraints poses a significant hurdle. Understanding emission profiles is a critical step in the decarbonization journey. 

Entities must assess historical emissions data, establish a baseline (GHG inventory), forecast future emissions due to growth factors, and analyze the gap between forecasted emissions and science-based target pathway. Granular data, such as hourly or monthly utility data, can provide valuable insights into building operations and seasonal changes.

Strategies for Operationalizing Decarbonization Targets

To achieve net-zero targets, entities should focus on energy efficiency and load reduction before resorting to fuel-switching or renewable energy sourcing. In a world where budgets are tight and commitments are high, we now can roughly estimate that the optimal capital allocation (e.g., cost-neutral scenarios) will be achieved when achieving 20-30% on energy consumption reduction first. This energy reduction helps achieve significant utility and maintenance cost savings as well. 

“To achieve net-zero targets, entities should focus on energy efficiency and load reduction before resorting to fuel-switching or renewable energy sourcing”

-Afaf Azzouz

The abatement hierarchy emphasizes the importance of prioritizing load reduction and energy efficiency measures first, before resorting to fuel-switching and renewable energy certificates. For instance, electrifying every single building to meet the operational carbon target will only increase the burden on the grid and will not save on utility/operational costs for the entity. Load reduction strategies include improving the envelope thermal performance and its airtightness, changing the setpoints in the building, reducing the lighting and equipment loads, operational changes etc. Exploring embodied carbon reduction targets will also ensure that your value chain emissions are low in carbon intensity and ensure that the developers/suppliers you are sourcing materials from have prioritized low-carbon industrial processes to manufacture such building products.

Entities should also be making their decisions based on a lifecycle cost, not just the upfront capital cost of measures and finally, for your portfolio, you should continuously track your progress and showcase your governance approach to operationalizing your strategy. 

Marginal abatement cost (MAC) curves help visualize the combined environmental and social benefits relative to costs. Projects that fall have a negative MAC provide cost savings and are considered “no brainers” or quick wins. By analyzing these curves, entities can identify projects that offer the greatest return on investment and prioritize their implementation.

Synopsis

Operationalizing decarbonization for buildings requires a comprehensive understanding of emission profiles, a balanced approach between portfolio- and building-level strategies, and a focus on load reduction and energy efficiency (prior to fuel switching). A holistic approach considers multiple factors, including community well-being, lifecycle costs, and annual budget constraints. By respecting the abatement hierarchy, entities can maximize benefits and reduce unnecessary new costs.