$36 trillion in clean energy investment is needed to avoid the worst impacts of climate change. Ten cities are stepping up to the plate and investors are likely to follow, argues Brandon Smithwood.
The world needs to ramp up annual global investment in clean energy, doubling it by 2020 and quadrupling it by 2030. It is because of this massive investment opportunity that NGO Ceres launched its Clean Trillion initiative.
The initiative is a rallying call and a game plan for tackling this massive global investment goal, making it clear that companies, investors, and policymakers will have to work together to meet the challenge.
One promising area with serious potential for such collaboration is around building energy efficiency in cities.
Ten cities last week announced the launch of the City Energy Project. The ten cities participating in the project are: Atlanta, Boston, Chicago, Denver, Houston, Kansas City in Missouri, Los Angeles, Orlando, Philadelphia, and Salt Lake City.
The project is a joint initiative of the Natural Resources Defense Council and the Institute for Market Transformation, which will give city leaders and the real estate industry the support they need to make buildings better, improving the lives of millions of urban residents.
These cities are well positioned, with minimal public money, to unleash a tremendous amount of investment and bring emissions down.
Investors have known for some time now that greener, more efficient buildings are better investments. A study by McGraw Hill, for example, found that green buildings see significant financial benefits over their non-green peers
Consider just one policy that a number of City Energy Project cities have adopted. Under Building Energy Benchmarking and Disclosure Standards (BEBDS) building owners use free software from the Environmental Protection Agency to measure their energy and water usage, compare it with similar buildings, and report it publicly every year.
BEBDS overcomes a huge and persistent barrier to a functioning market for energy efficiency – a lack of information.
Investors live and breathe information, and require lots of it in order to make good investment decisions. It is no wonder, then, that these policies were identified as a priority by investors, banks, and energy efficiency experts we worked with on our report Power Factor: Institutional Investors' Energy Efficiency Policy Priorities Can Bring Energy Efficiency to Scale.
Investors have known for some time now that greener, more efficient buildings are better investments. A study by McGraw Hill, for example, found that green buildings see significant financial benefits over their non-green peers: building value is between 6.8 to 10.9% greater; return on investment is higher by 9.9 to 19.2%; occupancy increases between 2.5 to 6.5%; and rents are between 1 to 6.1% higher.
It is not surprising that major pension funds have improved buildings they own in their real estate portfolios. Since 2007, CalSTRS has doubled the number of buildings in its portfolio that achieve an Energy Star score of over 75.
Unlike CalSTRS, however, many investors don't own their own buildings. Instead, these investors own shares of real estate companies or real estate investment trusts (REITs).
Many people likely have these types of investments in their own retirement funds; REITs alone constitute 9% of the S&P 1000. Knowing what they know about the returns that can come from environmentally green real estate, investors are keen to invest in real estate companies that are more energy efficient.
Deutsche Bank puts the investment potential in making US buildings more efficient at more than $200 billion
Even these sophisticated investors, however, have a hard time figuring out which of these real estate companies have efficient buildings. This is where disclosure ordinances can contribute, providing more data to the marketplace.
Cities in the City Energy Project can, in turn, be a huge help, overcoming the challenges to benchmarking work with their utilities, real estate companies and other stakeholders.
The rewards of this work could be quite sweet. The folks at City Energy Project estimate that these cities could slice $1 billion off energy bills annually and reduce emissions by the equivalent of pulling a million cars off the road.
At the same time, cities could help provide the data that helps investors drive capital into more efficient, more valuable real estate, improving the quality and value of the cities' infrastructure.
In fact, Deutsche Bank puts the investment potential in making US buildings more efficient at more than $200 billion.
When we start doing the maths, these investments add up.
Bravo to the mayors participating in the City Energy Project – we hope many others will join them.
Brandon Smithwood is a senior manager in the policy programme at Ceres, where he works with investors and business on climate change and energy policy issues on the state, national, and international levels. He manages the Investor Network on Climate Risk (INCR) policy project and is a member of the Business for Innovative Climate and Energy Policy (BICEP) project team.