Canada’s building sector is responsible for 18% of the country’s emissions of greenhouse gases. This takes into account the emissions from the homes and commercial real estate buildings themselves and from the electricity used in those buildings.

Considering the large role buildings play in Canada’s total emissions, investors and tenants are both looking for ways to minimize their carbon footprint. One trend that’s picking up in Canada and around North America more broadly is a push towards ESG investments and decarbonizing commercial buildings.

Investors Push for ESG Investments

Surprisingly, investors and developers themselves are leading the push towards greener buildings in Canada. In CBRE’s 2021 Global Investor Intentions Survey, 60% of respondents stated they were placing more weight on ESG criteria when developing investment projects or deploying capital.

Where does this momentum come from? Why are investors putting so much weight on ESG investments?

Demand Considerations

Tenants and wealth management funds are both putting ESG criteria higher on their list of priorities. Buildings that don’t meet these higher standards are less likely to get large, high-credit tenants or investments from wealth management funds, sovereign wealth funds, or REITs.

This push for ESG real estate investments is not limited to new developments. Old buildings are also seeing investment capital going towards decarbonizing to reduce the overall footprint of the buildings. While this sometimes results in higher costs to tenants, demand for buildings with a lower carbon footprint is high enough that these capital reinvestments are thriving.

Long-term Values 

The other major benefit to prioritizing decarbonization of existing buildings and developing newer buildings with lower emissions is a long-term benefit. Because the trend for buildings is to improve emissions and become more environmentally friendly over time, investors need to consider how to future-proof developments now.

While the Canadian government doesn’t currently have any ESG reporting requirements or strict regulations related to ESG developments, it’s likely they will follow the wave of reforms happening in Europe and the rest of North America.

Reducing the emissions on new and existing buildings helps them retain their value for longer and gives them a higher appeal for tenants, capital investments, and future buyers if the property is to be sold.

Cost Responsibility

The biggest area of pushback with ESG investments in Canada is the area of cost responsibility. Who takes on the extra cost for more environmentally friendly real estate investments?

Low emission features often add a higher cost for developments or incur extra costs when an existing building is decarbonized. While many tenants are willing to take on marginally higher costs in exchange for greener buildings, there’s resistance when rates increase too much over market.

Tenants and investors tend to disagree on how to handle extra costs. For this reason, investors are looking for more cost-effective solutions that won’t involve passing excessive costs on to tenants in the future.

As technology advances, the cost for environmentally friendly buildings reduces. It’s likely this issue will not play as large of a part in the conversation within the next few decades as building tech continues to evolve and low emission materials and equipment are made at scale.

Final Thoughts

Canadian investors are actively prioritizing ESG measures when scrutinizing new investments or upgrading existing investment properties. This trend is accelerating and will likely lead to a new acceptable minimum ESG standards on investment properties in the Canadian real estate market.

Check out www.creiland.com to explore investment opportunities that align with your ESG and Decarbonizing initiatives.