Capital Ideas: 5 Reasons Deregulation Will Not Slow Sustainability

Last week, the current administration rescinded the 2009 Greenhouse Gas Endangerment Finding, an Obama-era scientific conclusion that served as the legal foundation for the Environmental Protection Agency’s rules limiting carbon emissions in certain industries.

Deregulation has been a hallmark of this presidency, but this rollback sent shockwaves through the heavily regulated auto, electric and oil and gas industries.

While buildings are responsible for 37 percent of emissions, according to the United Nations, the federal government has not imposed regulations on real estate to date. During the Biden era, the Department of Energy did establish a “discretionary standard” for zero emissions building, but that was rescinded at the end of last year.

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So, sustainability in CRE investment and finance has gained momentum—going from a nice-to-have to a must-have—without federal mandates. Here are five reasons why carbon reduction and sustainability is likely to gain rather than lose importance in the coming years:

1. The states and cities are driving

States and cities have taken up the mantle of controlling emissions from buildings, and those efforts are accelerating. Investing in markets where such laws have been enacted such laws requires a precise understanding of current regulations, and the potential for future statutes are a risk that must be factored into the underwriting of a potential investment.

2. Sustainability has a value

The business case for sustainability is no longer something CRE investors need to be convinced of. Efficient, carbon-conscious buildings are more competitive and more profitable.

3. Climate is a risk

Extreme weather, of which carbon emissions are known to be the cause, has made resilience a key requirement for lenders and insurers since resilient buildings are seen as less risky and more valuable. Likewise, properties that cannot be in compliance with state and local carbon regulations will be unfinanceable and uninsurable.

4. Occupiers have targets

American corporations look to occupy the buildings of owners who, like them, have plans to control carbon emissions, both operationally and in the materials they use, and wellness for employees, including clean air to breath, is a growing priority.

5. Sustainability is the global standard

Real estate capital is global, and overseas investors, particularly those from EU countries, the United Kingdom and Asia, want to engage with U.S. investors whose priorities are aligned with theirs.

While the EPA has dropped its scientific finding, research into the impacts of carbon emissions as well as innovations for reducing operational and embedded carbon continues. And renewable energy is also gaining traction in real estate despite the current administration’s favoring of fossil fuels.