Investors with an ESG focus can take a lot from leading and technologically resourceful real estate companies in the world’s largest office market as they move quickly on their renewable energy targets.
Moves by two of Japan’s larger landlord-developers to accelerate green and energy efficient operation and development shows the direction forward-thinking companies in the property sector are taking.
Mitsubishi Estate and Mitsui Fudosan, both listed companies actively engaged in development and as landlords, are examples of companies globally finding new pathways to carbon emissions reduction.
Mitsui Fudosan, for instance, is looking for ways to substitute timber for high carbon emitting concrete, drawing on plantations it owns in the north of Japan. The company is building condominiums and in some instances high rise office buildings with increasing amounts of timber in order to reduce concrete use, a major source of embodied carbon in the construction process.
Both Mitsui Fudosan and Mitsubishi Estate are undertaking initiatives to source renewable energy for all of their assets within central Tokyo to address operational carbon.
Real estate’s carbon problem
Overall, it is estimated 40% of global emissions comes from the real estate sector, according to the Global Status Report for Building and Construction1. This contribution is made up of both embodied as well as operational carbon.
So called ‘embodied’ carbon relates to the extended lifecycle of a real estate asset. That includes emissions right from the point of raw material extraction, through to construction and redevelopment activity, as well as post the active life of a building including demolition and through to landfill.
The operational side of emissions relates to the active life of a building and predominantly comes from the sourcing of energy for buildings during their active life spans.
Companies like Mitsui Fudosan and Mitsubishi Estate, along with other companies around the world, are finding new ways to address carbon emissions, as investor capital and tenant demand continues to find its way towards cleaner and greener operators and developers.
Green in Japan
The Japanese government has initiated a target to achieve net zero carbon emissions by 2050. The Japanese government has also undertaken to significantly increase the amount of renewable energy sources it’s looking to utilize.
By 2030 Japan is aiming to increase its renewable energy to close to 40% (excluding nuclear), according to IHS Market data2.
At the same time the country is looking to halve the amount of carbon emissions within its economy by the end of the decade, relative to a base year of 2013, according to Climate Scorecard data3.
It’s become even more imperative for Japan to look at green sources of energy given some of the geopolitical risks that have arisen, specifically, given the country has sourced coal, oil and gas from Russia. With the Ukrainian conflict playing out, Japan has decided to phase out the use of oil and coal, making it even more important for renewable and green energy to be sourced from within Japan going forward4.
ESG and in particular net zero is a big issue for developers and landlords to address, with many of the implications for laggards not yet fully priced into market valuations.
Meanwhile, businesses accelerating their efforts towards net zero and broader ESG issues provide strong opportunities for investors.
Green initiatives can potentially reduce the asset redundancy risk related to developer and landlord portfolios in light of the increasing demand tenant have now for clean environmental office opportunities. It’s estimated that green certified buildings in Tokyo can command roughly a 6% “green rental premium” compared to non-certified peer offerings5.
Further, developers and landlords, like these two Japanese examples, are actually looking to build their own green energy sources, including wind, solar and even biomass facilities.
Access to clean environmental income sources means these companies – and others like them – can reduce and indeed offset emissions in their wider landlord portfolios.
5 MDPI - Publisher of Open Access Journal (Green Premium in the Tokyo Office Rent Market, 2021)
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