Morgan Stanley IM: Climate Change is Here… And So Is the Need to Embrace Sustainability in Real Estate

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“It is unequivocal that human influence has warmed the atmosphere, ocean and land.” So said the scientists on the United Nations (UN) International Panel on Climate Change (IPCC) in their sixth assessment report released in August 2021.¹ Using their strongest phrasing ever to stress that human actions are responsible, this report heightened the sense of urgency to act on climate change.

Not surprisingly, the real estate industry has been under pressure to focus attention on sustainability. After all, building operations and construction account for approximately 40% of global energy-related CO₂ emissions.²

Morgan Stanley Investment Management’s (MSIM)³ Global Listed Real Assets (GLRA) team⁴ believes environmental, social and governance (ESG) factors and a real estate company’s approach to sustainability will significantly influence its future risk and total return prospects. Given this view, we believe it is imperative to focus on analyzing sustainability factors and integrating these risks and opportunities into an assessment of value.

Why Investing Sustainably Matters in Real Estate
Climate change is an important factor to consider for the real estate sector.⁵ Existing buildings face chronic and acute physical risks, including intensifying hurricanes, floods and wildfires, as well as economic, social and regulatory changes necessary for decarbonization. To limit the global temperature increase to 1.5°C in this century as required by the Paris Agreement, it has been estimated that real estate’s direct carbon emissions will need to be cut in half by 2030, compared to 2020 levels, and reach net-zero by 2050.⁶

Publicly traded real estate companies hold a significant share of the building stock globally. As such, they are in a unique position to play an important role in achieving global sustainability targets. As public market investors, understanding how companies can influence and achieve net-zero targets is important, as is assessing the financial implications and, importantly, the capital expenditures required to reach such targets.

With 80% of the existing building stock expected to still be in place through 2050, retrofitting the current stock is critical to meeting global net‑zero targets.⁷

¹ IPCC. “Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the IPCC”, August 2021.
² United Nations Environment Programme. “2021 Global Status Report for Buildings and Construction: Towards a Zero‑emission, Efficient and Resilient Buildings and Construction Sector”, October 2021.
³ The term MSIM generally includes each registered investment advisor owned by Morgan Stanley. However, unless otherwise noted, references to MSIM do not include Eaton Vance Management, Calvert Research and Management, Atlanta Capital Management Company, or Parametric Portfolio Associates which were acquired by Morgan Stanley on March 1, 2021.
⁴ The Global Listed Real Assets team, part of MSIM’s Real Assets capability group, invests in publicly traded real estate and infrastructure securities. MSIM Real Assets delivers comprehensive real estate and infrastructure solutions to our partners and clients.
⁵ McKinsey. “Climate Risk and the Opportunity for Real Estate”, February 2022.
⁶ United Nations Environment Programme. “2021 Global Status Report for Buildings and Construction: Towards a Zero‑emission, Efficient and Resilient Buildings and Construction Sector”, October 2021.
⁷ JLL Research. “Return on Sustainability: How the ‘Value of Green’ Conversation is Growing Up”, January 2022.

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