Narrowing the split incentive gap to decarbonise the built environment

Quick read

Clare Harman Clark's position paper for the Sustainable Buildings Task Force 'Narrowing the split incentive gap to decarbonise the built environment' formally adopted during Climate Week NYC.

Introduction

In the global effort to tackle climate change, the real estate sector is at the forefront. The operation of buildings is a significant source of carbon emissions. This includes emissions from heating, cooling, lighting, and other building operations. The effective management of these energy-intensive utilities is universally acknowledged to be key to building decarbonisation but attempts to tackle this routinely highlight the existence of a “split incentive gap” and this remains a significant impediment to genuine, long-term success.

What is the split incentive gap?

Among building developers, asset owners, and property occupiers/tenants, commercial interests are rarely exactly aligned. Ultimately, each party is clearly invested in the establishment of an effective building, but exactly what that means can be very different to each. Put simply, even where capital values are enhanced by “green” building credentials, development appraisals might take a conservative approach to material selection, looking to minimise construction costs. Owners may also look to minimise upfront outlay but will also be concerned with controlling ongoing maintenance or refurbishment requirements. On the other hand, short(er) term occupational tenants have less stake in the bricks and mortar on paper, but they can make balance sheet gains where space maximises operational productivity and “green” brand credentials, while minimising running costs with reduced energy bills.

On the ground then, there is often a very real tension in progress to effective decarbonisation, and a growing global realisation that this split incentive gap must be bridged. The good news is that significant trends are emerging that more effectively align the interests of owners and occupiers to help close the split incentive gap in the commercial real estate market and encourage decarbonisation of the built environment as a whole. Those trends are emerging in three primary: