Decarbonizing Real Estate: Raphael Mertens on PIMCO Prime's Path to Net Zero

Raphael, thanks for taking the time to talk. A broad question to start: why is it important for PIMCO Prime to focus on decarbonization?

Thanks for having me. The real estate sector accounts for approximately 40% of global greenhouse gas (GHG) emissions1, making its decarbonization both challenging and crucial. With around 70% of these emissions stemming from building operations2, significant reductions can be achieved relatively quickly by refurbishing and updating existing buildings, particularly in terms of energy use and efficiency.

What steps is PIMCO Prime taking to address this challenge?

As a leading global real estate investment manager, PIMCO Prime has developed significant expertise in sustainable operations. Since 2018, we've been focused on transitioning assets in one of the world’s largest global real estate portfolios towards net zero by 2050. To facilitate this, we’ve created a global sustainability framework that systematically assesses portfolios and develops tailored paths to net zero for individual assets at various stages of their investment cycle. This expertise has enabled us to assist approximately 50 clients in their ambitious goals to achieve net zero by 2050.

Let’s dive deeper into the process. Can you give a bit more detail about how PIMCO Prime supports its clients’ sustainability goals?

To support our clients’ goals, we actively adapt to tenant expectations, local legislation, and carbon taxation policies. We follow a Sustainability Framework, which is designed to be adaptable and provides a comprehensive action plan that includes:

1. Evaluation: Conduct asset and partner due diligence, collect data, and determine climate-related risks.

2. Enhancement: Implement smart building programs, deep retrofits, and on-site renewable energy installations to maximize decarbonization.

3. Engagement: Run tenant and partner engagement programs to promote sustainable best practices and implement a global green lease framework.

This framework ensures consistent assessment across all assets, regardless of location, and tailors strategies to measure impact and enhance performance based on specific client mandates.

What are some of the key steps you take to help with implementation?

We’ve delivered initial successes through a combination of dedicated asset-focused CAPEX and a program of introducing smart features and green energy solutions into standing buildings. Understanding a building’s energy efficiency is the first step in reducing emissions, allowing for effective planning and progress measurement. PIMCO Prime employs a “no regrets” approach, typically involving the use of renewable energy while enhancing a building’s energy efficiency to modern standards.

Our key implementation steps include:

• Energy Monitoring: Deploy environmental data management platforms and smart meter systems to inform decisions.
• Efficient Operations: Conduct energy audits and implement energy management solutions for systems like HVAC and lighting.
• Renewable Energy Procurement: Engage tenants to adopt green practices and install on-site renewable energy sources such as wind turbines or photovoltaic panels.

What successes have you notched since implementing these strategies, and what does the future look like?

This approach has proven effective. By 2022, PIMCO Prime already achieved its interim goal of a 25% reduction in CO2 emissions by 2025, in line with the early version of the Carbon Risk Real Estate Monitor (CRREM) pathway, and we are currently on track to meet the stricter CRREM V2 pathway. This success has been driven by the implementation of remote energy monitoring in 87.4% of its portfolio and the switch to renewable energy in all landlord-controlled areas.

That being said, the next five years will be critical as redevelopment programs are completed and new assets are acquired with clear plans to meet their CRREM targets.

To learn more about PIMCO Prime's approach to sustainability and read about some compelling Use Cases, please visit the Sustainability page on our website.

¹ UNIP FI: Climate Risks in the Real Estate Sector – United Nations Environment – Finance Initiative (unepfi.org)

² Using AI to decarbonize buildings | McKinsey and 40% Of Emissions Come From Real Estate; Here’s How The Sector Can Decarbonize (forbes.com)