In our current model of capitalism, carbon emissions and environmental harm resulting from business operations are externalities that can be largely ignored by businesses and investors. But, as consumers, policymakers and society at large begin to call on companies to operate more sustainably, the costs associated with business as usual are mounting—and investors are taking notice.
The social license to operate is rapidly shifting to a more climate-conscious standard, driven by government policies and tax models, consumer demand, and investor outlook. And if a business is caught greenwashing, or over-emphasizing its green initiatives, it can face public backlash and even be subject to legal and financial penalties.
The real estate industry is a major contributor to climate change and environmental degradation, but commercial property owners are largely not responsible, or ready to be held responsible, for their property’s carbon footprint. One player working on investing in tech solutions for the real estate industry’s climate impact problems is VC firm Fifth Wall. Recently certified as a B Corporation, a certification awarded by the independent nonprofit B Lab to companies based on verified environmental and social performance, Fifth Wall seeks to help the real estate industry build scalable carbon-reducing solutions.
“Specifically around climate tech, sustainability tech, green tech, we strive to be a trusted confidant for a lot of large real estate corporations, and they look to us to help identify the emerging trends in technology that can be accretive to their businesses, not just six to 12 months from now, but five to 10 years from now, too. And that’s the role that Fifth Wall plays,” says Michael New, the chief of staff at Fifth Wall.
To understand how the growing importance of sustainability is beginning to cost the real estate industry, and as part of my research of B Corporations, I spoke with New and Tyson Woeste, a partner who oversees the company’s sustainability investing practice at Fifth Wall, about the firm’s role in addressing climate change and becoming a B Corp.
Christopher Marquis: Early this year, you announced a Carbon Impact Fund to help the real estate industry mitigate—and ultimately eliminate—its greenhouse gas footprint. Can you talk about why this fund focuses on real estate and why now is the right time for real estate leaders to integrate more sustainable practices?
Tyson Woeste: Real estate is the biggest contributor of greenhouse gases. If you care about climate change, I believe the first thing you ought to try to tackle is the real estate business. It’s kind of that simple, right? And so, it’s been true for a while, but what’s changed in this externality framework in about the last 12 months are three things.
First is regulators. In New York, Los Angeles, Washington, D.C., Austin, and Hawaii for example, there are aggressive carbon taxes that focus on the real estate business. Basically, regulators are imposing a short timeline and large taxes targeting the real estate business, so that has priced it in timeframes that matter to decision makers.
Another externality buster is large companies, like Amazon, Microsoft, Google, who are adopting decarbonization plans in which they take decarbonization pledges and roll out a plan, over five years, to decarbonize. These companies then audit and demand performance from their suppliers. If you’re demanding carbon performance from your suppliers, and you’re Amazon, that’s data centers, logistics centers, and office space. All of a sudden, there are huge demands on landlords to decarbonize coming from the customers in that case.
And then the third externality buster is public and private markets. In the case of climate change, activists have done a really good job of taking the message to large capital allocators, like pension funds, endowments, as well as allocators who have explicit low-carbon or decarbonized allocation mandates now that capital is looking for a place to flow.
To the extent that real estate is the largest asset class, it’s actually becoming a cost of capital problem for the real estate business.
Marquis: Outside of the Carbon Impact Fund, can you tell me a bit more about what Fifth Wall does?
Michael New: Real Estate is the largest asset class on Earth, but we believe it has historically underinvested in technology, as compared to the other largest industries. When Fifth Wall was founded in 2016, there were early signs of tech disruption in real estate. We saw an opportunity to partner with large owners and operators in real estate across sectors andasset classes in the United States and abroad, to invest in technologies where real estate corporations are likely the largest potential end users. And our model is predicated on facilitating those kinds partnerships between our portfolio companies and our limited partners (LPs).
Some of our portfolio companies don’t immediately look like real estate technology companies. But they are businesses whose distribution can be accelerated by access to large real estate players, like to retail landlords or by fostering partnerships with the tenants inside large office buildings. We try to look at our investments through a lens of how can we, through our LP network, our real estate knowledge, and expertise in distribution, accelerate the growth of this business. It gives us a differentiated value proposition to our portfolio companies and our LPs.
Our goal is to think more mindfully about the kinds of businesses we want to invest in and how they can add value to our limited partners.
Marquis: What are some ways that Fifth Wall itself is adapting itself to be more resilient to the market and consumer demands for climate-conscious businesses?
New: When we first completed the B Impact Assessment, we realized that although we were effectively a startup, there were many things we were already doing “right,” but we knew we could do even better. We looked to the B Corp certification process as a framework for auditing our internal practices and learning where we could improve as a company. With the help of the B Corp certification process, we formalized a variety of policies that touch upon employee relations, our supply chain, and operations, in general.
We enhanced employee benefits with an Employee Wellness Policy and as well added a Community Service Policy that gives employees three days of time off to donate to the community. We also formalized an Environmental and Local Purchasing Policy to support green and local businesses.
At the time we were progressing through the B Impact Assessment, we were also moving into a new office, so we were able to apply B Corp thinking to lots of facility management decisions as it related to our new office space. These were all things that were easy for us to do, and sometimes already were doing informally, but are now memorialized.
The biggest takeaway is that one of our goals is to help the global real estate industry minimize its greenhouse gas footprint, and our intention will be to invest in businesses that might help owners and operators of real estate do just that.