Bosses scrambling to reassess 2030 net zero targets, warns Hillbreak founder

This type of grand strategy within the sector is what Jon Lovell, co-founder of Hillbreak, is best placed to guide, given his role as one of the first movers and shakers in the industry to recognise the need for bridging the gap between financiers and the narrative-driving sustainability types.

This week’s PropCast, hosted by Andrew Teacher seeks to engage with the big questions, ranging from the huge risk and opportunity of stranded assets, the looming deadline for 2030 net zero targets, the skills deficit on both sides of the ESG fence and, perhaps most importantly, the profound implications of the Paris Accord’s 1.5°C goal being effectively dead in the water. All of this in the context of some eye-catching headlines on corporate climate goals, with global giants like HSBC leaving the net-zero alliance, to the American magnificent 7’s investment in power-hungry data centres, the question of how the sustainability industry evolves will be crucial.

For some context around Lovell’s role in the industry, along with Miles Keeping, he founded Hillbreak a decade ago, a consultancy that focuses on both strategic advisory mandates and skills development to build the capacity for effective sustainability integration within investment firms and markets. Which, as he compellingly argues, is becoming increasingly central to a successful long-term strategy and business plan. The increasingly acute importance of ESG, Lovell argues, comes at a time when some agitators are seeking to hamper progress, whilst paradoxically the threat of stranded asset risk is really beginning to bite. That is to say, more and more homes and commercial properties are becoming both uninsurable and, by extension, unmarketable – and while some managers might not mind, striking at the heart of a portfolio’s liquidity is a real strategic risk. Lovell points out that much of the industry’s approach to ESG, especially in the era of near-zero interest rates, was not without faults. He is frank about branding many “targets set four or five years ago” as “performative”, with little evidence of rigour on deliverability.

That’s made it pretty easy for those seeking to discredit the agenda. However, the performative virtue-signalling approach, which has resulted in a wave of new green finance regulation and standards in recent years, is being replaced at breakneck speeds. For instance, Lovell describes the Carbon Risk Real Estate Monitor, commonly referred to as CRREM, a benchmarking tool that gives investors and managers a methodical assessment of what carbon risk looks like across existing assets and portfolios. Where before, ESG might’ve looked like WeWork’s ‘community adjusted EBITDA’, Lovell puts forward a strong case that the movement and ESG industry have learnt and responded to real-world pressures, with systemic drivers like physical climate risk and nature collapse becoming ever more acute.

The welcome reform in sustainability, however, is still seeing opposition. Even with a Labour government quite strongly committed to carbon reduction and incentivising green business practices, the commercial case for an “ever-tightening net zero definition” becomes more challenging. Being blunt on this issue, Lovell is clear that organisations are more than ever before scrambling to reassess what they said they said they would do and how deliverable that is in the context of their mandates, capital structures and operating models.

Specifically, there was never a definitive cross-industry understanding of what net zero meant, and as such, it is challenging for the industry to gauge where their eyes were bigger than their mouths in terms of upholding prior commitments to net zero. This challenge is amplified by the continued structural problems in the market surrounding a lack of operational data and minimal control over assets – Lovell is very clear about this: “reality is starting to bite”.

That is not to say the market is all doom and gloom; in fact, he describes the most key challenge, that of basic access to data. Lovell sympathises with many of the sustainability teams who now are relegated to searching through data sets for “9 months a year”. Lovell is clear that the ESG sector is crying out for a better, more pragmatic balance between GDPR and the common-sense data use necessary to iterate and improve real estate. This attitude being one that is increasingly echoed across the industry, with last week’s podcast guest Anna Moore, founder of Domna homes, a retrofit consultancy describing similar reforms as crucial for the UK’s soon-to-be stranded housing stock to receive investment.

Beyond regulatory challenges, however, Lovell goes back to basics, making a strong case for urgent, role-specific learning and capacity-building. He highlights the divergence between investment professionals and sustainability specialists lies in a fundamental misunderstanding of each other. It is necessary that improved integration occurs between the investment teams, who in effect “speak one language”, and the ESG teams “which speak another”. For a long time, sustainability was seen as a ‘peer-pressure’ commitment, but as the threats posed by idleness and traditional investment dogma grow, with ever more complex markets and insurance ecosystems threatening ‘boring’ real estate, sincere understanding between both sides of the divide is key.

Lovell lastly puts forward the truth that many in the sustainability industry are afraid to grapple with – he posits, “the 1.5°C goal is effectively unattainable”.

The 1.5°C goal, signed onto in the 2015 Paris Accords, which I’m sure to many readers will feel like a century ago, was touted as a real and firm target that even if not reached would put real downward pressure on carbon emissions and all the extreme weather events that come with increased global temperatures. Reality, however, has been sobering; Lovell puts us as “tracking towards 2.5 to 2.9 degrees”. In practice he describes this as “an uninsurable world, where the real estate market ceases to exist”.  Hearing the word ‘uninsurable’ will scare many, but equally he argues, “The net zero economy in the UK is growing at a compound annual growth rate of 10 per cent versus relative stagnation in the wider economy.” At a fundamental level this makes the case for Lovell; there is a simple commercial case for reforming and reinventing the huge amount of global wealth we have in our real estate assets.

This is the case for resetting our mental model when it comes to understanding what commercial viability and resilience mean. Resilience isn’t just weathering interest rate hikes; it’s increasingly going to be weathering the weather.

Outside of boardrooms and benchmarking, Lovell’s passion for music offers a glimpse into his outlook on generational change and shared experience. He speaks fondly of attending heavy metal gigs with his teenage son, including an upcoming first-time visit to Bloodstock Festival – “the largest independent heavy metal festival in the UK,” as he puts it. Recalling a recent show, he says, “One of my very proud dad moments was seeing my son crowd surf at a Decapitated gig for the first time.” It’s a reminder that, despite the best efforts of some in the investment industry, it’s not all doom and gloom in green circles.