Commercial real estate (CRE) encompasses on-balance-sheet loans and equity investments in non-residential properties used for business purposes. Office buildings, retail spaces, industrial warehouses, hotels, and mixed-use commercial developments all fall within this asset class. The emissions associated with CRE portfolios come primarily from the energy consumed to heat, cool, and power the buildings rather than from the activities of the occupying businesses.
Asset Class Definition
This asset class covers:
- Loans secured by commercial property (mortgages on office buildings, retail centres, industrial facilities)
- Equity investments in commercial real estate (property companies, REITs)
- Development finance for commercial construction projects
The focus is on on-balance-sheet CRE exposures. Off-market or fund structures may be accounted for under other PCAF guidance.
Emission Scopes Covered
Financial institutions shall report:
- Scope 1 emissions: On-site fuel combustion from the building (gas heating, diesel generators)
- Scope 2 emissions: Purchased electricity, district heating, or cooling consumed by the building
Scope 3 emissions of the tenants (from their business activities within the buildings) should be covered if relevant, but this is operationally complex and often requires tenant cooperation.
Commercial real estate focuses on the building's energy consumption, not the tenant's business activities. A bank that finances an office building accounts for the building's electricity and gas use, not the emissions generated by the companies working inside. This "building shell" approach makes CRE emissions calculation fundamentally different from corporate lending.
Attribution of Emissions
The attribution denominator for CRE is the property value at origination, meaning the value of the property at the time the loan was first made or the equity investment was first established. This value is held constant over the life of the loan or investment:
Commercial Real Estate - Attribution Factor
Attribution Factor
The financial institution's share of the building's emissions
Outstanding Amount
Current outstanding loan balance or equity investment in the property
Property Value at Origination
Appraised property value at the time the loan was first made, held constant over the loan's life
Using origination value (rather than current market value) ensures that rising or falling real estate markets do not mechanically increase or decrease the reported financed emissions. It also avoids the perverse incentive of reporting lower emissions simply because property values have risen.
Attribution calculation for a CRE loan
A bank makes a €15 million loan on a commercial office building appraised at €40 million at origination. Three years later, the building has appreciated to €55 million, but the outstanding loan is now €12 million (after partial repayments).
Attribution factor (Year 3) = €12M / €40M (origination value) = 30%
If the building consumes 2,000 MWh of electricity per year (emission factor: 0.4 tCO2e/MWh) and 500 MWh of natural gas (emission factor: 0.2 tCO2e/MWh):
Building emissions = (2,000 × 0.4) + (500 × 0.2) = 800 + 100 = 900 tCO2e/year
Financed emissions = 30% × 900 = 270 tCO2e/year
Data Quality Options for CRE
The data quality scoring for CRE is based on the quality of energy consumption data rather than company-reported GHG emissions:
| Score | Option | Energy Consumption Basis |
|---|---|---|
| 1 | 1a | Primary data on actual building energy consumption with supplier-specific emission factors |
| 2 | 1b | Primary data on actual building energy consumption with average emission factors |
| 3 | 2a | Estimated energy consumption from official EPC energy labels and floor area financed |
| 4 | 2b | Estimated energy consumption from building type and location-specific statistical data and floor area |
| 5 | 3 | Estimated energy consumption from statistical data and number of buildings financed (no floor area data) |
EPC (Energy Performance Certificate) labels are the most commonly available secondary data source for building energy performance across many jurisdictions. They are issued at or before the time of sale or rental and provide a standardised rating (typically A to G) for energy efficiency. PCAF allows financial institutions to use EPC ratings combined with floor area data to estimate energy consumption when actual meter data is not accessible.
Whole Building vs Tenant Energy
A key practical challenge in CRE emissions accounting is that the financial institution often does not directly pay for the building's energy. Energy bills may flow to tenants who have metered accounts for their individual spaces. PCAF recommends:
- Using whole-building actual energy consumption where the landlord controls and pays for energy centrally
- Using metered sub-unit data and scaling up to the whole building for multi-tenant buildings
- Using EPC ratings and floor area when neither actual total consumption nor sub-unit metering data is available
Sector-Specific Considerations
Hotels: Emissions from hotel operations include both the building shell (HVAC, lighting) and guest services (laundry, food service). These should ideally be captured using the hotel's actual energy consumption data.
Industrial properties: Warehouses and logistics facilities may have low energy intensity per square metre but large total footprints. Industrial refrigeration and process heating are relevant if the building has specialised installations.
Development finance: For properties under construction, PCAF recommends using the projected energy consumption of the completed building (based on design specifications or EPC estimates) as a proxy until actual consumption data is available.
Commercial real estate emissions are like measuring fuel efficiency for a fleet of vehicles. You can precisely measure what each vehicle actually consumed (actual meter data, Score 1), look up the rated fuel efficiency before purchase (EPC label, Score 3), or use the average for that type of vehicle in your region (statistical data, Score 5). Better measurement requires engaging directly with the "driver" (tenant or building manager) to get real consumption data.
Key Takeaways
- 1CRE emissions come from the building's energy consumption (Scope 1 and 2), not the tenant's business activities - this is the 'building shell' approach
- 2The denominator is property value at origination, held constant over the loan's life to prevent market fluctuations from distorting reported emissions
- 3Data quality scoring is based on energy consumption data quality: actual meter data (Score 1) through statistical estimates with no floor area (Score 5)
- 4EPC energy labels combined with floor area data are the most commonly available proxy when actual building energy consumption is not accessible
- 5For multi-tenant buildings, scale up metered sub-unit data to the whole building when centrally managed consumption data is unavailable