Carbon pricing has become a critical consideration in real estate investment, significantly influencing decision-making and long-term planning. For Hines, a global real estate investment manager and leader in sustainability, carbon pricing offers both a strategic opportunity and a complex challenge. This case study explores the implications of carbon pricing on real estate investment, focusing on two major challenges: the cost of decarbonizing assets and market disparities in carbon pricing.
Key Challenge #1: The Cost of CapEx to Decarbonize an Asset
One of the primary challenges in integrating carbon pricing into investment decisions is figuring out the cost of decarbonizing physical assets like buildings. Real estate construction and operation involve carbon-intensive processes, including material sourcing, heating and cooling, ventilation, and lighting. The cost of reducing emissions can vary significantly depending on a building’s age, location, and existing systems. Complicating matters further, the future cost and availability of low-carbon energy, which is expected to replace on-site combustion of fossil fuels, is difficult to forecast.
Key Challenge #2: Market Disparities
Another significant challenge is the disparity in market maturity and regulatory frameworks. For instance, in the U.S., New York City imposes a clear carbon price of $268 per ton above a certain threshold, while other jurisdictions lack such regulations. Globally, carbon pricing varies widely, and real estate markets are dynamic over the long term: in mature markets, Hines can accelerate its carbon reduction targets, whereas less developed markets require nuanced, sub-market-level strategies. As such, it can be both difficult and impractical to apply a universal carbon price across a global portfolio due to significant price spreads, and even harder to communicate carbon pricing strategies to investment professionals and other stakeholders.
Conflicting time horizons present another related challenge. Hines has set a clear operational carbon target with an interim goal to reduce emissions by 42 percent by 2030[1], but faces more challenging decisions on whether or not to adopt a universal carbon price. The decision is complicated by competitive pressures and long-term uncertainties – such as the potential of green premiums or brown discounts upon exit – which may not factor in until years later.
To navigate these challenges, Hines has employed a combination of internal models, frameworks, and engagement strategies.
Internal modeling to assess the cost of decarbonization
Hines believes that how you use a carbon price is a more important conversation than what the carbon price actually is. Through its internal models, Hines has used different carbon prices to account for the cost of carbon in different markets and different parts of the supply chain.
In conjunction with Hines’ pursuit of SBTi certification, the firm utilizes the Carbon Risk Real Estate Monitor (CRREM)[2] tool to assess transition risks, align its portfolio with global decarbonization pathways, identify potential stranded assets, and quantify the financial impact of carbon reduction efforts through science-based decarbonization curves. Hines has developed a Carbon Impact Assessment Tool to gather the data needed to support this process. By incorporating CRREM into its investment strategy, Hines can proactively address regulatory risks, optimize capital expenditures for decarbonization, and ensure its assets remain competitive in a low-carbon economy. This data-driven approach enables the firm to make informed decisions that aim to balance sustainability goals with financial performance.
In addition, deal teams are tasked with proposing decarbonization capital expenditure (capex) projects and to include these costs in underwriting for new acquisitions— essentially estimating the cost of achieving the desired decarbonization curve. This approach simplifies the explanation of an abstracted carbon price and makes the process more accessible to stakeholders.
Collaboration and Framework Development
To navigate disparities in carbon pricing and regulation, Hines has established a framework to integrate sustainability-related considerations into investment decision-making. This proprietary model helps assess sustainability risks and opportunities by evaluating factors such as regulatory stringency, tenant and investor expectations, and market maturity across a patchwork quilt-like environment in carbon pricing regulations.
By embedding this framework into its capital allocation strategies, Hines seeks to ensure that its investments align with long-term sustainability goals while maintaining financial resilience. This structured approach enables the firm to optimize decarbonization efforts at the property and portfolio level, mitigate regulatory uncertainty, and enhance the long-term value of its real estate portfolio.
Beyond its internal framework, Hines plays a leadership role in advancing market-wide consistency. In Europe, where carbon regulation is more mature, the firm has actively sponsored industry-wide alignment through initiatives like the Urban Land Institute’s C Change program. By advocating for standardized transition risk guidelines for underwriting and transactions, Hines is helping to create a more uniform approach to carbon considerations, even though regulation may vary in other jurisdictions.
Engaging Institutional Investors
The lack of regulatory consistency across regions also poses challenges for institutional investors assessing carbon strategies, particularly in jurisdictions with uncertain policy outlooks. Hines addresses this by proactively engaging investors and demonstrating how its sustainability strategy mitigates risk across diverse regulatory environments.
Institutional investors—including pension funds and sovereign wealth funds—value Hines’ structured framework for managing climate-related risks. By framing sustainability within different investment strategies and time horizons, Hines provides clarity on both risks and opportunities associated with decarbonizing real-estate assets, reinforcing investor confidence in the long-term resilience of its portfolio.
Practically, this translates to engaging in constructive dialogues with deal teams, ensuring that strategies align with market-specific conditions. Hines prioritizes framing questions from an investor’s perspective, such as: “What is the sustainable investment thesis?” and “How might the asset’s value change over the hold period as a result of sustainability factors?” By focusing on tangible metrics like retrofit costs and tenant demand, Hines’ strategy resonates more effectively with investment teams than abstract discussions about carbon pricing.
Conclusion
Hines’ sophisticated approach to carbon pricing and sustainability reflects a deep understanding of market dynamics and stakeholder needs. By combining science-based tools, market-specific strategies, and collaborative initiatives, the company is well-positioned to lead in sustainable real estate investment. As global markets continue to evolve, Hines’ commitment to aligning carbon pricing with investment strategies serves as a model for integrating sustainability into real estate portfolios.
Hines’ net-zero target and certain other ESG initiatives and programs exclude our Integrated Facilities Management operations and buildings where Hines lacks operational control. The ESG or impact goals, commitments, incentives and initiatives outlined herein are purely voluntary, are not binding on investment decisions and/or Hines’ management of investments and do not constitute a guarantee, promise or commitment regarding actual or potential positive impacts or outcomes associated with investments made by funds managed by Hines. Any ESG or impact goals, commitments, incentives or initiatives referenced in any public information, reporting or disclosures published by Hines are not being promoted and do not bind any investment decisions made in respect of, or the stewardship of, any funds managed by Hines for the purposes of Article 8 of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector. Any measures implemented in respect of such ESG or impact goals, commitments, incentives or initiatives may not be immediately applicable to the investments of any funds managed by Hines and any implementation can be overridden or ignored at Hines’ sole discretion.
CRREM (Carbon Risk Real Estate Monitor) aims to provide the European commercial real estate industry with appropriate science-based carbon reduction pathways at building, portfolio and company level and with financial risk assessment tools to cost-effectively manage carbon mitigation strategies. CRREM resources are free to market participants; though companies are charged to refer to CRREM in reports and register their compliance with CRREM pathways officially.