How VCs Can Address Real Estate’s Outsized Climate Impact
Certified B Corporation Fifth Wall Takes Climate Action to the Real Estate Industry — and Inside Its Own Firm
All too often, businesses pass on the costs of their environmentally harmful practices to the health of the communities they operate in, and many times these are already marginalized communities that are systematically disenfranchised. Take, for example, the real estate industry.
A conservative estimate identifies global real estate as accounting for more than 20% of international carbon emissions. And while global efforts are ramping up to make those who own and operate commercial and private properties pay some of these costs, for the most part the climate impacts of these carbon emissions are considered an externality of doing business. That means the planet and our communities pay the price, but a business isn’t responsible for addressing the carbon emissions.
That’s what inspired Fifth Wall, a Certified B Corporation venture capital firm, to focus on using capital to address the real estate industry’s climate impact. B Corps are committed to help usher in more sustainable business practices. The third-party verification of B Corp operations by B Lab ensures these businesses are actually prioritizing sustainability and not just making symbolic gestures to acknowledge the issue.
As part of my research of B Corps for my book Better Business, I spoke with Michael New, the chief of staff at Fifth Wall, and Tyson Woeste, a partner who oversees the company’s sustainability investing practice, to learn how Fifth Wall seeks to address climate change and how being a B Corp supports its mission. Below are highlights from our conversation.
You recently announced a Carbon Impact Fund to help the real estate industry mitigate its greenhouse gas emissions. Why focus on real estate?
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, and Google that 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 and 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.
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 and asset 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.
How does being a B Corp help Fifth Wall uphold its mission and values, including those that pertain to environmental issues?
Woeste: There are a lot of reasons that becoming a B Corp made sense for Fifth Wall. But as we responded to demand that we saw for more and more climate tech for real estate, and we started to practice investing in it, that pushed the movement inside the firm over the hump.
A couple of our investments are B Corps too, so we got to understand what a B Corp was from that perspective, just working with them, investing in them and kind of understanding how it affected their interactions with us.
The values and the approach that B Corp represents are also things that matter to the founding team of Fifth Wall and us as individuals.
How did certification strengthen or operationalize Fifth Wall’s purpose?
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.
B The Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
