Fossil-free Heating – ESG-driven decision making in practice

    This article is part of NordSIP Insights – ESG Integration Case Book 2020. Read or Download the entire publication here.

    Transition to fossil-free real estate heating

    As the popularity of environmental initiatives continues to increase alongside society’s concern over the sustainability of our economic systems, some asset owners have decided to lead by example. Varma, a Finnish pension company, is a reference in the Nordics.
    District heating currently accounts for a significant proportion of the carbon dioxide emissions from Varma’s residential properties. In February 2020, Varma announced it would replace the heating system in 36 of the apartment buildings in its housing stock during 2020 and 2021. The decision is expected to lead to an estimated 48% reduction in CO2 emissions from Varma’s residential properties by 2023.

    As one of Finland’s largest real estate investors, Varma owns 61 apartment buildings, including approximately 4,000 flats. At the end of 2018, the value of Varma’s real estate portfolio was €3.8 billion. NordSIP reached out to Hanna Kaskela, Director for Responsible investments, Matti Lindfors, Real Estate Manager, and Johanna Haikala, Investment Manager Real Estate at Varma, to find out more about the energy transition in the context of real estate ownership.

    The new climate targets

    “Our goal is to reduce the carbon dioxide emissions of our direct real estate investments by switching to fossil-free heating and electricity by 2030 and 2025 respectively,” Lindfors starts. “Upcoming energy-saving measures in our apartment buildings are a natural step towards being emission-free and consistent with our climate targets.”
    “Varma took this decision in the context of the renewed climate policy targets we announced in November 2019,” Kaskela adds.

    The resulting emission reductions will correspond to the annual use of more than 1,700 petrol-fuelled cars or 7,600 return flights from Helsinki to Spain, according to Varma. “The carbon footprint of Varma’s real estate includes carbon dioxide emissions from the buildings’ consumption of heat, electricity, cooling and water. Our aim is to include the carbon dioxide emissions caused by waste in the carbon footprint by 2021,” the trio explains. “In some apartment buildings, geothermal heating will entirely replace district heating. Measures have already started in 13 of the buildings. 2020 will witness the transition from district heating to geothermal heating in eight apartment buildings.”

    “In buildings, energy consumption arising from electricity and heating is the main source of carbon dioxide emissions. Improving the energy efficiency of the buildings is one of the most viable paths to decreasing this consumption and the associated carbon emission,” says Haikala. “Carbon dioxide emissions, are easily reduced by using renewable energy either through own production or buying green energy.”

    “This is a natural step toward being emission-free, and it is consistent with our climate targets. The biggest contributor to greenhouse gas emissions in residential buildings is heating. Our objective is not just to meet the minimum requirements in the industry, but to enable the development of new energy solutions and a more climate-friendly construction sector. Solar panels and geothermal heating that utilises solar energy stored in the ground support our goals also in terms of enabling us to increase the use of renewable forms of energy in buildings,” said Lindfors, on the occasion of the announcement.

    Assessing progress

    “ESG aspects definitely had a big impact on our decision which was done by taking both ESG-factors and financial aspect into consideration,” Kaskela explains, highlighting the importance of materiality, before noting the goals and key performance indicators (KPIs) Varma focuses on. “In this project, the KPIs include economic variables, carbon emission reduction and energy consumption reduction targets. From 2020 to 2035, we will develop our portfolio towards carbon neutrality, and no stone will be left unturned.”

    “We have targets for waste, water consumption, fossil-free heating and carbon emission reduction in our real estate investments. We are also targeting to have our most important office buildings to be certified according to the BREEAM1 environmental rating system. In addition, we hope to have circular economy KPIs in the near future,” adds Haikala.

    Building on an existing partnership

    LeaseGreen, a cleantech service company, has been tasked with planning and implementing the energy overhaul, which will replace the buildings’ district heating with geothermal heat pumps, solar panels and property-specific heat pumps that recover heat from exhaust air.

    “Varma’s previous partnership with LeaseGreen also focused on other energy overhaul projects,” Lindfors says. Varma and LeaseGreen previously collaborated on the energy refurbishment of the headquarters of Elisa Oyj, a Finnish Telecom company. The headquarters building is owned by Varma and the partnership focused on reducing the building’s energy consumption and carbon footprint by around 40%.

    The Elisa energy refurbishment, announced in May 2019, targets yearly savings of around 250 tonnes of CO2, equivalent to the yearly output of more than 1,000 solar panels. According to Varman, the savings can also be used to offset the emissions of more than 2,000 return flights between Helsinki and Stockholm.

    According to Varma, the waste heat from the data centres is transferred to the building’s heating and air conditioning system. The energy provided will reduce the consumption of district heating and the need for cooling energy. At the same time, costs will be reduced for both the owner and user of the property.

    “It is a pleasure to carry out investments like this since their returns clearly exceed the typical rate of return in real estate investment. Achieved cost savings have a significant effect on the value of properties,” said Varma’s Real Estate Investment Director Ilkka Tomperi, at the time. “Responsible companies are promptly carrying out economically viable investments in energy efficiency. In recent years, the profitability of energy refurbishments has improved clearly due to fast technological development. Varma has tightened its own energy efficiency goals because the company achieved them ahead of time,” he added.

    Implementing the energy transition

    “We will substantially reduce the carbon footprint of Varma’s residential properties through energy-efficient and digital solutions. Varma’s inspiring example proves that we can reduce emissions while at the same time increasing financial well-being,” LeaseGreen’s CEO, Thomas Luther, commented on the new plans.
    “The results will be apparent already within a year or two. The technical level of the buildings will also improve. A full-scope examination of a large mass of properties offers a quicker and more efficient path to reducing emissions than the modernisation of individual buildings,” he added.

    “This comprehensive solution also includes new automation, solar panels and modern lightning in addition to ground thermal heat pumps and heat recovery systems. A heat recovery system provides fresh filtered air into habitable rooms while retaining heat that would usually be wasted. We are also closely following how the traditional district heating is developed to become more climate-friendly.

    According to Varma, digital monitoring will be used to optimise the settings for the building services technology according to the weather conditions, and to assist in the monitoring of progress and energy efficiency improvements.

    A Good Plan for Varma

    “Economically, this is also a good investment for Varma. With these kinds of energy solutions, we are looking to mitigate climate change as well as achieve good returns. Energy investments are one of the most efficient ways of improving the profitability and value of real estate investments as well as making them more responsible,” Kaskela explains.

    “From a real estate investor’s perspective in general, making allowances for sustainability does not conflict with return expectations. For us, sustainability is a means of securing long-term returns,” adds Lindfors.

    “So far, everything has gone according to our plan, but we strive to learn more during the project. We always look for new solutions to develop our approach as responsible owners. During this project, we have already learned more about different solutions in renewable energy production,” the trio concludes.

    1. The Building Research Establishment Environmental Assessment Method (BREEAM) is the world’s longest established method of assessing, rating and certifying the sustainability of buildings. It was launched by the Building Research Establishment (BRE) in 1990.

    Photo by Chris Barbalis on Unsplash

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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