3. Distributed energy resources integration: Utilities look at sum-of-parts solutions

In 2024, some states and electric utilities integrated behind-the-meter distributed energy resources (DERs) and flexible loads through compensations, rate designs, and other models. This occurred against the backdrop of rising electricity demand, on one hand, with DERs providing reliability to the grid and challenges such as permitting, and interconnection with building utility-scale resources increasing, on the other. Additionally, extreme weather events, which have been increasing due to climate change, are also impacting the electricity system and causing power failures. Between 2000 and 2023, 80% of all major power outages were due to severe storms, wildfires, and extreme heat.59

As utilities address these challenges, DERs can provide a variety of capabilities, including energy efficiency, demand response, power generation, and energy storage to the grid. By combining these capabilities, utilities can create smart systems such as non-wire alternatives, microgrids, and virtual power plants (VPPs), optimizing grid operations and enhancing resilience. For example:

DERs used as non-wire alternatives, regardless of ownership, have the potential to reduce system operating costs and delay the need for system upgrades. 60 For example, Xcel Energy recently proposed to state regulators the construction of a network of strategically located solar-powered energy storage hubs. These hubs would be linked with technology to operate in concert, designed to enhance grid efficiency and reliability. 61

For example, Xcel Energy recently proposed to state regulators the construction of a network of strategically located solar-powered energy storage hubs. These hubs would be linked with technology to operate in concert, designed to enhance grid efficiency and reliability. The increasing availability of battery electric storage systems has strengthened the case for microgrids to enhance grid resilience and reliability. In February 2024, SDG&E introduced four advanced microgrids capable of operating independently or in conjunction with the larger regional grid, which provide a combined storage capacity of 180 MWh across four substations. 62

By combining high-capacity, low-deployment DERs like EV storage with vehicle-to-grid technology and low-capacity, ubiquitous DERs like smart thermostats, utilities can create VPPs to optimize peak load management. Deloitte’s recent analysis points out that residential electrification creates a load that could potentially serve itself by 2035.63

Combination of such capabilities can help not only strengthen the grid at its most vulnerable points supporting reliability, particularly in areas experiencing high energy demand, but also provide resiliency, mitigating the risk of disruptions.

Additionally, utilities may still have an opportunity to unlock potential from commercial and industrial customers.64 The immense energy demand of data centers, often seen as a challenge, can become an asset for the future grid. Their ability to rapidly adjust power consumption levels and location can make them candidates for participation in VPPs, enhancing grid stability and supporting the integration of renewable energy sources.65 The introduction of FERC 2222, which allows DERs to participate in the energy market, would expand the services that VPPs can provide.66 Though there have been delays in the implementation across Independent System Operators,67 in April 2024, New York launched the nation’s first program to integrate aggregations of DERs into wholesale markets.68

While these solutions may seem isolated, they are expected to continue to converge and could continue to create synergies for a more reliable and sustainable electricity infrastructure. This integration can deliver economic benefits to both the grid and customers. As the industry prepares for rising demand from data centers, VPP platforms leveraging AI and ML algorithms can aid in managing power generation assets, understanding customer behavior, and adjusting output levels based on demand and forecast consumption.

However, currently, there are hurdles that need to be overcome to facilitate greater investment in VPP infrastructure. According to Deloitte survey respondents, technology integration, cyber, and operation complexities are the top three challenges in scaling VPPs (figure 4).69

How can CRE be an attractive career destination for next-generation talent?

The commercial real estate industry is facing a retirement cliff. In the next decade, 40% of the US industry workforce will reach the age of retirement.68 Meanwhile companies are struggling to attract and retain the next generation of talent.69 As detailed in Deloitte’s 2024 real estate workforce prediction, in order to help bridge this gap, real estate companies should align with the expectations of the next generation and take steps now to fortify their talent pipelines.70 These steps can include a combination of integrating the values and priorities of Gen Zers and millennials into the company culture and modernizing technological capabilities to help drive efficiency and upskill current team members.

Aim to meet the expectations of the next generation of talent

As real estate organizations look to reinvigorate their workforce for this shift, they should consider the alignment between the values of the next generation of real estate professionals and the needs of the organization. According to Deloitte Global’s 2024 Gen Z and Millennial Survey,71 they value climate action, mental health, and work/life balance. Seventy-six percent of respondents surveyed by the Commercial Real Estate Women Network noted that their organizations have policies or benefits that support mental health and well-being, such as employee assistance programs, but that the majority of their respondents still wished their company would offer more mental health benefits.72

But there’s more: Gen Zers and millennials are even willing to reject a potential employer based on personal and ethical beliefs, and this number continues to increase. Forty-four percent of Gen Z respondents and 40% of millennials would reject an employer for a disconnect in values, up from 39% and 34%, respectively, in 2023.73

They’ve also expressed optimism—albeit with some concern—around the use of generative AI in the workplace, with 80% of Gen Z gen AI users believing that gen AI will free up their time and improve work/life balance. Nearly 60% of Gen Zers and millennials are expecting that gen AI will impact their career trajectories and require them to learn new skills. However, that same survey revealed that only 51% believe their employers are training them on the capabilities and benefits of gen AI, resulting in a need for companies to lead the charge and differentiate on upskilling and reskilling to ensure that employees are set up for success in this new technological landscape.

Upskilling for a digital real estate future

There has been a growing discrepancy between the skills that employers seek and the skills that job seekers bring to the table, a mismatch coined the “skills gap.”74 And more recent advances in digital technologies and automation, such as gen AI, have led businesses, including those in commercial real estate, to require new and evolving skills from their workforce. When it comes to top actions leaders at real estate organizations are planning to take to attract and retain talent over the past several years, “accelerated upskilling and reskilling initiatives” has remained a top three response for the past two years (figure 13). But when asked to rank what challenges their companies are facing most in building better technical workforce readiness, most respondents identified limitations from compensation practices, apprehensions around adopting new ways of working, and dependence on legacy technologies. The solution, however, could be more homegrown: reskill and upskill existing team members to help ensure that there is a strong, adaptable pipeline of talent for decades to come.

How can insurers elevate their societal purpose in a financially sustainable way?

At face value, it may seem that insurers could be forced to confront the choice between doing well or doing good. But this does not necessarily need to be the case.

Over the past few years, the rise in extreme weather events, combined with high inflation raising the cost to repair vehicles, homes, and commercial real estate,76 pushed claims losses to unprofitable levels in related lines of business.77 To return to profitability, many insurance providers hiked premiums in impacted lines; some even retracted coverage altogether.78 Faced with fewer options and rising costs of coverage, more and more customers are now at risk of being underinsured or uninsured.79

While this scenario may seem dire, insurers who innovate and collaborate could use this as an opportunity to foster resilience and sustainability and create a better balance between profitability and equity. Emerging technologies and alternative data sources are now available to help stem the mounting losses, which can benefit many stakeholders. Insurers should ensure these technologies and data sources are used properly and with transparency to build trust and be recognized as stewards of purpose.

However, a perceived lack of transparency around the collection and use of some of the data currently being included in underwriting decision-making is becoming concerning to both consumers and regulators. For example, while consumer uptake of telematic devices that monitor driving behavior has been underwhelming since its inception in some regions,80 it is now possible for insurers to harvest this data from less obvious sources, such as apps that drivers already have on their phones.81 They can then use this data to underwrite policies, often without full transparency to the driver.82

While these data points can generate more precise underwriting, to help minimize mistrust among consumers and regulators, insurers should be transparent and disclose the information they are using to rate drivers. Insurers can also consider incentivizing mitigation strategies, such as issuing a driving score (similar to a credit score) to policyholders. These scores can be raised when driving behavior improves and then reflected in pricing.

Moreover, as technology evolves, insurance companies should work to free their underwriting models of all inherent bias. This could be particularly important where those preconceptions adversely affect vulnerable communities already plagued with affordability and access challenges due to their location. Regulators are already looking into this. For example, Colorado is currently developing a regulatory framework for insurers to help prevent bias and discrimination in AI models.83

Insurers are also recognizing the importance of conserving natural capital to drive down claims costs. They may need to guide clients to move away from a linear economy (take-make-waste) to a circular economy approach (reuse-transform-recycle). Doing so can help foster an ongoing product life cycle,84 ensuring that the parts used to repair damaged assets stay in circulation for a longer time. For example, some European insurers allow auto vendors to reuse spare parts for repairs, making the process environmentally friendly as well as economical.85

Insurers could further incentivize supply chain partners to use renewable raw materials and recycle end products, as well as convert their own insurance products into services like usage-based auto insurance, which tailors pricing based on the actual driving behavior of the policyholder. They can also consider giving premium discounts to clients in the construction and real estate sector that apply green chemistry, an approach that aims to prevent or reduce pollution and improve overall yield efficiency.86 These discounts could be applied across the life cycle of construction products, including its design, manufacture, use, and ultimate disposal, since it could reduce risk exposure for insurers.

For risk elements that insurers have less influence over, like climate change, insurers can influence, collaborate, and incentivize mitigation strategies to ensure more profitable and equitable coverage. One program in Alabama offers homeowners discounts on their insurance policies when they follow specific standards for construction or retrofits.87 In Mississippi, a bill pending in the state House could create a trust fund that could provide grants to homeowners for fortifying their homes against severe weather or building safe rooms for tornadoes.88

In a recent Deloitte FSI Predictions article, analysis revealed that if insurers, in partnership with government entities and policyholders, invest US$3.35 billion in residential dwelling resiliency measures, the two-thirds of US homes that are not currently built to adopt and follow hazard-resistant building codes can become resistant enough to reduce many weather-related claims losses. This could save insurers an estimated US$37 billion by 2030.89

For life insurers, climate change impacts health/morbidity and mortality in a more subtle way. Factors such as poor air quality due to increased pollution or wildfire smoke can exacerbate respiratory and cardiovascular conditions, leading to higher morbidity and premature mortality.90 To help minimize the overall risk profile, insurers, in partnership with other stakeholders, could explore collaborative investments in communities residing in these detrimental living conditions and promote health awareness and the benefits of early prevention of diseases. For example, several insurance companies in India that offer coverage for diseases caused by pollution, like asthma and chronic obstructive pulmonary disease, also include the cost of air purifiers and specialized respiratory medications.91

Regulators could introduce policies that encourage insurers to underwrite certain emerging risks like renewable energy technology. Government support and incentives could potentially lower the capital charge on assets or liabilities associated with renewable energy projects, benefiting society and potentially lowering insurers’ risk profile.92

Many of the risk mitigation and incentivization strategies being employed are still in their nascent stages. Insurers that are already experimenting have the ability to make adjustments to the way data is collected, processed, and used. As regulatory bodies, insurers, vendors, data suppliers, and policyholders get aligned, insurers that can transform traditional mindsets and processes in this challenging environment can take advantage of unprecedented opportunities to more effectively balance profitability with purpose.

The US National Association of Insurance Commissioners announced its strategic priorities early this year, launching a state-level data collection drive to better understand localized protection gaps in property insurance markets. These insights can provide guidance to state insurance regulators to address climate risk resilience and increase access to consumers at a national level.93

In the insurance industry, where 75% to 90% of emissions are Scope 3 (indirect greenhouse gas emissions that occur outside an organization’s direct control), direction on measurement is also critical.94 The Partnership for Carbon Accounting Financials has released guidance on measuring insurance-associated emissions for commercial and personal motor lines, but it could require insurers to collect vast amounts of data that is often not readily available.95 Calculating financed emissions also presents similar challenges, in particular for life insurance companies, which tend to have a large long-term investment profile.

As sustainability programs evolve, they are shifting from quantity to quality. Insurance companies are increasingly focusing their resources on reporting what’s most crucial to their organization rather than striving to cover everything.96 Moreover, the industry could see a shift from siloed compliance reporting to embedding sustainability into business strategy decisions. Introducing new metrics, such as implied temperature rise97 and portfolio warming potential98 —designed to assess and manage climate-related impacts of investment portfolios—involve complex, multidimensional data analysis. Therefore, they are expected to require long-tail investment portfolios to develop new modeling capabilities.99

Challenges plague integration of natural capital efforts

Understanding biodiversity and recognizing nature-related risks is a first step for many banks in their nature-positive journey. Successful implementation and assessment will, however, require US banks to overcome some possible hurdles.

1. Trying to boil the (nature data) ocean: The vast amount of information on biodiversity and natural capital can be overwhelming and confusing, likely making it difficult for many banks to set clear aims and goals. For instance, some banks may struggle to identify the drivers and dependencies of natural capital loss, especially as biodiversity encompasses the complex variability among living organisms across species and habitats. This can lead to a lack of clarity in decision-making and policy implementation.

2. Perceived lack of data: Quantifying nature-related risks and opportunities in their lending and investment portfolios may be a key limitation for some banks, particularly as data on natural capital has not reached the level of sophistication of carbon emissions data. However, it is not the absence of data, but the consolidation from diverse sources which may prove a hindrance for some US banks.

Third-party vendors could play a key role in providing a standard or a baseline to start nature-related risk assessments, just as with the climate change initiatives. However, banks should not wait for third-party data vendors to provide consistent and robust data to initiate nature-related risk assessments. Obtaining the information needed to understand a client or industry’s nature-related risks can be accomplished by integrating nature positive outcomes with the client underwriting process and other risk assessments that currently exist, not by waiting for nature databases to emerge.

Recent developments in assessment frameworks and tools, such as TNFD’s LEAP (locate, evaluate, assess, and prepare) assessment, offer promising solutions to value biodiversity and natural capital more accurately. For instance, a combination of the S&P Global Nature Risk Profile methodology and the ENCORE (Exploring Natural Capital Opportunities, Risks, and Exposure) system can provide a robust start to revamping banks’ credit assessment tools.54 Banks may still face difficulties in integrating these tools into existing risk management frameworks and decision-making processes, due to insufficient specialized expertise and resources. However, the goal is not to put in place a “perfect” nature-related risk program tomorrow; the goal is to get started by assessing the nature-related risk associated with business relationships with a goal of improving the bank’s approach as new information and tools become available.

3. Multiple regulatory frameworks: Both developed and developing nations are coming up with specific nature-focused regulations and standards, with possibly more to come in the future. These standards, which are available in different geographies for different products and industries, will likely create additional complexity for US banks, especially those with a global presence. Banks will need to navigate various frameworks and standards, both local and global, and to adapt their operations efficiently. They should determine which frameworks are most relevant to their specific context and help ensure compliance with multiple, and sometimes conflicting, requirements.

4. Limited cross-disciplinary expertise: Banks may lack the necessary talent and resources to address biodiversity and natural capital issues. Banks should aim to recruit professionals with cross-disciplinary expertise in assessing biodiversity and natural capital risks across the banking value chain, as these fields are relatively specialized. But using existing climate-focused infrastructure and teams can help bridge this gap. Banks should look to scale and upskill existing teams and leverage current resourcing models, rather than start from scratch. They should also look at conducting training programs on biodiversity loss and its direct impact on their value chain.