The pressures on the property sector to manage its environmental, social and governance (ESG) risks are increasing. As new regulations and benchmarking come into effect, these metrics will increasingly be reflected in the value of property assets. Real estate investors and developers increasingly need to understand their ESG footprint to ensure their properties are fit for the future.
It is well understood that buildings are a significant source of carbon emissions, both from the energy needed to heat, cool and power them, plus the footprint of materials and construction. Since the pandemic, their social role has also become clear – how property can impact the wellbeing of tenants and the local community or support local enterprises.
Equally, property companies are increasingly being scrutinised on the quality of their governance. This includes areas such as their diversity and inclusion policies, culture, and external reputation. This applies across the supply chain, from suppliers to tenants.
Policymakers are exerting growing pressure on the sector. The Government continues to push forward on plans to decarbonise and improve the UK’s energy security. Its recent “Powering Up Britain: Energy Security Plan”, for example, sets out the steps for the UK to become more “energy independent, secure and resilient”.
This follows a series of other initiatives, including the British Energy Security and Net Zero Strategies. All these initiatives have implications for the property sector. For example, ‘Powering up Britain’ seeks to ensure that industrial and commercial properties have rooftop solar energy sources. In Chris Skidmore’s Net Zero Review, he recommended developing more energy-efficient homes: “Including legislating for the Future Homes Standard so that no new homes will be built with a gas boiler from 2025, adopting a 10-year mission to make heat pumps a widespread technology in the UK”.
The Net Zero Carbon Buildings Commitment was created in 2018 and enhanced in 2021. This was developed to recognise and promote climate leadership action from businesses, organisations, cities and subnational governments in decarbonising buildings. It encourages participants to target net-zero building emissions in their portfolios by 2030 and a full net-zero carbon-built environment by 2050.
There are also plans to reform the Energy Performance Certificate (EPC) ratings to create a clearer, more accessible Net Zero Performance Certificate for households. As it is, properties will need to achieve a ‘B’ rating or higher by 2030. In short, there is now real momentum behind the decarbonisation movement across the property sector.
There is also increasing recognition of property investors and developers with high ESG standards. The use of benchmarks to measure sustainability performance is now widespread. In particular, the Global Real Estate Sustainability Benchmark (GRESB) is a worldwide sustainability benchmark and plays an important role in decision making across the property sector. It assesses and benchmarks real estate and infrastructure on a range of sustainability metrics, taking into account both qualitative and quantitative data.
As the use of these benchmarks proliferates, ESG metrics are increasingly likely to be reflected in market pricing. The risks inherent in not adhering to sustainability metrics are increasing, with the potential for stranded assets. Real estate is a long-term sector and ensuring buildings are ‘future proof’ is important in preserving value.
The need to comply with ESG rules has come as the sector is facing myriad other challenges – a lack of skilled labour, the rising cost of construction materials and the legacy of the pandemic. Property developers and landlords are having to rethink key parts of their business already.
As part of assessing their environmental impact, developers and landlords will need to examine everything from their choice of building materials to their choice of location – are they building on brownfield sites or flood risk areas, for example? What are the social implications of building at a particular location? This will also extend to how they run their business: what are their policies on diversity and inclusion, for example? These changes will come with a cost, but this needs to be balanced against the costs of not taking action.
At Evelyn Partners, we’re here to help. We are hosting a series of workshops designed to give property developers, consultants and landlords clear guidance on where they are, how they can improve their existing portfolio and plan for the future. We will cover all aspects of sustainability to help participants understand the risks and opportunities.
The Evelyn Partners Group of companies comprises Evelyn Partners Group Limited and any subsidiary of Evelyn Partners Group Limited as amended from time to time. Further details of the group are available at www.evelyn.com