The increasing focus on the principles of ESG in the real estate sector presents challenges. But Karla Ritchie, a senior associate at international law firm CMS, also points out the opportunities for those ready to embrace a sustainable future.
The built environment is responsible for approximately 40% of annual global CO2 emissions.
In light of the long-term nature and significant contribution to global emissions that the built environment has, it is no surprise that in recent years the integration of Environmental, Social and Governance (ESG) principles has increasingly become a focus within the UK real estate sector.
Like most sectors, the “E” in ESG has been the pillar of ESG focused on most closely by the industry.
Historically, the reduction of operational energy use of buildings (e.g. arising from lighting, heating and cooling of buildings) was a prime consideration.
Now, developers, occupiers, investors and supply chains are also concentrating on carbon neutrality and building sustainability.
Regulation is driving change to energy efficiency and the environmental impact of the built environment.
Landlords of commercial property in England and Wales who continue to lease properties with an energy performance certificate (EPC) rating of either F or G will be subject to fines (unless certain exemptions apply).
While there is currently no equivalent minimum energy efficiency standard for commercial properties in Scotland, it is anticipated that this is likely to change in the future.
The Scottish Government, in the meantime, has committed to introduce an equivalent to a minimum energy efficiency standard of C in EPCs for privately rented properties by 2025.
Scotland has seen the introduction of action plans under the Assessment of Energy Performance of Non-Domestic Building (Scotland) Regulations 2016.
At the point of sale or lease, these regulations impose obligations on owners of commercial buildings exceeding 1,000 square metres in floor area (that are not built to 2002 building standards) to undertake an assessment of building emissions and energy performance via the production of an action plan.
Action plans identify targets for improvement of the carbon and energy performance of a building and specify how these targets would be met through physical improvements.
Once an action plan has been lodged, the building owner must decide whether to undertake the improvements identified in the plan, or defer the improvements (through an annual reporting exercise known as Display Energy Certificates).
In terms of carbon neutrality, there is currently no industry-wide standard for this.
Achieving carbon neutrality is a significant challenge to the industry, as it is estimated that approximately 80% of the buildings that will be standing in 2050 in the UK have already been constructed – the upshot of this being that building owners will have to undertake some form of retrofit to their buildings to improve energy efficiency (in some cases, at significant cost).
On the letting side, the inclusion of green lease provisions is becoming increasingly more common.
Green lease provisions impose obligations on landlords and occupiers to co-operate in order to manage and reduce the environmental impact of a building.
Over the past few years, we have seen a shift from incorporation of the light green, mostly aspirational green lease provisions, to more comprehensive dark green provisions.
For occupiers, these more stringent provisions can have an impact (both cost-wise and administrative burden-wise) on consent to alterations, service charge and reinstatement at lease termination, in addition to requiring reporting on environmental performance.
While the sector’s focus on ESG is clearly of pivotal importance to the fight against climate change, it brings with it both opportunities and challenges.
With regard to the latter, the industry crucially now needs to navigate the complexities of sustainability and consider (and incur costs in heeding) the evolving technical, regulatory and market landscape.
With regard to the former, those who pro-actively embrace ESG will be well positioned to thrive in the rapidly changing built landscape in ensuring that investments are future-proofed (both commercially and environmentally), as well as playing a key role in building a more sustainable future.
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