What are the main sustainability issues currently affecting the real estate industry? And what are the practical implications – will they cause a change in behaviour?
Recent months have seen schoolchildren going on strike, parts of London being brought to a halt by Extinction Rebellion and climate change activists blockading corporates' headquarters. On top of that we have seen an increasing number of severe weather events: Cyclone Fani which caused major flooding in India, torrential rains in America's Midwest, unprecedented flooding of the Mississippi and the double whammy of Cyclones Idai and Kenneth hitting Mozambique. It is therefore no surprise that climate change is high on the social and political agenda again. Thankfully, the real estate industry is already grappling with it and there is a lot going on.
- The Carbon Reduction Commitment was abolished at the end of April and replaced by Streamlined Energy and Carbon Reporting (SECR). Qualifying undertakings must report their carbon emissions annually, which could expose them to pressure, from both the public and their shareholders, to reduce their energy consumption.
- April also marks one year since the Minimum Energy Efficiency Standards came into force. Many major landlords had been grappling with MEES for a number of years and had done a lot of work to anticipate it so the MEES effect was not as abrupt as many feared. Nonetheless, it is forcing a change in behaviour, and 2023 (when it will become unlawful to "continue to let" premises with an EPC rating of an F or G without a valid exemption) is not far away.
- 5 December 2019 is closer on the horizon though. This is the deadline for qualifying undertakings to comply with their audit and reporting obligations under Phase 2 of the Energy Savings Opportunity Scheme. Whilst ESOS reporting is not public in the way that SECR is, the energy audits do have to be reviewed by the undertaking's board of directors, who may well realise that implementing some of the changes that have been recommended will reduce costs and improve the bottom line, as well as strengthening their sustainability credentials and being a good PR story.
- Looming even closer than that is the deadline for those who take part in GRESB to submit their 2019 reports, with the results (and the news of who this year will be awarded Green Stars) due out in September. GRESB (formerly known as the Global Real Estate Sustainability Benchmark, but now not an acronym as it covers more than just real estate) is a major benchmarking system in which a number of fund managers, asset managers and others participate annually, and which is becoming increasingly important to management mandates.
With all this legislation, investor attention and of course political and social pressure, it is no wonder that more and more organisations are building their own full-time in-house sustainability teams to navigate the sustainability compliance maze. With the UK Green Building Council and others firmly focussed on how we achieve net zero carbon by 2050, I predict that there will be plenty more regulation and best practice to come and the sustainability teams will have their hands full for the next few years!
Will all this effort really save the planet? Not on its own, obviously, but I suspect it will go some way to help. MEES in particular is really forcing a change that previous schemes like the CRC could not, but there will come a point where the lack of any resources to enforce it becomes a policy issue. There is a trajectory to stricter criteria for EPC ratings and at the same time to a higher minimum EPC rating for MEES. This will make it much harder for landlords to comply and if the lack of enforcement resources continues, some may take a calculated risk not bother. There is already a growing resentment of the application of MEES to shell space, particularly refurbished retail units. The EPC rating will be low because there is no fit-out and worst case assumptions (particularly around lighting) have to be made. This leads to a vicious circle where the lease can't lawfully be granted because there is no fit-out, but there can be no fit-out because there is no lease. There are no simple solutions to that conundrum.
Green clauses in leases are also becoming less popular in some circles. After the initial flurry of excitement around the introduction of the Better Buildings Partnership's Green Lease "Toolkit", the market largely settled down to include them, but several years on the jury is out as to how effective they are. Parties accept that clauses included in a memorandum of understanding or "light green" clauses in the lease itself have no real teeth and are arguably more aspirational. Anecdotally, some landlords' sustainability teams are now questioning the value of including them in new leases as, although they help to boost scores in things like GRESB, the real challenge is to change behaviour outside the lease. Whether they survive or evolve remains to be seen, but the risk of the clauses being onerous and therefore depressing the rent on an open market review is probably still enough to deter most investors from "dark green" clauses. Standardised documents like the Model Commercial Lease (which aim to reflect the market position) contain "light green" clauses for now, but this could change in the coming years.
In my view, the direction of travel is increasing regulation and compliance and an emphasis on market forces and commercial, investor and public pressures driving actual change. Perhaps the most unrecognised pressure of all, though, is from employees, who are increasingly taking account of sustainability and social governance matters when considering potential employees. Traditionally, the imperative for tenants has always been to find the right space, in the right location, at the right price. While those fundamentals remain essential, the sustainability credentials of space, along with its internet connectivity, are becoming increasingly important in the battle to recruit and retain the best talent. All of which makes the role of the in-house sustainability team even more important and extends their role beyond energy consumption to encompass things like compliance with the UN's Sustainable Development Goals. A lofty ambition indeed!
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