Environmental, Social, and Governance (ESG) issues have particular relevance to the real estate sector. From place-making through design and planning to construction, financing, occupation (whether living or working), and eventually demolition, the built environment can have significant impacts, positive and negative, on the environment, individuals, and communities.
With ESG firmly in the mindset of developers, investors, occupiers, and funders, we set out our thoughts on the ESG trends and developments to look out for this year – we'll see if we're brave enough to look back on these in twelve months' time.
1. A focus on nature
Biodiversity Net Gain (BNG) in the development industry has been a hot topic since the Environment Act 2021 received Royal Assent. It will come into effect on a phased basis, starting with larger schemes on 12 February and smaller schemes from April 2024. Despite the simplicity of the aim (an increase in biodiversity), it has the potential to cause delays and confusion, particularly in the early stages of the policy. But the relationship between development and nature will never be the same again – mandatory BNG may result in significant design changes for developments, bringing biodiversity back to our doorsteps and connecting us all to nature and the natural environment.
2. A presumption against demolition?
Planning permission for the demolition and redevelopment of a flagship retail store on London's Oxford Street was refused by the Government last year, amongst other things, because the proposals would "fail to support the transition to a low carbon future, and would overall fail to encourage the reuse of existing resources, including the conversion of existing buildings".
Whether the decision ultimately leads to Local Planning Authorities adopting a policy to introduce a presumption against demolition, unless other reasons outweigh the carbon cost, remains to be seen - although we think it is rather likely. One day policy may go even further, encouraging new builds to be designed and constructed to allow reuse without the need for demolition. In the short term, we expect a greater emphasis on calculating the carbon cost of demolition and the long-term carbon savings of rebuilding.
3. The first air quality positive development?
In 2023, the Mayor of London published guidance to be used at the master planning stage of large developments in London to improve air quality through design. The guidance promotes thoughtful site layout, avoiding street canyons, designing spaces to encourage airflow, promoting sustainable transport infrastructure, etc. While still only guidance, and only applicable to large developments in London requiring environmental impact assessment; we think many air quality positive principles will soon be adopted by non-Environmental Impact Assessment (EIA) schemes and will be picked up outside of London.
4. Increasing use of sustainable construction materials
The materials we use most commonly to build – bricks, concrete, steel, and glass – are amongst the most carbon-intensive industries globally. Reducing their use or developing low-carbon equivalents is an obvious way to reduce the carbon footprint of the real estate sector. While we might not (yet) see straw or bamboo buildings on the high street, we are likely to see greater use of sustainable timber and wider deployment of green steel and green concrete (which uses waste as a component part).
The world's tallest timber building is 24 storeys in Vienna (Hoho Wien), a mixed-use development including a hotel, apartments, leisure facilities, and offices. Horyuji, in Japan, is thought to be the oldest wooden structure in the world, built in 607AD – so timber structures can suit our 21st-century needs and be extremely durable. Commercial timber-frame buildings are becoming mainstream, and critical issues such as fire safety, fundability, and structural safety can all be dealt with.
5. A focus on construction phase emissions
As well as the embodied carbon within the materials chosen to build, there will likely be an increasing focus on the environmental impact of the construction phase. How materials are transported to the site, the plant and machinery used on-site, and the potential for materials wastage and reuse all have significant potential for carbon emissions.
Some large developers are already trialling zero carbon construction sites. While it may not become a common Section 106 Agreement planning obligation, it may soon start to be offered up as part of a bold package of measures for the most sustainable developments.
6. More and more ESG benchmarks
The real estate sector already has a number of benchmarks against which developments can be independently assessed and graded, ultimately highlighting that the development has positive ESG credentials and is therefore more attractive to occupiers or investors and potentially has a higher value than if uncertified.
For a long time, BREAAM certification was the go-to assessment tool, but others are becoming more common, such as LEED, GRESB, EnergyStar, NABERS, OPERAT, Fitwel, AirRated, and WiredScore. Whilst there may not be any consolidation, and some will be more common than others, it's clear that the real estate sector will have an increasing number of ways to assess the performance of a variety of ESG criteria, from energy use, water use, tech connectivity, air quality, to the community support available to older residents.
7. The year of the green lease?
Green leases are leases which promote positive environmental management or behaviour. They have been discussed for many years, but only in recent years has there been noticeable take-up. The Better Buildings Partnership published a toolkit in 2013 setting out model clauses and best practice recommendations. The toolkit is due to be refreshed in early 2024, and we think that will spark a flurry of discussions between landlords and tenants as to how environmental provisions can be included in their leases and how strong those commitments will be.
8. A thirst for ESG data
For a while, there have been various mandatory reporting requirements in relation to ESG matters, and a number of businesses published details of their ESG performance on a voluntary basis. The EU Corporate Sustainability Reporting Directive rules are now firmly in play. We expect an increasing number of developers, contractors, investors, occupiers, etc to share details of their ESG performance with their stakeholders. Large institutional landlords will likely be subject to reporting duties, and to do so, they will need data from their tenants, for example, how much electricity, gas, and water are they consuming? A number of landlords are now including ESG data provisions in leases, but not all have done so.
It won't just be tenants who are being encouraged to share information – everyone in the supply chain will be increasingly required to pass ESG performance data up the chain.
9. A greenrush for ESG talent
To meet all the new requirements for high ESG performance – whether those requirements come from law, adopting best-industry practices, or stakeholder demands – we expect the ESG talent recruitment drive to continue. Many in the real estate sector are hiring ESG and sustainability specialists, and we expect that to continue into 2024 and beyond – ESG teams will be getting bigger and rapidly in order to help guide their colleagues into the net zero carbon, nature-positive world.
10. The great retrofit starts
If you go outside at lunchtime, 80% of the buildings and structures you see will still be there in 2050, when the UK is supposed to be net zero. It's no secret that most buildings you see are not operationally carbon-zero due to their heating, cooling, maintenance, refurbishment, etc. As well as a net zero by 2050 target, the UK aims to reduce carbon emissions by 68% by 2030 (against 1990 levels) and 77% by 2035. To date, the UK has cut emissions by 48%.
Whilst the cuts to date are impressive, the UK has a lot to do in the coming six years to hit its 2030 targets and will look to the real estate sector to make substantial emissions cuts. The retrofitting of existing properties must surely start soon, although that seems an overly simplistic statement given the enormous cost and added legal complexity where properties are occupied. So, to kickstart "the great retrofit", will we also see increased availability of green finance to support such projects?
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