- within Transport, Environment and Law Department Performance topic(s)
- in United Kingdom
ESG factors are now central to the majority of landlord and corporate occupier strategies, driven by regulation, stakeholder expectations, and reputational risk. At our roundtable at the recent HSF Kramer ESG Summit, landlords and occupiers shared key insights on the evolving challenges and emerging opportunities.
Here are our key takeaways on what both landlords and occupiers can do to stay ahead when it comes to incorporating ESG into their real estate strategies:
1. Future-Proofing Assets
Clarification on future minimum EPC thresholds for the commercial sector is needed for real investors and developers as well as occupiers. Although it seems the current carbon-based metric will remain the same for now, it is still not clear whether the minimum EPC threshold for these properties (currently Band E) will increase to Band C in 2027 and Band B in 2030. Despite the uncertainty, the likely future increase in standards means landlords are looking to future-proof their assets and agree on how upgrades and compliance will be managed and funded.
Parties are keenly monitoring the progress of the UK Net Zero Carbon Buildings Standard and await the key findings from the Pilot Testing, ahead of the launch of Version 1 in 2026. There is some concern that the Standard may be very challenging to achieve – for example, that the on-site renewable requirements may be difficult to achieve for offices in central London, where space is limited.
Landlords may wish to take a proactive approach – engaging with the Standard and other future initiatives early, and staying agile as requirements evolve to futureproof the value of their assets.
2. Cost Allocation
Cost allocation for ESG upgrades remains a contentious issue. Occupiers, particularly with the shortening of lease terms, do not want to see the landlord upgrading the building on their own ticket. The roundtable discussion highlighted the importance of early dialogue between parties, transparency and the demonstration of tangible benefits and savings, such as a reduction in energy costs, as the best approach to agreeing cost allocation.
Lease negotiations are a prime opportunity to embed ESG commitments. Sustainability provisions, including cost allocation mechanisms, increasingly feature in heads of terms to avoid any future disagreements. It is harder to achieve where there are no foreseeable lease events (e.g. renewals) but, as with most ESG initiatives, collaboration is key between the parties.
There can sometimes be a disconnect between corporate ESG policies and the cost and operational reality. The challenge and opportunity is to bridge the gap to ensure that ESG commitments made at the corporate level are realistic, actionable and reflected in operational decisions and lease terms.
3. Communication: Structuring ESG Dialogue
Although informal communication is still helpful, formal environmental forums and regular meetings are best to ensure the key stakeholders are involved from the outset and to provide a structured feedback loop and drive progress. The ESG dialogue should be started at heads of terms stage and both landlords and corporate occupiers could nominate individuals with clear roles for ESG responsibility within their teams to ensure accountability on an ongoing basis.
4. Data Transparency and Reporting
Accurate ESG reporting is, unsurprisingly, a top priority for both landlords and occupiers. Both landlords and occupiers should work together to ensure access to building performance data, including energy consumption and emissions.
If not already installed, landlords could consider the costs and benefits of installing metering to facilitate better reporting and compliance. The challenge often lies in determining who pays for sub-metering and data collection infrastructure with shorter lease terms making payback periods less attractive for occupiers. Upfront engagement on this and including contractual provisions on compliance are advisable.
5. Renewable Energy Procurement
Renewable energy procurement is increasingly required by corporate occupiers, with many occupiers requiring electricity supplied to the property to be 100% renewable energy. Legacy supply arrangements, tenant user requirements, physical space, whether the building is multi-let, and backup diesel generators are all constraints.
However, addressing any constraints and discussing the occupier's user requirements enables collaboration on a flexible and practicable energy solution that benefits both parties.
6. Social Value and Community Engagement
Social initiatives, although arguably harder to measure and implement, are gaining some traction. It is recognised that buildings have a significant impact on the lives of those who interact with them and the real estate sector is well placed to create positive social impact.
When it comes to considering how to incorporate social issues into leases, as discussed in our recent podcast, a 'one size fits all' approach is not possible. For offices, it depends, for example, on the location and community the building serves.
Leases may include obligations to use reasonable endeavours for certain social impact measures, but they should not be strictly prescribed so as to allow the social initiatives to develop flexibly. Otherwise, there is a risk that these initiatives set out at the start of the lease term quickly become outdated and are not able to evolve.
We often see that social initiative costs are borne by landlords. However, innovative schemes, such as providing space within a mixed-use building to a local community enterprise, and earmarking service charge contributions for those initiatives, are often well received when expectations are set early and the benefits are tangible to occupiers.
What is clear is that parties should focus on: (i) early engagement; (ii) transparent communication; (iii) realistic commitments; and (iv) appropriate cost allocation.
Currently, these discussions are still likely to vary deal-to-deal as landlords and occupiers have different ESG priorities (both amongst themselves and from each other). The direction of travel of these discussions will of course be determined by the current energy efficiency of the building and the landlord's future proposals, as well as the lease term and other commercial terms of the occupier's lease. However, by working together, both parties can still future-proof assets, meet compliance obligations, and deliver meaningful ESG outcomes.
As ESG regulation intensifies and stakeholder expectations rise, both landlords and occupiers are facing increasing requirements. Over time, we expect that these requirements are likely to become more closely aligned, since both owners and occupiers ultimately need the same information and outcomes from their buildings. It will be interesting to see how ESG requirements and the market's response to them develop during 2026 (and beyond).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
