ESG is not old hat. Sustainability is here to stay, with investors showing an increasingly discerning approach to assets. The British Property Federation expects decarbonisation will continue to form part of the political agenda of the next government. The green agenda remains vital, with the property industry's key players pivotal in providing solutions. It is estimated that around 40% of UK carbon emissions are linked to the built environment. 

JLL's UK Capital Markets Review & Outlook 2024 gives important insight into investor appetite. 75% of survey respondents had a greater focus on environmental and social impacts over the past 12 months, with only 2% confirming their focus has reduced. A whopping 53% of investors changed their decision to bid for or buy an asset based on ESG considerations. Sustainability has gained real momentum. Mitigating environmental impact is no longer a nice to have, and environmentally astute occupiers are becoming gold to investors. The Science Based Targets initiative (SBTi) (among other frameworks) has grown in popularity, and those companies which adhere to such pathways for emissions reduction will potentially find themselves ahead of the game when it comes to agreeing the best deals. 

Rising ESG focus

Landlord investors cannot decarbonise in isolation. Collaboration with occupiers is key. Ideally, such collaboration will begin early on in the development of an asset to fit the ambitions of both parties. While landlords may have a central focus on real estate emissions, tenants may be eyeing greater issues in supply chain and production areas. However, the potential for "green space" as an easy win for carbon reduction should not be underestimated. While Scope 3 emissions can be tricky to tackle, the space a company chooses to occupy is directly within its control. 

Lender-side decision-makers are also looking to mitigate risk associated with carbon footprints and the potential for increased regulation in the years to come. Valuations may be increasingly impacted.

Green lease advancements

All this adds up to a high score for the Better Buildings Partnership's (BBP) Green Lease Toolkit which has been recently revised with the input of many industry players, including Dentons which participated in the Legal Working Group. The toolkit helps landlords and tenants agree leases which support sustainable management and improve the environmental performance of buildings. For example, data sharing about energy use and waste is essential if practical changes are to be made. Good landlord and tenant communication underpins the cooperation required, with the toolkit making formal provision for these and other essential ingredients of a sustainably managed asset. The toolkit now includes drafting with a traffic light coding system of light, medium and dark green to reflect increasing levels of ambition. Each suggested clause contains an explanatory preamble helping to focus minds on why the clause is important. 

BBP has also produced an Acquisitions Sustainability Toolkit which looks at the factors which purchasers may want to consider in choosing an asset. This toolkit aims to aid investors in identifying risk and determining any potential mitigation. Again, this is the backdrop against which assets may increasingly be divided into prime and subprime, depending on carbon impacts. It is clear that climate change cannot be ignored, and it is heartening to see some real stakeholder buy-in to the issue of decarbonisation. It seems likely that moves will continue amongst investors and regulators to address the real estate aspects of net zero targets, and those who move with them will get the best out of these changing times.