Net zero and the push for a greener tomorrow – Laura Haworth and Louise Irvine write for EG

In the first article of a three-part series on ESG and sustainability, Commercial Real Estate Senior Associate, Laura Haworth, and Senior Knowledge Development Lawyer, Louise Irvine, have contributed a piece to Estates Gazette about the UK’s pathway to reach net zero by 2050.

On 31 March, the government released three documents intended to lay out the UK’s plan to achieve this: the Green Finance Strategy, the Net Zero Growth Plan and the Energy Security Plan. These were released collectively under the government banner of “Green Day” announcements.

Haworth and Irvine write of how, “for those in real estate, the challenge is that there were scant measures that addressed the sector directly, yet at the same time, a large proportion of the measures will have an indirect impact and will need to be considered.”

Despite this, they do say that the announcements clearly outline the government’s overall strategy centring around a “pro-growth regulatory regime”, with examples including “carbon border taxes” and plans to upgrade the UK’s power grid.

Green Day provisions for real estate

The “Great British insulation scheme” is one of the few policy references to real estate, albeit focused on domestic buildings only. It involves middle-income households being offered grants worth hundreds of pounds to make their homes more energy efficient.

A common criticism of this scheme is that while the UK Green Building Council say 27m homes need retrofitting, this initiative will only cover 300,000 households. Moreover, there is no such scheme for commercial real estate.

As expected, the government is also focusing on transitioning to low-carbon heating systems such as heat pumps. For social and low-income homes, the aim is to improve energy efficiency through the extension of the Energy Company Obligation levy.

“While this is a positive move, it does not address energy inefficiency, a fundamental issue that must be rectified across domestic and commercial real estate if the industry is to meet net zero.”

How can landlords fill in the blanks?

Since Green Day, real estate trade bodies like the British Property Federation, the BPF and CBRE say that a much greater level of detail is needed from government in terms of a net zero transition strategy.

Haworth and Irvine believe that landlords are already under considerable pressure to demonstrate how they are tackling the fight towards net zero. “There are factors beyond looming regulatory pressures, such as reputational risk and the idea that there will increasingly be a premium on green spaces. Landlords want to attract the best tenants so they need to ensure that what they are offering is both what tenants want and competitive against other offerings. It is also important to bear in mind that tenants will have their own environmental targets, which will affect their real estate requirements.

“Competition is playing out in terms of compliance with the growing number of accreditations that landlords can seek for their buildings. These not only improve reputation but also help to attract tenants.”

The retrofit revolution

Retrofitting, which carries the dual benefit of helping to decarbonise the sector while also enabling landlords to think more creatively in terms of sustainability and design, is gaining popularity.

Haworth and Irvine comment: “The trend is moving away from the white box spaces that have been popular for so long and towards spaces with more character and in which sustainable measures are very visible. It is a chance to showcase and to create flexible spaces that do not require a complete re-fit every time there is a change of occupier.”

In order to keep pace with the trend’s growing momentum, there is a need for a larger workforce to carry out the improvements to building stock as currently there are few that specialise. The government talks of securing supply chains for the transition, but only time will tell if that extends to the types of skills required for retrofitting and whether it translates into government investment for skills training or if that is left largely to private funding.

How should it be funded?

The Green Finance Strategy indicates that financial markets are planned as a key driver in funding this climate action. “Once again, the real estate sector is in a prime position to benefit from more money going into green projects through dedicated green funds or green loans.”

While the Green Finance Strategy does not, as many had hoped, contain a finalised green taxonomy, it does include a renewed commitment for the UK to be the “best place in the world for raising transition capital”.

“Although there has been an increase in sustainability-linked lending (a loan where the pricing is tied to the borrower’s achievement of sustainability performance objectives as an incentive), and green loans (where the loan proceeds are used for green projects), these are not as commonplace as might be expected, and do not usually offer a real financial incentive to landowners.”

Haworth and Irvine believe that lenders will increasingly focus on the green credentials of buildings and interrogate this more closely as part of their due diligence.

“The question then is – should landlords or tenants pay for the works? There is no one size fits all. The good news is that payback periods for measures such as solar panels are getting shorter. This means tenants are more likely to contribute if they are going to get a full return on their investment during the term of their lease. But, largely, the cost will fall to landlords, and landlords will pay in order to attract the best tenants and achieve the best rents.”

A way to go

Haworth and Irvine conclude by writing: “While there is still a long way to go, the property sector has proven itself to be committed to net zero, as confirmed by a recent joint survey by the BPF and JLL. The government’s Green Day drive has been welcomed for the partial direction that it gives but, as has been the case to date, it will be the pioneers within the sector that drive the initiative and the innovation needed. The good news is there is a growing bank of evidence that green commercial buildings are attracting higher rents, which is expected to act as an incentive, alongside government policies and regulatory requirements.”

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This article was originally published by EG on 9 May 2023 and is available here (behind their paywall).