Environmental performance – scrutiny sharpens in 2023
Real estate's focus on the 'E' of ESG continues to gather pace and will have a far-reaching influence on market activity in 2023 and beyond.
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Regulation surrounding environmental impact is set to tighten, coinciding with the need for organisations and investors to demonstrate environmental responsibility further. Consequently, reporting will be greater and market activity will increasingly be conducted through a 'green' lens in the coming year.
Greater transparency over the green credentials of an organisation will grow, with disclosure of carbon emissions and energy consumption required through UK policy vehicles such as Streamlined Energy and Carbon Reporting (SECR), Phase 3 of the Energy Savings Opportunity Scheme (ESOS), and other climate-related frameworks with a macro tone including Task Force on Climate-related Financial Disclosures (TCFD).
Although it is a global framework, the interaction between TCFD with UK company law reporting requirements will gather momentum throughout 2023, following listed company inclusion from 2021 that affected company reports from 1st April 2022. The next tranche is for accounting periods beginning on or after 6 April 2022; mandatory climate-related financial disclosure regulations apply for certain companies and LLPs. Guidance to help companies and LLPs better understand the requirements is available from BEIS. The thrust of the TCFD disclosures draws upon the four key pillars: governance, strategy, metrics and targets, and risk management. The reporting entities captured will need to address the identification, assessment and potential impacts of climate-related risks and opportunities. Real estate regulations such as SFDR (delegated regulation from Jan 23), UK SDR (under consultation) and the EU taxonomy framework are all pushing funds actively marketed, real assets held and on transactions, in the direction of offering greater transparency and accountability, to further support investor decision making.
Pressure via regulation for real estate will also grow. From 01 April 2023, the scope of MEES will extend to existing tenancies of most commercial properties. It will restrict a landlord's ability to continue to let property with an F or G rating. While this may not immediately impact the main markets – there are few properties at this rating. Its implementation fires a starting gun on the path to enforcing a minimum EPC rating of B by 2030 in England and Wales. A recent Knight Frank study indicates that 4 of 5 office buildings across the UK regional cities do not have an EPC rating of B or better.
Furthermore, while we acknowledge the minimum planning requirement is for buildings to achieve BREEAM New Construction of an Excellent rating, we are yet to see NABERS Design for Performance, the NABERS Energy for Offices rating scheme and BREEAM In-Use become mandatory. Interestingly, these certification types are increasingly a significant feature on the criteria for investors.
BREEAM is known by many for being all about the design and construction of the asset and refurbishment. BREEAM In-Use considers a building's environmental performance and management. Rather than being representative of a snapshot in time, it is a certification that lives alongside the building and is subject to regular review. It covers key environmental categories such as energy, health and well-being, management, land use & ecology, pollution, water, resources, resilience and transport. A certification offering with roots from Australia, NABERS, is now beginning to feature across the markets. The operational variant of NABERS energy rating for offices has a stringent set of utilities metering requirements and captures real-time energy and carbon emissions at the point of occupancy, and offers a rating on evidence of building performance over 12 months. Toronto Square in Leeds, owned by Grosvenor, was the first office to be verified using the NABERS UK Energy for Offices Scheme, with the building achieving a 4.5 Star Rating.
A focus on carbon reduction will mean that retrofitting over new development will grow as a preferred route to market for developers. A study comparing new build, conversion and refurbishment found that embodied carbon emissions from refurbishment were at 2.1%, conversion at 10.3% and new build at 27.9% - 31.3%. This illustrates the significant difference between adaptive reuse and new development.
A good example of this in practice is 30 Semple Street in Edinburgh. The building is under extensive refurbishment and will be Scotland's first 'outstanding' BREEAM refurbishment and 5* NABERS Design for Performance building. Further green credentials include AirRated Platinum certification for indoor air quality, achievement of EPC 'A' after modelling high-performing fabric u-vales and g-values, planning approved for the addition of solar PV panels for the new roof, and the building refurbishment benefiting from taking a circular economy approach to lower its environmental impact. 30 Semple Street's innovative hybrid VRF air source heat pump system and opening windows with wireless contacts to switch off/on air conditioning to save energy, complete the key aspects of the green approach to a major refurbishment. In Glasgow, The Lucent, 50 Bothwell Street – which is nearing completion, is a Victorian-built building that has adopted a zero-carbon approach for design materials, construction and operation. It will feature electric vehicle and cycle infrastructure within the design and high-efficiency air source heat pumps and air conditioning.
A silent factor for buildings in operation, sought by landlords and occupiers alike, is whole building data relating to utilities consumption. Correctly metered data reads accurately, which is crucial in establishing a firm basis for reporting and driving our acceleration toward net zero carbon. The supply chain concerning the circular economy and embodied carbon are inextricably linked to new developments and refurbishments. The role of data health as a whole will only gather momentum over time, and formal assurance of these data sets is already upon us, demonstrated by leaders within the real estate space who are setting the pace.
Given the breadth of current and incoming drivers and the speed at which ESG is developing in real estate, it is clear that all markets must adapt. Investor and occupier focus is sharpening on ESG within real estate, with mindsets transcending any market turbulence. Supply chain issues, delays, and government regulation will not prevent the sector from forging ahead with an ESG-driven agenda, primarily due to strong market demand balanced with converging occupier requirements. As we see conformity towards minimum standards becoming a reality, particularly in the case of EPCs and MEES, landlords might consider key environmental credentials as a point of differentiation and opportunity.