25 February 2022/ Guides

ESG in real estate: The three biggest trends contributing to its rise

Over the past year, it has been almost impossible to open a newspaper or read an article online without encountering something dealing with the topic of ESG. ESG has become the green buzzword of modern times standing for ‘Environmental’, ‘Social’ and ‘Governance’. Together, the acronym summarises an agenda that will have a major impact on the real estate industry both now and in the future.

The past few years have been a watershed moment for ESG in real estate. With the pandemic and climate-related issues bubbling up to the surface, along with the growing acknowledgment of social inequity, ESG considerations are fast becoming a priority for investors, developers, landlords and occupiers.

Clearly there is a lot of talk about ESG. So, what are the main drivers behind ESG, and what trends should we keep our eyes on as we head further into 2022? Here are some of our key predictions:

Net zero will be the new normal

It’s no secret that the built environment is one of the largest energy consumers, making up 40% of total energy consumption and 36 per cent of CO2 emissions. While property certifications such as LEED, BREAM and NABERS2 will continue to be important measurements of buildings’ environmental performance, the focus is now shifting to initiatives such as the World Green Building Council’s (WGBC) Net Zero Carbon Buildings Commitment, which calls for all buildings to have net-zero carbon emissions by 2050.

As occupiers increasingly avoid properties with subpar environmental credentials, it’s clear that reducing carbon emissions and making a minimal impact on the environment will play an important role in preserving asset value. As a result, both occupiers and investors will be drawn to properties that are environmentally friendly and sustainable, increasing the value of the property.

In addition, we’ll see the proliferation of more ‘green leases’ between landlords and tenants to meet certain environmental standards. These will become a common tool for investors to measure and accelerate the environmental performance of their real estate assets.

Regulations will continue to tighten

There has been increasing pressure on governments to mitigate environmental and social threats. As a result, they have responded with new ESG-focused legislation and policies that are expected to be implemented in the near future. To accelerate progress, the UK government is using a carrot-and-stick method with both investment and regulatory policies in an attempt to reach its target of net-zero carbon by 2050.

Despite this, the UK is still not on track to meet its fifth and sixth Carbon Budgets nor is it on target to achieve an 80% reduction in emissions by 2050, let alone net zero in 2050. More investment and regulation is expected, as the built environment, accounting for 40% of emissions, will continue to be a target. As the trend toward tighter compliance accelerates, the real estate industry must ensure it is able to stay on top of a rapidly shifting regulatory environment.

At the same time, the push to improve the energy efficiency of buildings isn’t just down to regulation and investor demand. Many commercial occupiers have their own net-zero targets and want real estate to mirror these objectives.

Health and wellness will have larger influence

We already know that workplace wellness is high up on the agenda of office investors and landlords because of its ability to attract tenants. Add to this, the outcomes of the pandemic, which have led to increased demand for office space that takes air ventilation and filtration into account, not only to prevent the spread of illness but also to increase employees’ energy levels and overall mental health.

The pandemic has also heightened awareness around hygiene, causing landlords and facilities managers to conduct more thorough and regular cleaning, especially of communal equipment and amenities such as elevators. They have also come under pressure to provide protective products such as hand sanitizer, disinfectant and masks, and erect signage advising building occupants on how to maintain cleanliness.

Looking ahead, it’s clear that ESG in real estate will continue to focus on tackling climate change, increasing asset value, and creating social value. We are already seeing investors embedding ESG considerations into every stage of the property lifecycle, from due diligence to acquisitions and from green leasing to development. In fact, 60% of respondents to a 2021 Global Investor Intentions Survey by CBRE stated that they have already adopted ESG criteria as part of their investment strategies, with the Americas, EMEA and Asia-Pacific all recording a stronger focus on ESG issues than in previous years.

If you’d like to find out more about what the future holds for sustainability in UK’s real estate, check out our other tenant guides for more insight.