The Biggest ESG Considerations That Developers And Investors Are Facing Right Now
Setting and maintaining environmental, social and governance goals is becoming increasingly complex and necessary. Today, a business needs to balance growing numbers of regulations regarding carbon emissions and public demand for more sustainable practices with the potential high costs of creating a fit-for-purpose property.
So where to start? On 21 November, Evelyn Partners head of Real Estate Zoe Thomas will be discussing this question at Bisnow’s UK ESG Real Estate Agenda event on a panel that will discuss Capitalising on Sustainability: Investment Strategies and Trends in the ESG Landscape.
In advance of the event, Bisnow spoke to Thomas about what property developers and investors should focus on when building an ESG roadmap.
Bisnow: What are the biggest ESG considerations faced by real estate developers and investors?
Thomas: There are a lot of regulations for the real estate industry to get their heads around. The government’s measures relate to many areas, from energy performance certificates to the regulations introduced during construction. The most recent is the climate-related financial disclosure, which has applied to large companies since April 2022.
These regulations have a huge impact on organisations involved in real estate, from developers to tenants. The number of standards to meet is only going to increase. And whether you’re constructing a new building or retrofitting an existing one, there will be costs involved.
Developers and investors also need to consider how their handling of ESG impacts reputation, branding and demand for properties. They won’t want to just meet the minimum requirements — they’ll want to be seen as going above and beyond.
Increasingly, people won’t invest in properties that don’t exceed regulations. This is both because of public perceptions and because they won’t get the returns they’re looking for.
This all comes at a cost, which has to be balanced. Investors and developers need to realise that the returns they generate may not be at the same level they used to be.
Bisnow: Many property owners are focusing on energy efficiency. Is embodied carbon and construction waste becoming a greater consideration?
Thomas: Generally, the industry is focusing more on the fabric of a building and construction techniques. People have realised that just installing energy-saving light bulbs won’t cut it. ESG is much bigger than that.
Developers and investors are also looking more long term. The reinforced autoclaved aerated concrete, or RAAC, crisis in schools shone a light on why we need to. Thirty years ago, the industry used concrete that was fast and effective, therefore cost-effective, but it didn’t last. Now that’s come back to bite us.
The current inflationary environment globally has made people realise that returns have to work over a longer time period. It’s not enough to focus on the next few years. Investors will increasingly force developers to think more long term.
Bisnow: How real is the threat of stranded assets for property owners?
Thomas: There is a very real threat posed by owning a property that no one wants to purchase or lease because it doesn’t meet regulations. A landlord that owns an outdated property will be wondering how to turn it into something that is fit for purpose for the future, without a huge investment.
The pandemic brought this forward more quickly than it might have otherwise. The way people are now using spaces has changed, not just from an environmental perspective. People want their work environment to be more aligned to how they work at home, and tenants don’t want spaces that can’t provide this.
Bisnow: How well is the real estate industry approaching the social aspect of ESG?
Thomas: On the social side, in the last few years, our perspective on property has changed beyond anything that we could have foreseen. People want to work in spaces that provide an environment they actually enjoy being in. Otherwise, they won’t go.
This extends beyond a workspace. Developers need to create real estate that offers potential for leisure time, including green spaces.
This is filtering into how we use our high streets. Many properties will see a change of use so they’re not abandoned and derelict. We’re getting more green space, spaces with seating and leisure offerings that provide an experience. People are thinking smarter about how to use space.
Bisnow: Is good governance becoming a greater consideration for property developers and investors?
Thomas: There is now far more emphasis on how to reflect good governance in a business’s accounts, which includes creating a narrative for what you’re doing and why. Businesses have to account for spending and show how they will bring accounting standards into everyday activities.
Regulations such as the Modern Slavery Act and The Corporate Governance Code have been around for a while, but organisations are still coming to terms with the climate-related financial disclosure regulation of 2022. This requires large organisations to disclose their governance around climate-related risks and opportunities, as well as strategies and targets.
Bisnow: With such a broad range of focuses within ESG, where should a business begin?
Thomas: The best place to start is to take stock of where they are with a thorough health check of all aspects of the business. What state are the accounts in? Who is tracking whether you meet regulations? If you’re not meeting regulations, can you demonstrate that you’re working towards them?
Once you’ve reviewed the current state of your business and portfolio, you can address what you need to do to get to the right place.
This article was produced in collaboration between Evelyn Partners and Studio B. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
