United Kingdom: Action, not aspiration

Embedding ESG into real estate agendas

In brief

Environmental sustainability, social justice and proactive corporate governance will increasingly underpin the ESG agenda in the real estate sector for investors, occupiers and stakeholders alike. Buildings are responsible for almost 40% of global greenhouse gas emissions, meaning our industry clearly has work to do if the UK is to achieve net-zero by 2050. The terms "net-zero" and "greenwashing" do not sit well together, and if the former is to win out, the UK will need an ambitious regulatory framework, coupled with unwavering buy-in from the boardroom to the living room. "Action, not aspiration" is the UK government's message.

In recent years, we have seen the introduction of the headline-grabbing Paris Agreement on Climate Change and the United Nation's 17 Sustainable Development Goals, the latter being adopted by all UN member states as part of the 2030 Agenda for Sustainable Development. Those goals represent an urgent call to arms.

Domestic legislation is and will continue to be key in bringing the goals to life. Government plans to overhaul UK building regulations, a continued tightening of minimum energy efficiency standards (MEES) and a new mandatory reporting for larger companies to disclose climate-related financial information and to ensure consideration of the risks and opportunities they face as a result of climate change, are encouraging steps. However, we must, within the real estate industry, continue to look for ways to change the way we operate, build and interact with our stakeholders if we are to keep up with both global goals and domestic ESG agendas.

ESG has become a buzzword in the business community. Its frame of reference is vast, but contextual referencing for real estate highlights an urgent need to focus on climate change suspension measures.

The E - Environmental

The UK government plans to reduce business and industrial energy consumption by 20% by 2030 and targets net-zero emissions by 2050. Putting these plans into action will, in a real estate context, require costly retrofitting and decarbonisation of existing buildings, as well as redesigning the buildings of the future to not only comply with current regulations but to ensure sustainability and low energy consumption are factored in at every step of the process, from the whiteboard to construction, through to deconstruction and disposal.

Smarter buildings (supported by advancing technology and data drivers) allow businesses to promote, control and measure a building's performance, and a bold commitment to increase MEES to a 'B' rating by 2030 should and must hurry us along. Landlords and developers need to collaborate with occupiers, clients and stakeholders to agree, support and achieve ESG commitments, and know that a failure to future-proof their practices and stock will make it less appealing to the tenants of tomorrow, which in turn will impact the bottom line. Equally, parties will need to exercise effective environmental leadership to ensure that occupier fit-out works and everyday use of their spaces align with both regulatory standards and market-leading sustainability practices. For its part, Baker McKenzie has negotiated green lease provisions, including challenging (for both landlord and tenant) certification requirements and in-operation ambitions, into the forthcoming lease of its own new office premises, aimed at addressing present and future sustainability standards.

From funding to planning, development, lease documentation, fit-out and occupation, the way we design, build and use our buildings will need to consider the use of natural resources, clean energy and technology and the sustainable disposal of pollution and waste.

The S - Social

The performance of a building is easier to measure than its wider impact on its occupiers, society and the community in which it is located. Investment in community projects may be quantified, but whether a building reflects and shapes its stakeholders and surroundings is tougher to measure. Workplaces, for example, are no longer just endless rows of desks but instead accommodate exercise and wellness facilities, on-site medical provision, restaurants, bicycle parking and a wide range of focus and employee action groups.

The physical space in which we work has a social impact on our well-being. Employees are increasingly aware of the climate crisis affecting our planet and expect action to be taken at a company level. Coupled with a new trend towards home, or hybrid, working, businesses are under pressure to make their buildings attractive places to spend the working day. Specialists have always been central to the design, construction, build, occupation and decommissioning of our built environment, but now buildings must be plugged-in to the needs of local communities, employees and staff if they are to remain relevant in a changing world.

The G - Governance

The importance of environmental and social issues at board level has already brought business management and governance into a world of regular and extensive reporting, such as on carbon footprints, diversity and inclusion, and wholly non-financial matters. As part of its Net Zero Strategy, the government became the first G20 country to introduce mandatory requirements (effective from April 2022) for Britain's largest companies and financial institutions to report on climate-related risks and opportunities and to set out their emission reduction plans and sustainability credentials. Stakeholders also measure the performance of a business against its impact on the environment, its staff, and the communities it serves. Shareholder profits now make up just part of the picture, rather than being the whole picture.

Within real estate, as for many other sectors, supply chain governance has become a critical issue. Companies might require suppliers to account for their regulatory compliance, report on the use of renewable materials, sources of materials (such as conflict minerals or timber), sources of energy used, and reporting and statistics on inclusion and diversity.

Baker McKenzie has contributed to extensive thought leadership in the governance field:

  • Baker McKenzie partnered with the World Business Council for Sustainable Development on "Modernising Governance", a report which sets out key recommendations for boards to ensure business resilience.
  • Baker McKenzie collaborated with the World Economic Forum on "Balance Sheet to Value Sheet", a report which looks at stakeholder capitalism: connecting value creation and stakeholder outcomes to lead to long-term, sustainable business success.

Many businesses, our own included, house and encourage employee committees to tackle matters ranging from waste removal and recycling to fundraising and literacy in schools. Stakeholders appreciate the power of business to bring about change and see their own efforts as much more impactful when taken together with those of others at all levels of seniority within a team.

The Sustainability Series

In a forthcoming series of articles, we will take a look at a number of topics in the context of ESG and sustainability within the real estate sector, considering the steps that real estate businesses can take to bring about timely and positive change, including the net-zero carbon movement, the purpose and effect of MEES and energy performance certificates (EPC), the role of technology in advancing climate-conscious policies within buildings and businesses, green finance, and "green" leasing principles and issues.

When it comes to ESG in the real estate sector, in order to meet the government's 2050 net-zero target and more widely achieve a sustainable, fairer, and equal society, we can no longer just talk the talk; we need to walk the walk as well.

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