The net zero mission

In June 2019, the UK government committed to reduce the country's greenhouse gas emissions to "net zero" by 2050, and its Net Zero Strategy: Build Back Greener set out decarbonisation policies designed to achieve net zero emissions by that date.  Urgent, early action is required, however, and the government's Sixth Carbon Budget contains commitments to reduce emissions by at least 68% (on 1990 levels) by 2030.  Success will enable it to remain in line with commitments made, as part of the 2016 Paris Agreement, to keep global warming under 2 degrees, in recognition of the catastrophic, existential threat posed by climate change.

Last month's Skidmore Review - Mission Zero - reinforced the urgency of action.  Its recommendations included reforms of the local planning system and National Planning Framework to place net zero action at its heart, new incentives for decarbonisation, a 'solar roof revolution' and a comprehensive reform of construction methods.

Net zero buildings

According to the UK Green Building Council ("UKGBC"), the "net zero" classification is two-fold in the context of buildings.

Firstly, net zero will be achieved in relation to the construction of new, or the major renovation of existing, buildings where the amount of carbon emissions associated with a building’s materials and construction is zero or negative, through the use of offsets or the net export of on-site renewable energy.

The commitment to net zero emissions cannot, however, stop at practical completion.  Net zero action must extend through the whole lifecycle of the building.  This means targeting not only its in-use performance (requiring high levels of energy efficiency to reduce carbon emissions associated with the building’s operational energy to zero or negative) powered from on-site and/or off-site renewable energy sources, but also its eventual disposal.

A net zero framework

In order to meet the UK's 2050 net zero targets, urgent, widespread and real action in relation to the construction, operation and demolition of buildings is needed.  The route to net zero is a work-in-progress, supported by industry collaborations such as Better Building Partnership's Climate Commitment, which focuses on improving the sustainability of commercial buildings.  Industry and global advisory bodies are increasingly developing frameworks (such as UKGBC's Net Zero Carbon Roadmap, and the World Green Building Council's EU Policy Whole Life Carbon Roadmap) to help buildings achieve a net zero status during construction, operation and demolition, and to mitigate climate change.

The UK Government's Environmental Audit Committee recommended in May 2022 that the UK should make whole-life carbon assessments for buildings mandatory, as it is in other countries such as France and the Netherlands.  The Committee's report, forming part of its sustainability of the built environment enquiry, notes that this requirement should be fully incorporated in building regulations and the planning system, and advises the UK government to develop carbon targets for buildings to align with the country’s net zero goals.

The World Economic Forum (WEF) (in collaboration with JLL) has published ten Green Building Principles: The Action Plan for Net-Zero Carbon Buildings, calling on property stakeholders to:

• Calculate a robust carbon footprint of the property portfolio in the most recent representative year to inform targets
• Set a target year for achieving net-zero carbon (2050 at the latest), and an interim target for reducing emissions by at least 50% by 2030
• Measure and record embodied carbon of new developments and major refurbishments
• Maximise emissions reductions for all new developments and major pending refurbishments  to ensure delivery of net-zero carbon (operational and embodied) by the final target year
• Drive energy optimisation across both existing assets and new developments
• Maximise supply of on-site renewable energy
• Ensure 100% off-site energy is procured from renewable-backed sources, where available
• Engage with other associated stakeholders to reduce indirect emissions in its value chain (including through business travel, purchased goods and services and waste disposal, but not including emissions from fuel combustion, company cars or purchased energy)
• Compensate for residual emissions through high-quality carbon offset purchases
• Engage with stakeholders to identify joint endeavours and equitably share costs and benefits of net zero actions

These steps are not just 'nice-to-have' suggestions but 'must have' necessities if net zero targets are to be achieved.  However, WEF's final recommendation raises an interesting point. There will be a significant financial cost to climate sensitive, net zero programmes, and discussions will be required as to their funding. Landlords and tenants should check the terms of existing leases to clarify where action and cost obligations lie (if indeed contemplated by the lease).  Landlords in the course of leasing premises are increasingly likely to encounter early discussions with tenants about energy efficiency issues, to avoid cost and duty conversations further down the leasing relationship.

New builds

The pathway for sustainable design within new construction is relatively clear.  Designing buildings to eliminate as much embodied and operational carbon as possible will see changing specifications for plant and materials, with greater focus on:

• Refurbishment, rather than demolition, of existing structures, to reduce construction materials and embodied carbon otherwise integral to new foundations and core structures
• Redesigning traditional heating, cooling and lighting systems to incorporate on-site renewable energy sources
• Introducing new, smart technology to enhance operational efficiency and eliminate energy waste
• Integrating green spaces within building design to enhance workplace well-being

Addressing carbon issues in new construction is, however, only part of the challenge.

Retrofitting existing buildings

Retrofitting existing building stock to net-zero carbon is central to full decarbonisation, and the extent of the challenge should not be under-estimated.  Most of the UK's existing buildings are likely to be standing when the 2050 net zero deadline is reached, which means the environmental challenge to adapt and upgrade buildings is both real and time-critical.

In the short term, commercial properties must be adapted to meet, and exceed, the government's Minimum Energy Efficiency Standards ("MEES"). It is currently, for the most part, unlawful for landlords to grant (or renew) leases of commercial premises with an Energy Performance Certificate (EPC) rating below an 'E'.  From 1 April 2023, the MEES restrictions will extend to existing leases of commercial property with an 'F' or 'G' energy performance rating. The UK government's net zero strategy proposes the introduction of a minimum 'B' energy rating for commercial properties by 2030. Savills reports that approximately 1.4bn sq ft of retail real estate (approximately 83% of the UK's current retail stock) is currently below this standard, and will need widespread energy efficiency improvements to remain lettable beyond that date.

Outside the UK, the EU is revising its Energy Performance of Buildings Directive, the main EU Directive setting building energy standards, which is likely to be adopted by the end of 2023.  Although the proposal focuses on the reduction of operational greenhouse gas emissions, it also takes the first steps towards addressing emissions over the whole building life cycle.  Under the Directive, all new buildings must be 'zero-emission buildings' from January 2030.  Buildings 'occupied' or owned by public authorities will need to be zero-emission from January 2027.  For further information, please see our client alert here.  Where the EU legislates, other jurisdictions tend to follow, and so the substance of this Directive has broad relevance.

Offsetting

Whilst drastic emissions reduction and decarbonisation is targeted, total elimination to gross-zero is simply not possible.  This necessitates compensatory, offsetting steps. Carbon emissions will need to be 'neutralized' through other contributory measures, such as investment in reforestation, in renewable energy sources such as wind or solar farms, or in sustainable farming projects.  There remains a danger, however, that offsetting, or carbon credits, will slow the pace of emissions reduction, and there is increasing scepticism in the net zero credentials of those who place over-reliance upon it. Offsetting should be the last resort, not the fallback position to justify energy cost-savings.

Changes from within

Occupier expectations in terms of their space within commercial buildings have been steadily evolving, and greater numbers of tenants and investors are now seeking 'green leases' as standard.  Letting out an environmentally-substandard building is now more likely to attract a 'brown discount', that is, a lower rent, than one which has been built, or retrofitted, to a more sustainable specification, and have a higher risk of vacancy.

Pressure not only from government but within the real estate market itself may prompt positive efforts to meet net zero targets more quickly.  The new industry messaging promotes collaboration, not competition, in the push to make sustainable, climate-conscious, energy-efficient and net zero buildings both a priority and a reality. 

For further guidance on the implications of the UK's net zero mission on your property portfolio, please do not hesitate to contact us.