ESG stands for “environmental”, “social” and “governance” and broadly refers to the flow of non-financial information that aids decision-making, with the view to ensuring the long-term viability of a business. ESG has become an important value driver in the real estate sector and, as our Christmas countdown continues and the temperature drops, we focus on 9 key ESG (dance!) steps to take in the real estate sector going into 2024.
Step One – “D”
For the “D” in “Dancing” we bring you Dubai! All eyes are currently on Dubai with COP 28 taking place. From a real estate perspective, look out for an emergence of focus on: (i) low-carbon solutions in the context of building design, material procurement and construction; (ii) district heating and energy efficiency; and (iii) the nexus between energy considerations and water use. We may not, however, see a radical shake-up of real estate policies and approaches come out of COP 28 and the real estate sector is likely to follow what we have seen in other sectors where increasingly the private sector has pushed further the sustainability agenda.
Step Two – “A”
“A” is for Ageing Buildings. Keep an eye out in the New Year for the next step in M&S’s legal challenge against Michael Gove’s decision to block its Oxford Street store development plans. The judicial review is a timely test case in the argument over whether ageing buildings should be refurbished and retrofitted rather than demolished and replaced because of the embodied carbon in them.
Step Three – “N”
“N” is for Neighbourhoods. Real estate has a social impact on the communities in which it is located and in 2024 look out for more of a focus on “impact investing” in sectors such as affordable housing and retirement living.
Step Four – “C”
“C” is for Collaboration. Collaboration is key in driving the ESG agenda in the real estate sector, and collecting and exchanging “good” data needed for corporate disclosures. When considering sustainable solutions, the elephant in the room is often who will bear the associated costs, so parties should engage well in advance to agree an approach, with the process hopefully being highly collaborative.
Step Five – “I”
“I” is for Information. An end is hopefully in sight to the “alphabet soup” of disclosure and reporting of sustainability information with the new International Sustainability Standards Board (ISSB) standards published by the IFRS Foundation effective for annual reporting periods from 1 January 2024. The ISSB standards are currently voluntary, however, do monitor this over the coming months, as they are expected to be endorsed by the UK government to create the UK Sustainability Disclosure Standards (SDS) by July 2024.
Step Six – “N”
“N” is for New Builds. Consider how green buildings, including the inclusion of green provisions in agreements for lease and leases, may assist not only in meeting sustainability targets but also by increasing the commercial attraction of the new building to tenants. CREFC Europe and The Association of Real Estate Funds (AREF) said in their joint report issued last month that assets which are poorly positioned on ESG matters may risk becoming obsolete within the UK commercial property market in the relatively short term.
And “G” is for…
Step Seven – Green leases
Green provisions not only apply to new builds but should also be considered in relation to existing building stock. Consider negotiating green provisions on renewals, in addition to anything already provided in the existing lease. Watch this space as the Better Buildings Partnership is expected to soon publish an updated version of its Green Lease Toolkit and, in the longer term, the government is expected to consider the extent to which the Landlord and Tenant Act 1954 should provide a mechanism for including green provisions in statutory lease renewals.
Step Eight – Global to local
Consider whether the broader ESG targets and policies set by your boardroom are translated into a format which is practicable and tangible, so that they work in practice throughout your operations chain to help deliver on your goals.
Step Nine – Governance
Last but by no means least, governance is rising in prominence as boards are increasingly worried about whether they are correctly exercising their duties as directors whilst considering ESG factors. Whilst it is hard for shareholders to successfully assert a breach of duty in relation to ESG matters (as Courts are generally unwilling to interfere with decisions of directors who have properly considered information before them), look out for more ESG-related shareholder activism in 2024.
ESG will continue to be a core issue for businesses, investors and lenders and we have a cross discipline team to help you with this. For more information, please visit our ESG hub or please get in touch.
Links to the previous posts in our Yule Blog series are below – check back tomorrow for our 8th Day’s post!