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How will ESG financially impact the property sector?

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The need for a focus on sustainability in real estate is no longer a ‘nice to have’ but recognised as business critical. However, becoming ESG compliant is an increasingly complex operation. Earlier in November, we welcomed subject expert, Charlie Twyman - Senior Account Lead at Carbon Intelligence, to share his intelligence and sector specialist, Tony Garner - Director at Watkin Jones, to provide his perspective from the development world at our event: How will ESG financially impact the Living sector?

You can read what they had to say in their Q&A below.

Charlie Twyman, Senior Account Lead at Carbon Intelligence

Why is embedding a sustainability strategy critical for Real Estate companies?

The science makes it clear that our planet is warming at significant levels due to the increase in atmospheric greenhouse gas caused by human activity. In turn, this is having severe consequences the world over, relating directly to rising sea levels, the increase of extreme weather events, droughts, heat waves and mass migration. The costs of these effects are detrimental, and not least of all from a financial perspective.

The world has and is responding, with the move towards a net zero economy gaining momentum and sustainability sitting on the agenda in boardrooms. There is now a better understanding of the climate crisis and recognition that ESG now plays a substantial role in determining risk and return.

In the context of real estate, the built environment contributes to around 38% of global annual GHG emissions (UKGBC), this sector, therefore, has a duty to address its emissions to ensure the success of national and international climate goals. With any investment, there are risks and opportunities, both immense, depending on how little or much action is taken. 

How can the ‘Living’ sector prioritise being a high-growth sector whilst ensuring it is sustainably focused?

The correlation between growth and ESG is clear and can be noted from different perspectives.

Investors are taking a forward-looking approach and mandating that sustainable practices be incorporated into corporate strategies. Across the global economy, we can see that with the surge in popularity of various reporting bodies such as  GRESB, which now covers $6.4 trillion of assets under management. A key component of growth is therefore aligning with investor ambitions and embedding sustainability in operations.

From an occupier's point of view, the green desire is moving further up the agenda. This may be to a lesser extent in residential compared directly to other asset classes, where there is a growing body of evidence showing the correlation between reduced voids and increased occupancy rates and more sustainable assets. One could suggest that this hasn’t spread across the entire market yet, although the macro trends we’re seeing elsewhere, combined with the energy crisis will result in a greater demand for greener residential buildings.

We have also seen changes in financial products and services to transition to a net zero economy. For example, there has been a monumental rise in labelled debt, which is linked to green and sustainability loans and tends to be tied to climate or environmental performance. To put it into perspective, across the global economy sustainable debt finance totalled at a little over $25 billion in 2013. That figure is now at $732 billion dollars. 

How do you get senior stakeholders to make sustainability a priority in the boardroom?

The corporate boardroom is a complicated place.  Board directors juggle conflicting demands and with responsibility for direction and oversight of the company, they are under pressure to achieve an agreed organisational purpose, to deliver return to shareholders and investors. 

Boards have a legal duty to secure the long-term success of their company and are expected to have the skills and expertise to do so, and for senior management who have obligations to serve the Board, environmental issues are starting to become urgent business considerations.  

Understanding the complexities for a board of directors to guide a business through this is key to building the relationships needed to get boards to be catalysts for change. 

3 key pillars of effective board engagement are:

  • Engage: Do your due diligence and really understand who is on your board and what makes them tick. What are their existing interests and responsibilities → this information will help you identify who can be your champion in the board and translate the risks and benefits of climate change into words that resonate with their pressures and drivers. 

  • Educate: Diplomatically upskill directors for they have sufficient knowledge and expertise to make the right decisions, to understand the most material risks and opportunities, to set the right strategy then oversee and govern the delivery. 

  • Enrich: Give your board strategic insight and foresight into how the market is performing, what competitors are doing so they can make active, informed decisions that will help respond to investor pressure for action. Give them the insight they need to realise ESG is the cut through for their business. 

What are the financial impacts that real estate developers or investors may face if they do not invest in a sustainable future?

Regulation is coming thick and fast. That can be at the corporate level, with the likes of SFDR and TCFD, but equally from a building and domestic perspective. For example, in the UK,  recent changes to Part L regulations were made, which stipulates a reduction in CO2 emissions in all new homes and forms an integral part of the Government's target of delivering Zero Carbon Ready Homes by 2025. The impact of regulations increases the chances of non-compliance, which very much poses a risk to real estate companies.

Regarding the price of carbon, the energy crisis is driving demand for energy-efficient buildings and by implementing best practice we can deliver a value add. Equally, in the world of offsets, these are unavoidable and the business case for low carbon buildings becomes even more compelling when we consider them. In any credible Net Zero strategy, we should focus on reducing carbon as much as we can and only in the last possible instance when all projects have been implemented should we use offsets. The cost of offsets is only going to increase, and this means opening yourself up to financial risk if you plan to be entirely reliant on them.

Finally, and becoming more and more important is the threat to reputation. Although putting a price on this is complicated, the role of ESG in a company’s reputation is growing by the day and allegations of greenwashing, where claims are made that environmental and social practices are overstated, can result in reputational and financial damage.

So, one of our clients wants to start their journey to becoming Net Zero…where do they begin?

In terms of the key considerations, the following process is recommended;

  • Establishing priorities:

    • Reviewing what is most pertinent to you and how you might be affected by key drivers such as regulation and investor demands, allows you to understand and appreciate how you can capture opportunities, manage risks and align to your corporate strategies.

  • Setting a strategy:

    • Following that, setting a strategy which can be supported by a strong business case and targets is fundamental. Within this strategy, there needs to be clear accountability with well-defined responsibilities, with a clear consensus on who is doing what and when.

  • Thinking full life cycle:

    • Buildings must be designed with their Whole Life impact in mind to align with operational and embodied carbon targets. By thinking across the lifetime of an asset, we can then appreciate what the associated impact of an asset will be. In turn, this informs the design process, bringing stakeholders on board, and putting those predefined targets in reach.

  • Reporting:

    • Reporting drives action, providing a measure against progress. As part of the reporting process, we need to establish a benchmark for our successes and the areas for improvement and use that data to drive further action.

Finally, and incredibly vital,  is that this is all underpinned by effective collaboration and engagement. Engagement between all parties ensures that ambitions are understood, and lessons can be learnt throughout the project.By acting collectively, we can and will accelerate the transformation towards a decarbonised, and sustainable built environment

Tony Garner, Development Director at Watkin Jones PLC

What is the greatest challenge you have faced in your journey so far to becoming carbon zero at Watkin Jones PLC in the longer term?

It is no secret that viability is a big challenge, particularly in the current market / economy, therefore cost vs value has to be the biggest challenging factor, however as an industry we cannot afford to ignore the need to reduce carbon and assist with both UK & Global targets.

What ESG action have you taken that’s had the biggest impact?

Apart from our ESG certification engagement with BREEAM & HQM etc, I feel our higher internal targets we have set for carbon reduction in design above statutory targets, will, in the medium and long term, be the most impactful.

What advice can you give your development peers and wider property industry?

I think joining events like this, talking amongst ourselves and trading ideas is a great opportunity to have a voice as a collective, we discussed confused government messaging and lack of direction in terms of regulation on ESG particularly in the residential sectors. ‘Let’s keep talking and keep the agenda alive’ as well as personal responsibility we all have for future generations.

If you had 10 minutes alone with the housing minister, what would you say?

What wouldn’t I say maybe easier! More clarity and guidance are required from Government to listen to our Industry as a collective, understand the issues in the practicalities of achieving carbon reduction goals, give assistance and funding where applicable to reward innovation, and make regulatory changes to both simplify and streamline the process to achieve our targets towards a net zero world.

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