The ESG Imperative

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The ESG Imperative

Published 4 November 2021

Christopher Stanwell, Head of Planning at international law firm DAC Beachcroft, consider how investors and regulators are re-shaping Real Estate’s approach to ESG. This article first appeared in Estates Gazette on 4 November 2021.

“A code red for humanity” was how Antonio Guterres, Secretary General of the UN, described this year’s “Intergovernmental Panel on Climate Change” report. It concluded that the 1.5 temperature goal would likely be breached by 2030 – a decade earlier than it predicted only three years ago. COP26 in Glasgow is an opportunity for global leaders to submit more ambitious targets for achieving carbon reduction. The UK government’s overarching aim for the summit is to “keep 1.5 degrees alive” and ensure that temperatures do not rise beyond this.

Sustainability has been a decision criteria for some investors for many years, concerned with social as well as environmental concerns. Their approach has now become more widespread and is re-shaping finance. “The BlackRocks of the world are getting more aggressive in shareholder discussions about voting in favour not only of climate related issues, but also social measures,” said Jon Hale, global head of sustainable investing research at Morning Star Inc. “They’re in effect saying we want you to care not only about profits, but about people, planet and profits." In his annual letter to CEO’s this year, Larry Fink, CEO of BlackRock , made his views clear. “We believe that sustainable investing is the strongest foundation for client portfolios going forward. Capital markets pull future risk forward. We will see changes to capital allocation more quickly that we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant re-allocation of capital.“

As being a responsible business becomes a fundamental purpose, then a defined ESG strategy is the route map for achieving this. Previously the component parts of ESG were more frequently dealt with separately. Individual actions of course made a positive difference, but bringing all the elements together in a coherent plan improves the reach of impact. Many quoted businesses in the sector have appointed Heads of ESG to drive their plans through.

The influence of these investors is making itself felt across the real estate sector. ESG is a macro economic risk and will become an increasingly important consideration in transactional activity, on reputational as well as financial aspects, as investors demand greater transparency. It could even be a driving factor in the transaction itself. FT Big Deals, “83% of business leaders say that ESG factors will be increasingly critical to M&A decision making.”

In the very healthy area that is Industrial, net zero is very much higher on the agenda than it was a year ago. Any new building not able to demonstrate a BREEAM rating is unlikely to attract investors or occupiers. It isn’t so much that best practice raises the price of the development and rental levels; rather it’s more a case of restricted interest with no green credentials. Industrial is also integrating placemaking into its vocabulary, as another importance reference to ESG. Carbon offsetting via planting is a simple, but effective and hugely important part of the solution. Expect to see more green spaces around sheds that helps address the environmental agenda, planning conversations around bio diversity gain and creates healthier places to work in for an expanding workforce. For office development, neglect of the ESG agenda could result in zombie developments, when occupier interest dries up due to lack of investment into environmental improvements. Quality of air and quality of well being could become new kpis for building performance.

Regulation is also driving change. At the planning and design stages, all new schemes will be subject to the conditions of the Environment Bill, which is soon to become legislation. This doesn’t only mean biodiversity net gain of 10%, it also means finding a way of maintaining the improvements long term, so that the more beautiful surroundings will endure. The theme of beauty was first used in planning rules in the New Towns Act, which celebrates its 75th anniversary this year. It has been picked up again by the New Office for Place, which launched in July its Building Beautiful Places initiative. This embraces good quality design as paramount, with local communities put at the very heart of decision making.

Another relevant anniversary this year is that of Welwyn Garden City, celebrating its centenary. Garden communities have the potential to embody ESG – care for the environment, creating healthier communities and improving social inclusion. Some of the 14 new sites have come under criticism for not breaking the cycle of reliance on cars. Others are taking up the challenge, with proposals that provide very limited communal parking and improved public transport links.

Too often green initiatives make people’s lives more difficult. Penalties and restrictions will become very real if we do not respond more pro-actively to the crisis, but we would do well to consider a rewards based approach. Green bonds are just one of a number of financing tools that could support greater investment in sustainable practices. Sweden has already applied them successfully, as has one UK local authority. They have national government backing and the time is certainly right for local government and the private sector to consider this aspect of sustainable financing and include these as part of their ESG strategy.

Authors

Christopher Stanwell

Christopher Stanwell

London - Walbrook

+44 (0)20 7894 6269

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