One of President Biden's first acts was to re-join the Paris Agreement; the UK is preparing to host the 26th UN Climate Change Conference later this year; and the UK Government is busily fleshing out its 2050 Net Zero Carbon strategy, so it is fair to assume that as the world cautiously creeps out of the COVID crisis, the climate crisis will very much be back on the agenda. In the Real Estate world, this takes the form of “Sustainability”.
We can’t hide from the built environment being responsible for approximately 40% of UK carbon emissions; whilst the construction industry is thought to be the single biggest contributor to waste. It is therefore no surprise that sustainability is shooting up the list of priorities for banks, developers, landlords and tenants - and in a very real way, far beyond lip-service. In many ways, banks are leading the way, with several lenders committing to reduce carbon emissions by at least 50% on all financing by 2030; making billions of pounds available by way of green lending initiatives; and by applying suitability criteria when making financing decisions.
With leading banks nailing themselves to bold targets, it is clear that the market is being encouraged to act on this crisis now. We shouldn’t see sustainable investment as a drawback or box-ticking exercise either, not least because the UK Government is crossing its fingers that Real Estate construction will be a driving force in the economic recovery from the corona virus fallout. Beyond the wider economic benefit of sustainable lending, development and redevelopment, most landlords see their investment paid back more quickly than anticipated, meaning there is a genuine business case for such investment. This is aside from the inherent benefit of contributing to a more environmentally responsible Real Estate sector.
While banks are becoming increasingly committed to lending on environmentally efficient developments and retrofits, it is clear that pension funds, institutional investors and developers are following suit. Individuals are increasingly keen to ivest in sustainable-only funds, so green portfolios are likely to become much more widespread. It follows that landlords will therefore become more committed to working with tenants to ensure behaviour aligns with the sustainable nature of the asset. This could take the form of requiring low energy usage or setting waste limits. Real Estate lawyers should stand ready to ensure that any such commitments, made by either landlord or tenant, are reflected as obligations in letting documents.
An eye should always be kept on the Minimum Energy Efficiency Standards for landlords too. No doubt as green lending and lease obligations become more entrenched, tighter regulations will inevitably aim to force the hand of those not acting quickly enough.