What’s the Cost of Ignoring the ESG Agenda?

Posted by Knight Frank Newcastle on 27th May 2021 -

Despite ESG beginning to trend, there’s still a tendency to think about it as a ‘big London office thing’, rather than believing it's applicable to a local shop in St Ives or an industrial unit in Sunderland. But all real estate will be impacted – be it physically, through regulation or through stakeholder pressures.

London has been leading the way, with high-profile office schemes demonstrating the breadth of what ESG encompasses. Take Roots in the Sky for example, which the GLA has deemed ‘exemplary’. It will be built to net-zero carbon, BREEAM Outstanding and WELL Platinum standards. It will also feature a 1.4-acre rooftop forest of over 100 trees and 10,000 plants, as well as a glass-floored, infinity-edge swimming pool which will be warmed by the building’s unused heat.

But it’s not just offices that are at the forefront of the UK’s ESG agenda. Segro Park in Tottenham is an industrial example, which features on-site renewables, green walls and wooden bike sheds doubling as insect hotels.

All ESG elements have financial costs and benefits – be it direct or indirect. But it’s important to understand whether they sit with the asset or the wider business, and consider them in the context of the fundamental drivers of value. We caught up with Gillian Bowman, a Partner in our Valuation & Advisory team to get the full picture.

What is the cost of ignoring the ESG agenda? 

 

There are physical risks, like increased operating costs, wear and tear damage, possible adaptations needed in the future and insurance implications.

There are also transition risks - regulation risks, such as tougher building standards and emissions regulations (we are already seeing EPCs tightening to E by 2023, then set to rise to minimum B by 2030). So this isn’t something you can ignore.

There may even be risks of whole markets becoming less desirable if climate change makes it more costly to maintain infrastructure and supply resources – utility bills and property taxes, for example, may rise.

And finally, a damaged reputation. A company’s brand – and potentially the viability of the business – may be at risk of backlash if climate change and the wider ESG agenda hasn’t been taken seriously. And this may impact investment value and liquidity if the company as a tenant cannot pay rent or is poorly perceived.

Will pressure mount?
 

In the world of real estate, we can certainly expect pressure from tenants and investors to avoid less sustainable buildings. We can also expect to see investors reject tenants who are deemed unacceptable to their stakeholders.