ESG is critical for business

It was also a move that signalled, if it were not already abundantly clear, that the government and society at large now expect businesses of whatever size to take their environmental and social responsibilities seriously.

For the property industry, this is an opportunity. At a time of rampant energy cost inflation, those landlords and investors that provide the most energy-efficient accommodation will have a competitive advantage; those that fail to invest in their assets, on the other hand, will find themselves increasingly irrelevant.

This was the context for a webinar held last month, entitled ‘No time but the present: why ESG is now business critical’, hosted by Property Week under the banner of our Climate Crisis Challenge campaign and sponsored by chapmanbdsp and Octopus Real Estate. Hundreds of industry professionals attended the live webinar and some 49.7% said ESG was a material risk to their business.

Kicking off the webinar, Susan Hone-Brookes, director of sustainability at chapmanbdsp, provided a rundown of her company’s approach to ESG in a pre-recorded video. “We commenced this journey a few years ago when we created our own sustainability charter, which for the very first time captured in one place all aspects of our work and set targets and aspirations for the future,” she said.

“This changing of mindset within our business has been quite fundamental to embedding our vision and striving to make the case with our clients to push the boundaries of their designs. This is where the strength of ESG really comes into play as communication is not just about the engineering concepts in isolation; it is married with the social dimension.”

Hone-Brookes concluded: “We created our own vision, and that is to create beautiful, sustainable places that protect people, planet and nature. From this point, the rest is detail that supports your own moral compass. My advice would be: don’t delay commencing this important journey.”

The webinar then heard from Benjamin Davis, CEO of Octopus Real Estate, again in a pre-recorded video. Davis said Octopus has pledged to hit net-zero carbon by 2030 and added that all its funds have sustainable investment policies embedded within them.

The Green Homes Alliance, for instance, is a partnership with Homes England and provides development finance to small and medium-sized housebuilders – the difference is that the greener the development, the lower the business rate. “Importantly, it also provides education and advice for the housebuilders,” said Davis.

Raising the bar

In addition, Davis related Octopus’s activities in the care home sector, stating that all such facilities it funds will have to be net zero by 2030, as well as its recent entry into affordable housing. The latter, he said, was motivated by a desire to “tackle the twin crises of the shortage of affordable housing in the UK and the cost of living crisis, which disproportionately impacts people on lower incomes”.

He added: “I think it’s incumbent on all of us to constantly raise the bar and to demand more at key decision-making moments in the real estate lifecycle. If everyone plays their part, we can make the real estate sector a leader in tackling climate change and, most importantly, a sector to be really proud of.”

With the pre-recorded dispensed with, the webinar moved on to a panel discussion. Davis was joined by Paul Cahalan, head of communications at chapmanbdsp, who stepped up at the last minute to replace Hone-Brookes owing to illness, as well as Omega Poole, head of capital raising at LendInvest.

I think regulation is crucial, particularly for those at the smaller end of the market

Paul Cahalan

In light of the first mandatory ESG reporting requirements coming into force – and given the panel members’ enthusiasm for ESG – panel chair Adam Branson asked whether regulations were actually necessary. “I think there is actually a big role for government regulation here,” said Davis. “It sets the tone for the country; it sets the tone for direction of travel.”

However, Davis added that the government should not just set rules; it should create incentives. “Going back over a dozen years, government incentives came in to encourage investment into solar farms and wind farms,” he said. “That meant a huge amount of investment in renewables. The industry is now able to create renewables in the UK and abroad without any sort of incentives.”

Cahalan agreed. “I think regulation is crucial, particularly for those at the smaller end of the market,” he said. “How do they begin to be a responsible business and part of a supply chain for a company higher up in the food chain? I think regulation is good.”

From Poole’s perspective, regulation is “essential” but she added that it is insufficient; in order to achieve real change, a programme of education is required, especially in the residential sector. “The PRS market in the UK is very fragmented,” she said. “If you take out some of the larger institutional owners, landlords typically have about three properties.”

At that scale, landlords are unlikely to have the time and resources to keep on top of all forthcoming regulations, not least that all newly rented properties will have to have a grade ‘C’ energy performance certificate (EPC) by 2025. “So, I think more than government regulation is required,” said Poole.

Landlord pressures

Apart from anything else, landlords need to understand that their assets will massively fall in value unless they are made more efficient. “I think we need education around some of the owners of current rented assets,” she added. “And we are not yet seeing that the markets truly see that polarisation of value that has already fed through to the commercial assets side. It is not yet as clear cut in the residential space.”

However, it may well be that both residential and commercial landlords will come under increasing pressure to improve their buildings, partly due to societal changes but mainly due to skyrocketing energy prices and the wider cost of living crisis.

“I think there is still a lack of awareness among tenants and homeowners – how many people actually know the EPC ratings of the properties that they rent or own?” asks Poole. “But as we see the cost of energy increasing, I think it is inevitable that tenants will start to ask questions about whether [properties] are as efficient as they could be.”

Davis added: “I think it is becoming more and more topical and is something that is more and more on the minds of tenants. For some businesses that occupy commercial premises, the electricity bill is a massive cost. Their businesses may not be viable.”

In addition to answering questions from the chair, the panel also responded to questions from the audience. One question was deceptively simple: if a company has not yet started on its ESG journey, where should it start?

“It’s like any problem, I’d say: start doing the really easy stuff first,” said Davis. “So, that is the stuff you can do within a few days. You can switch to a renewable energy supplier; you can look at your policy around recycling; you can look at your policies around energy usage; you can set an ambitious target around how you are going to get to net zero. You don’t even necessarily know how you are going to get there, but you set a target and get people motivated.”

For Cahalan, the answer is to think big and then work out the detail later. “I’d start with a question around what kind of business you want to be,” he said. “It is that gap analysis: this is where we are and this is where we want to be. And then that gives you a way into thinking about the detail underneath. [The starting point] is how do I get people engaged and emotionally involved in this?”