Investment in the office sector is on the rise, but is the property industry ready to meet the ESG compliance and investment models of real estate investment companies? Are funds ready to invest and looking to attract tenants who need to prove their occupational interests meet the ESG standards they claim to have?
Companies face an increasing burden of statutory compliance and reporting regimes, coupled with an ethical need to show commitment to the most challenging issues in society.
New-build offices trumpet their ESG credentials to prospective investors and tenants, supported by performance data and post-build certifications. The challenge is how owners of existing office stock can prove to the investment committees that their buildings meet ESG investment criteria.
In the subprime office market, redesign or refurbishment of buildings or systems may ultimately be required to reach the most stringent ESG investment criteria. However, even those 10% to 15% of prime offices will struggle to prove compliance due to an outdated approach to ESG data collection, monitoring and documentation.
The days where the only information provided in legal diligence and documents was an EPC and potentially an ability for the landlord to take steps to improve the energy efficiency of the building are gone. So, too, are the days when a tenant would only receive information on ESG matters linked to the pass-through of costs in a service charge regime.
The industry needs to ensure that the information on and benefits of ESG are collected and disseminated by building owners and tenants alike. Reporting regimes should be hard-coded into leases and ESG recognised and embodied in the boilerplate of the parties’ obligation in the operation, maintenance and management of a building.
The effect of a lack of standardised ESG requirements, data management tools and metrics particularly for the more qualitative and declarative social and governance metrics should not be underestimated. However, it mustn’t be used to delay the progress our industry and this sector badly needs.
Vikki McKay is a real estate partner at Proskauer Rose