At Octopus Real Estate, we have always done things differently. Investing in real estate is, of course, about making a return for investors.
But just as important is the fact that this industry has both the power and responsibility to do a great deal of good in the world. That’s easy enough to say; it is quite another thing to prove it. It was for this reason that a couple of years ago Octopus set about working towards B Corp Certification.
For those who haven’t heard of it, B Corp Certification is like a Fairtrade mark for businesses; a way of measuring a company’s social and environmental performance. Certification is a designation that a business is meeting high standards of verified performance, accountability and transparency across its operations.
A B Corp must regularly assess how its activities impact all its stakeholders; employees, community, the environment, customers and shareholders are all given equal importance. It requires companies to build stakeholder impact into their legal structure for the long term. In short, gaining certification isn’t easy. In our case, it took us a couple of years and a lot of effort, not least due to the fact that we wanted to gain accreditation for the entire Octopus group, which is made up of a variety of different businesses, albeit ones with a common ethos.
Would you rather own an asset that has high environmental standards, or a building next door that looks exactly the same, but that is running off gas or oil?
That said, it was certainly worth it. We see our B Corp certification as a way to hold ourselves to ever higher standards. It’s also a mark of the values we share with other progressive companies, from clothing company Patagonia to Innocent Drinks, and marks us out as a company that not only cares about investing sustainably, but acts responsibly too.
It should also be said that this is an ongoing process; we gained a sufficiently high score to merit certification, but we fully intend to build on that and gain progressively higher scores.
Very few financial services companies have both pursued and gained certification. However, since we announced that we had been successful, I have been approached by several other investors, fund managers and financial institutions who are keen on also becoming certified. While we think that gaining certification sets us apart, we would be delighted if others joined us as B Corps.
However much we value our certification, we like to think that it is recognition for policies and practices that we had already put in place, rather than for new initiatives instigated in response to going through the process. Those policies and practices can come at a cost to the short-term bottom line. In short, we don’t want to do business with companies that don’t share our values, which inevitably means turning down some opportunities.
In the long term, though, we know that our approach will deliver better results. What we really want to do is partner with like-minded companies and do repeat business. The certification has changed the way we report, both to our shareholders and internally. When we have company meetings, we always talk about those five stakeholder groups and the progress that we’re making.
To take just one example, if we are considering funding development of a new building, we will insist on a certain level of environmental performance. We might insist on the development having solar panels or going fully electric and cutting out gas. As a result, the building will cost more, but in the medium to long term, it is the right thing to do for that building and its future investors and occupants.
After all, in five years’ time, would you rather own an asset that has high environmental standards, with rooftop solar, an air source heat pump and using fully renewable energy, or a building next door that looks exactly the same, but that is running off gas or oil?
The road to net zero
The fact is, sustainability is already having a material impact on capital values. For years, the evidence for this was sadly lacking, but that is no longer the case. Today, it is clear that many buildings are worth more purely due to their green credentials. That was already the case before energy costs started going through the roof.
Yes, the government has capped both electricity and gas prices for businesses as well as households, but they will still be double what they were last year as we head into winter. Quite simply, companies have a very real incentive to choose the greenest building possible when they are facing a lease event. The energy cost crisis, while incredibly difficult on many levels, has made the case compelling.
Of course, it is to be hoped that energy costs will come back down in the medium term, but the green premium will remain. Changes to government regulations mean that from 1 April next year, landlords will be unable to lease buildings that fall below an Energy Performance Certificate (EPC) ‘E’ rating. Progressive further tightening of the regime is expected in 2027 and then in 2030, with rental properties requiring a ‘B’ rating by that point.
Such changes are undoubtedly necessary if the UK is to have any hope of hitting its legally binding target of reaching net zero carbon by 2050. Of course, there may be some moving of the goalposts along the way, but the direction of travel is clear. Quite apart from it being the right thing to do, investing in greener properties is business critical.
There is a genuine danger that vast swathes of commercial property could become effectively worthless. After all, what value does an office or retail property have if it cannot be legally leased?
Incentivising and educating
However, we also want to go further by incentivising both landlords and developers to strive for increasingly environmentally sustainable buildings. For example, together with Homes England we established the Greener Homes Alliance, which provides development funding for small to medium-sized housebuilders and offers meaningful discounts for building greener. So, if a company develops homes with an EPC ‘A’ rating, we will give it up to 2% discount on its loan interest rate. For a loan of, say, £15m or £20m, that represents hundreds of thousands of pounds that it can save, which is a material difference.
To help housebuilders hit those high levels of sustainability and gain access to the discount, we are working with our sister company Octopus Energy and its partners to help educate the market. That can literally mean getting on the phone to a developer and saying: “OK, you’re currently on course to get an EPC ‘B’ rating, but if you did this you could get an ‘A’.” Even without the need to modify a planning permission, we can often help developers to make that final step.
The benefits of the relationship with Octopus Energy go even further. It is growing its capacity to get involved with everything from solar panel and electric vehicle charging point installation to next-generation battery technology, all of which can benefit developers and assist on the net zero journey.
So, for the moment, our policies and practices – plus our B Corp status – set us apart from other companies. But our sincere hope is that these unique selling points are gradually and ultimately entirely eroded in the market. Doing the right thing needs to become business as usual.
Octopus Real Estate, part of Octopus Group, is a leading specialist real estate investor, with over £3.7bn in real estate assets and secured lending, and a highly experienced team of more than 90 professionals.
The property lending team provides bespoke, customer- focused financing solutions across the UK residential, commercial and development sectors. The team has lent more than £5.7bn across more than 4,100 loans, providing competitively priced financing throughout the UK and spanning the property investment lifecycle, with loans typically ranging from £100,000 to £100m.
The investment team manages more than £1.6bn of investments, with a focus on care homes, retirement communities and affordable housing.