Limited sustainability investment activity is putting decarbonisation in the commercial sector out of step with global progress and, more importantly, national targets for emissions reduction according to a new report.
Bilfinger GVA’s sixth Green to Gold survey, which questions UK real estate fund and portfolio managers on how they view sustainability, found that the majority (84%) have sustainability strategies in place.
However, only 23% have plans for more than three quarters of their properties, while half operate sustainability management plans across less than a quarter of their portfolios. In addition, the proportion of respondents who do not have any sustainability strategies or policies has increased from 6% to 16% since 2014.
The report also identified a series of worrying trends within commercial sector sustainability management. Only half of respondents claimed to assess operational energy efficiency and less than 20% assess greenhouse gas emissions, with flood risk and EPCs deemed the most widely assessed criteria.
In addition, a significant proportion (63%) is not assigning specific figures for the costs or benefits of sustainability issues in investment appraisal calculations, making future investment cases difficult to build.
It is estimated that the operational carbon intensity of UK commercial property needs to reduce by 52% between now and 2030 as part of the UK government’s legally binding plan to reduce emissions by 80% by 2050.
Bilfinger GVA has claimed that its findings have revealed an urgent need for more action and greater leadership in tackling sustainability requirements in commercial real estate if the sector is to meet this target.
Alastair Mant, director and head of sustainability at Bilfinger GVA, said: “Our findings don’t show the signals of progress that we would expect considering the broader global trends. We now find ourselves with more to achieve in less time.”
The majority of respondents agreed, with 70% admitting that they don’t believe the sector can achieve a reduction in operational carbon intensity of 52% by 2030.
“Our Green to Gold survey illustrates how short investment horizons appear to translate into less focus on sustainability. Existing corporate and fund level sustainability strategies are not translating into the level of change at acquisition and management level,” Mant added.
Despite the decline in progress suggested by the report, Bilfinger GVA’s findings do point towards some positive activity. Occupier demand was identified as the most important motivator for integrating sustainability criteria into the management of their fund, portfolio or property, suggesting asset managers are being forced to act by the expectations of their tenants.
However, this reveals that government regulation – considered the most important reason for adopting a sustainability management programme in 2014 – has dropped to third place behind corporate responsibility strategies. Pressure from investors to act more sustainably has also dropped.
The report states: “In light of the global challenges it is a worry that both government regulation and investor pressure are deemed to have reduced in importance as drivers of action, although the former is no surprise in light of the bonfire of environmental regulation and tone from the Treasury.
“Following the Paris Agreement in December 2015 it would be hoped that climate change would remain a key driver for the property industry, an industry with so much to mitigate and adapt to. However, it has instead fallen in ranking.”
Despite these changes, the report goes on to claim that a series of issues that will come to affect the commercial sector in the next two years will likely see progress made in the sector, led by the upcoming minimum energy efficiency standards (MEES) due in April 2018.
These standards will make it illegal to let commercial properties in England and Wales with an Energy Performance Certificate (EPC) rating of F or G, with let commercial properties needing at least an E rating.
These standards are expected to impact a fifth of UK commercial properties and are likely to kick start sustainability activity over the next two years. Over 90% of respondents to Bilfinger GVA’s survey think that MEES will be “somewhat important” or “very important” to the drivers of investment performance, particularly capital expenditure requirements.
Only just over half (57%) have assessed their portfolio’s risk profile in regards to the MEES regulations, suggested there are still a lot of properties for which the level of risk and potential mitigating measures are unknown.
The report said: “Our message to those yet to assess their portfolios is that now is the time to start in order to avoid exposure to unnecessary risk and disruption to transactions or lease negotiations as we approach 2018.”
The report also showed that many (89%) would prefer the government to publish a trajectory for the improvement of MEES over the coming years so that they can plan their investments accordingly.
