A lot of attention is being paid to the built environment in discussions on decarbonisation. This is no surprise given that buildings account for 40% of total global energy use and emissions. There is also an increasing amount of attention being paid to the ‘social value’ of assets – how development and retrofit can support households, local communities and the wider economy.
In the UK, 80% of the houses we’ll be living in in 2050 have already been built and a majority will need major upgrades to meet future energy standard requirements. Twenty-seven million homes in the UK need to be retrofitted. There’s also a very real need to retrofit much of the UK’s commercial stock such as offices, shopping centres, and warehouses.
ESG and Impact
None of this can happen without having financing in place. Institutional and private investment into retrofit, and access to finance, is increasingly driven by ESG and Impact considerations.
ESG refers to Environmental, Social, and Governance (ESG) factors. It provides a way for businesses to evaluate their risks and practices. Investors are increasingly looking at financial products, and businesses, that have an evidenced position on ESG factors. This will include the environmental ‘credentials’ of real assets such as buildings and infrastructure. This is where much of the focus has been.
Alongside this, we are also seeing the rise of Impact investing. Impact investments are ‘investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.’[1] In the property sector, this can be investments with the ambition of creating new jobs or increasing the supply of affordable homes or growing local economies.
Costs and financing
A key question on improving our building stock to both decarbonise and to add real social value is how this will be financed.
Retrofitting buildings to become more energy efficient and meet occupier needs can have significant upfront cost. And building new buildings and homes to meet not just current, but future requirements, is expensive. Getting the financial mechanisms and incentives right is critical to accelerating this necessary change.
There are a growing number of investors looking for opportunities to invest in projects with a focus on decarbonisation and the ‘greening of assets’. The aim is to increase the value of assets and to ensure buildings and offices are fit to meet requirements, now and in the future. Many of these investments, though not all, will be aligned with core ESG considerations, predominantly with a focus on environmental factors. We’re seeing this more with larger assets such as commercial buildings (offices, shopping centre), logistics hubs, and infrastructure where there’s a clear focus on improving operating efficiency, reducing waste, improving biodiversity and so on.
We are also seeing an increasing number of Impact focused investments across real estate. These can be targeted towards decarbonisation and also include a clear focus on creating positive impacts such as creating more jobs and/or increasing the supply of affordable housing. These types of investments tend towards being more focused on place and placemaking with a view to longer term financial returns.
But there remain gaps.
For home owners and small to mid-sized asset owners and developers, there can be real challenges with accessing appropriate green financing and getting the appropriate investments in place. The challenge is not so much a data challenge, such as being able to demonstrate an improvement in energy performance, as it is in having the financial products available. At the housing level, UK government have developed a Green Home Finance Accelerator[2] to trial a range of financial products focused on financing decarbonisation efforts in homes.
The role of metrics and data
Whether the approach to real estate investment is driven by EGS considerations or with a focus on Impact, data is critical.
In terms of ESG, core considerations for financing are driven by a range of defined metrics. These metrics tend to be aligned with recognised global reporting standards including the Global Reporting Initiative (GRI)[3], and GRESB[4] which is more specific to real assets, and increasingly the new International Sustainability Board Standards (ISSB)[5] disclosures. These frameworks include a range of qualitative and quantitative metrics which can be mapped across to assets. These include carbon emissions and waste, and community engagement. Much of what is available in ‘green’ financing will be aligned to relevant metrics. Alongside this will be requirements to meet country specific requirements such as the forthcoming Minimum Energy Efficiency Standards (MEES)[6].
Companies large and small are increasingly being asked by customers, clients, investors, stakeholders and shareholders, about their environmental ‘credentials’ in particular. As part of this, we are seeing more data that is realtime and comparable. These requirements are very much shaping investment and financing decisions.
In terms of Impact, an area experiencing real growth at the moment, the approach includes additional or potentially a different set of core metrics. This may include considerations such as local economic contribution, job creation, the number of affordable homes created. Often the impact outcomes are tied to relevant and specific UN Sustainable Development Goal (UNSDGs) indicators[7]. This approach tends to be longer term given it can take some years to have and demonstrate positive impacts across such a range of metrics.
Final thoughts
The scale of what’s needed to decarbonise our built environment is great, but there real opportunities not just for finance to be used in ways to improve environmental and social credentials, but to also have positive impact. There is still some way to go. The benefits are many and should be front of mind – from ensuring our built environment is fit for the future, to growing our local economies, slashing carbon emissions, and supporting households and communities.
If you want to join the discussion about ESG in Retrofit projects book a free place on our Retrofit Meets event happening on 10 July https://www.buildingcentre.co.uk/whats_on/events/retrofit-meets-esg'
Dr Sophie Taysom
Sophie is Founder and CEO of Keyah Consulting, advising clients on ESG across real assets. She regularly publishes and speaks nationally and internationally on the topic. Sophie established and runs the ESG in real estate group on LinkedIn which has around 6,000 members.
[1] https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing
[2] https://www.gov.uk/government/publications/green-home-finance-accelerator-discovery-phase-projects/green-home-finance-accelerator-details-of-discovery-phase-projects
[3] https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/
[4] https://www.gresb.com/nl-en/
[5] https://www.ifrs.org/groups/international-sustainability-standards-board/
[6] For private domestic rentals see: https://www.gov.uk/guidance/domestic-private-rented-property-minimum-energy-efficiency-standard-landlord-guidance ; for non-domestic private rentals see: https://www.gov.uk/guidance/non-domestic-private-rented-property-minimum-energy-efficiency-standard-landlord-guidance
[7] https://unstats.un.org/sdgs/indicators/indicators-list/
