Sustainability rises up the property agenda for investors, occupiers, and landlords

Created: 06 Sep 2022

New research has found that the majority of UK pension schemes consider greater focus on ESG (environmental, social, and governance) in property development imperative to  generating greater institutional investment. This coincides with a rise in ESG loans, green lease clauses, and looming deadlines for minimum EPC (energy performance certificate) ratings. 


Sustainable ESG capital deployment has risen up the property development investment agenda with a survey from Downing LLP showing that 86 per cent of institutional pension fund schemes are more focused on ESG. Further, 70 per cent of those surveyed expect this trend to grow, whilst 24 per cent anticipate a dramatic increase, given a long term outlook enabling investment in illiquid assets that offer premium yields. 


Another key element of the liquidity mix for developers is debt financing which has seen the emergence of sustainability-linked lending including green and ESG loans. Such leverage products now offer more flexibility, in that they needn’t be used exclusively with green buildings, as well as offering appealing margin reductions once KPI’s (key performance indicators) are met. These might include the ratio of renewable energy usage, energy efficiency captured by EPC ratings, and greenhouse gas emissions. 


The combination of greater institutional pressures, liquidity access, as well as regulatory impetus is driving the uptake of sustainable practices across the property sector. A Decarbonizing the Built Environment report by JLL finds that in nearly a third of major global cities occupiers are using green lease clauses to propel decarbonization, waste reduction, and increased energy efficiency across their portfolios. 


Government estimates reveal that energy use in residential buildings contributes 13 per cent of all the UK’s greenhouse gas emissions. The rise of sustainability up the property agenda for investors, occupiers, and landlords looks set to continue to ramp up as the country seeks to balance meeting housing needs with conservation of climate and biodiversity. 


By April 2023, the Minimum Energy Efficiency Standard (MEES) regulations will come into force, prohibiting landlords from leasing out commercial buildings with an EPC rating of ‘F’ or lower. Those continuing to do so risk a fine ranging from £5,000 to £150,000.