We need to accelerate green evolution – but who should finance it? -UKGBC

On Finance Day at COP27, Avison Young’s Nicky Knight and Emma Berry discuss who should fund the green revolution in commercial buildings.

Published on

November 9, 2022

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On Finance Day at COP27, it is impossible not to reflect on the role that investment must have in transitioning our built environment to net zero. Strong financial incentives and robust and reliable green investments will play a crucial role in scaling up and accelerating our climate action. In this blog post, Nicky Knight and Emma Berry will discuss, with respect to individual assets, who should pay for these sustainability measures.

Head shot of Nikky Knight - a white woman with blonde hair against a white background.

Nicky Knight – Head of Service Charge Consultancy at Avison Young – acts for occupiers who are concerned about rising service charge costs

Emma Berry – Regional Head North West Property Management at Avison Young – acts for owners looking to improve their assets.

Green approaches to building construction, management and occupancy benefit all parties, so why hasn’t a mutually agreeable financing solution been found yet?

Nicky:

Although the impact of buildings on the climate is well established, how owners and occupants can effectively work towards shared sustainability goals can still present a challenge. Currently, although the intentions are good, we often see each side assuming that the other will fund green improvements or – even before that stage is reached – start the conversation. Where dialogue takes place, tangible results are still sporadic. Engagement of owners and occupants is needed as soon as possible to progress faster.

Emma:

Owners have rightly put sustainability on the agenda and are looking more closely at the operational performance of their assets. As is often the case, the program is further accelerated by legislation. Under the April 2023 MEES legislation, lease renewals will begin to be covered by its provisions and must have a rating above F or G. Consultations are underway to raise the EPC rating to a minimum of B by here 2030.

The focus should now be on commercial renovation and decarbonization strategies to ensure the continued attractiveness of assets, as occupiers may otherwise consider moving to greener buildings when leases expire or end. Moreover, with changing legislation, the only way to ensure that many assets remain legally worthwhile in the future is to comply with ESG regulations. If homeowners are slow to act now, especially with the added pressures of labor shortages and rising material costs, they may run out of time.

Nicky:

Sharing data and aligning goals and commitments is valuable here. We want to encourage behavioral and systemic change, which can be initiated by looking at building data and understanding where improvements can have the most impact. Occupants need to be part of the conversation – commitment and agreement are needed.

Both parties can benefit from green initiatives – so who should fund them?

Emma:

Many of the sustainability initiatives championed and implemented by owners also have a clearly positive outcome for occupants, including through reduced energy consumption, which, given rising gas and electricity, can make a real difference, as well as the overall benefit of helping to support their own owners. sustainability goals.

I think it is reasonable to expect occupiers to fund such projects, at least in part, through service charges if this benefit is passed on to them. However, owners should consider term financing to reduce upfront occupant expenses. It is also important that the benefits to occupants are clear when seeking membership.

Nicky:

This is where we may have to agree to disagree – at least in part! Legislation belongs to the landlord – so shouldn’t he fund new initiatives? Improvements are often not an element of service charge or even explicitly excluded under the lease, and also benefit the owner of the asset, so the owner should contribute financing.

However, there is no one-size-fits-all approach. Factors to consider include the length of the lease, the terms of the lease, the benefits of the proposed work, and the costs – recovery of service charges should be assessed on a case-by-case basis. But the assumption cannot be that ecological improvements are entirely funded by service fees.

How should leases evolve to support green initiatives?

Emma:

We must remember that these changes are for the common good. Perhaps a stubborn focus on protecting each side’s positions around this topic is outdated – a collective movement toward protecting our climate would benefit all.

The structure of most current leases does not properly support the ESG conversation and this is something as an industry that we should seek to change with an even greater emphasis on early collaboration between landlords and occupants.

Green lease clauses should be explored, particularly because from the perspective of the managing agent, they offer potential contractual support for sustainability initiatives. The BPP Commercial Lease Model, has some good examples, including a co-operation clause, providing guidance on a range of issues including environmental performance testing and recovery costs of CPEs.

Nicky:

I agree that leases are currently not fit for the purpose of ensuring green progress. Separate communication and agreement is required if tenants are expected to contribute or partially fund improvements.

What should happen next?

Nicky:

Actively seek discussions between landlord and occupier if they have not already taken place. Focus on initiatives with proven impact to avoid falling into the trap of greenwashing or expensive exercises with little benefit. Sustainability surveys, for example, tend to be a repeat expense, but without proper analysis and a solid plan to implement changes, it becomes a tick box exercise.

Emma:

Landlords should engage with occupants from the outset; to know their ESG aspirations and expectations for their own shareholders, employees or wider stakeholders – then be transparent and articulate the cost-benefit around the proposed initiatives to agree on a strategy that also works for the occupier. I would also recommend early data capture so occupants can see both challenges and demonstrable benefits, which in turn helps support conversations about shared funding responsibilities and can improve the building experience for occupants. users.

A common goal

The cliché of the landlord dictating to a tenant has never been more outdated than when we consider the impact of climate change on our built environment. The UK Green Building Council benchmarks for 2030-35 are challenging and will not be achieved without collaboration. By working together, building owners, occupants and users can approach reducing emissions holistically, creating greener, more sustainable places that benefit everyone.

This article is written by employees of Avison Young.

To learn more about what owners and occupiers can do next to accelerate the transition to net zero, explore the thoughts from our Whole Life Carbon Roadmap workshop that sought to answer this question.

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