Net zero and the push for a greener tomorrow

On 31 March, the government released three documents intended to lay out the UK’s pathway to net zero by 2050: the Green Finance Strategy, the Net Zero Growth Plan and the Energy Security Plan. These were released collectively under the government banner of “Green Day” announcements. The blitz of green policy publications and rebaked strategies will take some time to unpick, absorb and integrate into corporate net zero strategies. For those in real estate, the challenge is that there were scant measures that addressed the sector directly, yet at the same time, a large proportion of the measures will have an indirect impact and will need to be considered.  However, the announcements do provide a clear picture of the government’s overall approach and strategy. As well as energy security, there is strong focus on incentivising private investment and a “pro-growth regulatory regime”, with the chancellor including plans to ensure that the UK is as competitive as possible. In contrast, other global regions are more preoccupied with a tax reform and subsidies approach. Examples include the announcement of a consultation on a new system of “carbon border taxes” designed to protect UK manufacturers from being undercut by countries with lax environmental rules. There are also plans to accelerate the upgrade of the UK’s electricity grid to enable it to keep pace with higher demand as more renewable power comes on stream and a new net-zero research and innovation delivery plan is announced. This is expected to focus on technologies such as “direct air capture” that can take CO2 directly from the atmosphere. Green Day provisions for real estate Of the relatively few references in the policies to real estate, the emphasis was on domestic buildings rather than the wider built environment. For example, the “Great British insulation scheme” is aimed at middle-income households which will be offered grants worth hundreds of pounds to make their homes more energy efficient.  However, the initiative has received criticism from opponents who have pointed out it will only improve the energy efficiency of 300,000 households – a fraction of the 27m homes that the UK Green Building Council says need a retrofit. Moreover, there is no such scheme for commercial real estate. As expected, the government is also focusing on transitioning to low-carbon heating systems such as heat pumps. A new £30m heat pump investment accelerator scheme has been launched, alongside an extension to the boiler upgrade scheme to 2028. For social and low-income homes, the aim is to improve energy efficiency through the extension of the Energy Company Obligation levy. While this is a positive move, it does not address energy inefficiency, a fundamental issue that must be rectified across domestic and commercial real estate if the industry is to meet net zero. How can landlords fill in the blanks? In the aftermath of Green Day, we have seen real estate trade bodies such as the British Property Federation say that a much greater level of clarity is needed from government. Specifically, the BPF called for more urgency in aligning the planning system to the net zero agenda and a national retrofit strategy that supports and incentivises green refurbishment. CBRE has gone further and said the new announcements do not constitute the comprehensive net zero transition strategy the real estate industry needs. We believe landlords are already under considerable pressure to demonstrate how they are tackling the fight towards net zero. There are factors beyond looming regulatory pressures, such as reputational risk and the idea that there will increasingly be a premium on green spaces. Landlords want to attract the best tenants so they need to ensure that what they are offering is both what tenants want and competitive against other offerings. It is also important to bear in mind that tenants will have their own environmental targets, which will affect their real estate requirements.  Competition is playing out in terms of compliance with the growing number of accreditations that landlords can seek for their buildings including GRESB, NABERS and WELL Building, to name but a few. These not only improve reputation but also help to attract tenants.  The retrofit revolution Momentum is also gathering in the retrofitting space, which carries the dual benefit of helping to decarbonise the sector while enabling landlords to think more creatively in terms of sustainability and design. Retrofitting is the mainstay of the sector’s contribution to the circular economy by focusing on reusing as many existing materials as possible.  The trend is moving away from the white box spaces that have been popular for so long and towards spaces with more character and in which sustainable measures are very visible. It is a chance to showcase and to create flexible spaces that do not require a complete re-fit every time there is a change of occupier. While retrofitting can be more complicated, requiring greater contingency in terms of budgeting, there are often overall cost benefits. There are generally shorter build times and lower materials costs. Of course, the level of challenge varies depending on the sector. Those in the industrials sector, for example, may find it easier to include solar panels and other energy initiatives, whereas the office sector, which often has multi-tenanted buildings and close neighbours, may struggle more to make alterations to improve energy efficiency.  There is going to be a challenge in finding the workforce to carry out the improvements to building stock as currently there are few that specialise. The government response talks of securing supply chains for the transition and “boosting domestic capability” but time will tell if that extends to the types of skills required for retrofitting (or focuses more narrowly on green energy production) and whether it translates into government investment for skills training or if that is left largely to private funding. How should it be funded?  Another major part of the government’s strategy is using the financial markets to drive climate action, as indicated by the release of the Green Finance Strategy. Once again, the real estate sector is in a prime position to benefit from more money going into green projects through dedicated green funds or green loans. Back in 2021, the then-chancellor Rishi Sunak announced an ambition for the UK to become the world’s first “net zero financial centre”. While the Green Finance Strategy does not, as many had hoped, contain a finalised green taxonomy, it does include a renewed commitment for the UK to be the “best place in the world for raising transition capital”. There are government funding streams for innovation in energy efficiency, and there are some grants and “green finance” available for small businesses to make energy efficiency improvements.  There are comments in the government’s documents about streamlining funding options for project developers, but it does not mention addressing the balance between new build houses and flats and retrofits (whereby new builds benefit from tax incentives, whereas retrofits do not).  Although there has been an increase in sustainability-linked lending (a loan where the pricing is tied to the borrower’s achievement of sustainability performance objectives as an incentive), and green loans (where the loan proceeds are used for green projects), these are not as commonplace as might be expected, and do not usually offer a real financial incentive to landowners. We think that lenders will increasingly focus on the green credentials of buildings and interrogate this more closely as part of their due diligence.  The question then is – should landlords or tenants pay for the works? There is no one size fits all. The good news is that payback periods for measures such as solar panels are getting shorter. This means tenants are more likely to contribute if they are going to get a full return on their investment during the term of their lease. But, largely, the cost will fall to landlords, and landlords will pay in order to attract the best tenants and achieve the best rents. A way to go While there is still a long way to go, the property sector has proven itself to be committed to net zero, as confirmed by a recent joint survey by the BPF and JLL. The government’s Green Day drive has been welcomed for the partial direction that it gives but, as has been the case to date, it will be the pioneers within the sector that drive the initiative and the innovation needed. The good news is there is a growing bank of evidence that green commercial buildings are attracting higher rents, which is expected to act as an incentive, alongside government policies and regulatory requirements. Laura Haworth is a senior associate and Louise Irvine is a senior knowledge development lawyer at Forsters Part two will consider the practical steps needed to achieve net zero and will touch on green leases, data sharing, balancing responsibilities of landlords and tenants, fit-outs and refurbs Image © Nicholas Doherty/Unsplash