How integrating ESG can deliver a competitive edge

Sustainability, energy efficiency, and decarbonisation have become top priorities for real estate developers, investors, and occupiers, with major financial and operational implications. In the UK, this shift follows an increasingly stringent legislative environment. For example, from 1 April 2023, landlords are in breach of Minimum Energy Efficiency Standards if they continue to let commercial properties with an EPC rating below E. The expected trajectory, as consulted on by the government, is for commercial properties to require an EPC rating of B by 2030. Data from CBRE indicates that up to 11.9m sq ft of office stock set to enter central London’s market by the end of 2027 has an EPC rating lower than C. Mandatory disclosure requirements are also evolving, following the introduction of the Transition Plan Taskforce, announced at COP26 to set a “gold standard” for private sector climate transition plans. The task force’s 2023 framework included guidance for asset managers and owners, aiming to ensure robust, compliant transition strategies. For many commercial real estate developers and investors, these changes reaffirm the belief that proactively improving a building’s sustainability credentials is not only essential for compliance, but increasingly critical as a point of difference in meeting occupier demands, securing lettings and, ultimately, staying competitive in the market. The 2022 guidance issued by RICS emphasised the importance of valuers considering factors such as building obsolescence, capital expenditure requirements and carbon emissions when assessing property value. Data from Knight Frank supports this, revealing that green-rated buildings can achieve sales premiums of up to 18% and rental premiums of up to 12%. Investment One real estate investment manager that believes environmental, social and governance factors can be a key differentiator in ventures is Feldberg Capital. “ESG runs deep within our DNA,” explained Luke Duckworth, fund manager at Feldberg. “All our investments have an ESG focus. We take this approach, as it is consistent with our values as an organisation, but it’s also a way of generating superior returns from our investments. “It’s driven by occupier and investor demand and the realisation that if you provide best-in-class buildings, including superior ESG credentials, you can achieve a rental and investment premium.” Feldberg has launched a range of products, most recently its central London brown-to-green workplace fund, Cora, which aims to identify under-managed “brown” office buildings in the West End and reposition them into ESG-focused “green” workplaces. Impact Shoosmiths advised Feldberg on Cora’s first transactions: the purchase of 8 Bloomsbury Street, WC1 (pictured), and 21-25 Bedford Street, WC2, in Covent Garden. “We are purchasing buildings that have the potential to be best-in-class. Our first two assets were built in the 1990s and, while they have ‘good bones’, there are plenty of improvements we can make,” added Duckworth. Some of the upgrades that Feldberg is making includes the removal of gas boilers, utilising air-source and water-source heat pumps, and installation of on-site solar panels. Each property also undergoes a biodiversity audit to identify opportunities for enhancement. For example, 8 Bloomsbury Street features a roof garden that has been improved with the installation of planting to encourage the natural biodiversity of the asset. Feldberg also conducts local needs assessments of the area surrounding the building, forming partnerships with charities and social enterprises that work to alleviate the challenges within that community. “Governance is important. Our ventures have stated targets in terms of ESG, which we are accountable to. Every year we present to our investors on the progress made against these targets. We can say we want to do these things, but unless we are actually doing them and we are accountable, it counts for nothing,” said Duckworth. Feldberg’s commitment to integrating ESG into its investment approach has allowed it to respond to market changes, while meeting the evolving demands of its occupiers, particularly ensuring their workplace occupation aligns with their corporate ESG targets. Future-proof These ventures are also part of Feldberg’s to be at the forefront of investment trends and ahead of potential legislative changes. “The market is moving towards stricter environmental regulations, and having a holistic ESG strategy is crucial to future-proofing any property portfolio. This approach makes our assets more resilient and defensible against evolving market demands and regulatory changes.” A proactive approach to integrating ESG should be viewed not only as a way to meet the immediate needs of occupiers but as a strategy for securing long-term investor value. Feldberg believes this is key to enabling assets to remain adaptable in an evolving market – driving performance and contributing to a more sustainable built environment. Matthew Kenwood is a real estate partner at Shoosmiths Image © Feldberg Capital