We all know that reducing environmental impact is hugely important, but the Impact Investing Institute has advocated that the move towards a more sustainable way of living and doing business is carried out in a fair way so that no one gets left behind.
The built environment has a huge role to play in reducing carbon emissions.
Legislation and regulations are increasing the pressure on real estate to be more sustainable. Examples include the transition to more energy-efficient buildings through changing rules around EPC certificates and the new Environment Act, which requires a 10% biodiversity net gain (calculated by reference to a biodiversity metric) on any new development.
Businesses will also need to think about whether they need to make climate-related financial disclosures. A change in the Companies Act (which came into force on 6th April 2022), makes it mandatory for all publicly traded companies and all businesses and LLPs over a certain size (more than 500 employees and a turnover of more than £500 million) to disclose the climate risks and opportunities of their investments and mitigation strategy.
Scrutiny of business activity
Businesses advocating strong ESG credentials are being scrutinised to ensure they deliver on their values, and that extends beyond what the company is doing internally.
There have been cases where ethical brands have been called out where one element of their supply chain didn’t match the standards they promoted. Several banks recently made headlines for how much money they were lending to oil and gas companies. For property businesses, this focus on ensuring that every element of your business maintains the same ESG values means that businesses need to carefully scrutinise all the companies they do. Business with and lease space to.
“If you’re building with timber frames, you want to make sure the timber is coming from sustainable forests,” says Katharine Lewis, Partner at Trowers & Hamlins. “Or, as a landlord, your ability to comply with the ESG requirements your investors want from you, is only as good as what you can pass on to your tenants.”
But pursuing a just transition to net-zero isn’t as simple as cutting ties with those businesses that don’t meet certain environmental standards. The danger is that businesses struggling to become more sustainable will get squeezed out when it comes to opportunities or future financing resulting in those businesses failing with the associated job losses that would bring.
Similarly, certain skills risk becoming obsolete as we move towards renewable energy and more efficient ways of building.
The oil and gas sector is a good illustration of this challenge. Earlier in the year, there was a debate about whether the Government should invest in the oil industry in Scotland. On the one hand, supporting an industry we need to rely less on feels counterintuitive. However, divesting from oil also means divesting from the jobs and communities that industry supports; unless there is a strategy in place to reskill employees and replace lost jobs.
Levelling up, not leaving behind
There are plenty of examples of communities across the UK that, decades on, have yet to fully recover from the closure of key industries like coal and steel, something which could be replicated if the transition to net-zero isn’t properly planned. With levelling up high on the Government’s agenda, there is a political imperative to ensure a just transition.
The pragmatic approach is for businesses to transition in a way that includes their supply chain and tenants, so they aren’t left behind. For a landlord, this could mean having green clauses in a lease.
Eileen Duncan, Partner at Trowers & Hamlins comments: “Green clauses can include collaborating with tenants on energy efficiency or green energy. A landlord might require that all tenants sign up to using renewable energy, and in return, the landlord can bulk buy to get tenants a better rate.”
Larger companies are also in a better position to help small businesses by redistributing the cost of transition.
Lewis adds: “I think we’ll see a lot more pressure on bigger businesses to support the smaller businesses in their supply chain to take steps towards transitioning to net-zero rather than just walking away completely.”
Landlords may, however, choose to walk away from undesirable tenants. Businesses with bad sustainability credentials may end up on ‘red lists’ and find it harder to secure business space. This might be an additional incentive for businesses to move towards more sustainable operations, but it also risks damaging businesses in a way that impacts jobs.
Accessibility and fair price
Some landlords may not be in a position to choose who they rent to, and there is a balancing act in ensuring that greener products and services are accessible and affordable. Part of a just transition is also about ensuring that businesses pay a fair price for goods and services and a fair wage to their staff.
Community engagement, particularly around large-scale projects, has long been important, but it is even more so when it comes to the transition to netzero. Those affected by changes can’t be marginalised or excluded.
Duncan says: “It’s not just about job opportunities but also health and well-being and ensuring development projects, particularly larger ones, are inclusive and that people feel they have agency over what is happening.”
But this means asking the right questions and delivering what is appropriate for a particular community. For example, a developer may offer apprenticeships as part of a reskilling strategy, but it’s a redundant exercise if there aren’t enough people to fill those apprenticeships.
Lewis comments: “It’s not just about providing one solution, say job creation, it’s about providing the right solution for a particular community, and that could be jobs, but it could also be promoting well-being or social benefits.”
While there is pressure on businesses to follow ESG principles, particularly from investors, strategies will still need to consider returns. Duncan says: “Social value and sustainability are important, but so is the commercial viability of a project for it to go ahead. Businesses still need to make money.”
Considering natural capital
The inclusion of biodiversity net gain in the Environment Act highlights the importance of considering natural capital. The act requires a 10% net gain in biodiversity on new developments or, to put it another way, developers need to leave a site in a better natural state than it was to start with.
In parallel to the move towards financial disclosures on climate change, a new British accounting standard in relation to natural capital accounting has been introduced. The Taskforce on Nature Related Financial Disclosures (TNFD) is looking to bring in a set of standards businesses will need to adhere to and report against in relation to their impact on the natural world.
Natural capital treats the resources we rely on, such as clean air and water, as finite goods and services.
The Natural Capital Financial Alliance has developed a tool to guide understanding of how businesses depend on natural resources and impact them. The tool is called ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) and it helps businesses identify and understand the business risks associated with dependence on natural resources.
Lewis comments: “ENCORE allows banks and lenders to assess the impact on natural capital of the businesses they are investing in.”
