ESG (environmental, social and governance) is becoming more prominent in urban logistics developments, driven by increasing regulatory requirements alongside wider societal factors such as climate change.
Here, Cathy Myatt, head of ESG, examines the key drivers and what measures are helping meet this demand:
What is ESG?
There are three pillars of ESG:
But what are the key drivers and how are practices shifting to meet demand?
Investors push for improved ESG credentials
The impact of climate change together with increasing disclosure and financial transparency requirements covering the UK and EU markets mean there is a greater focus on buildings’ ESG credentials amongst investors. A recent survey by DTRE showed that 75 per cent of investors/developers reported that ESG is a determining factor in every transaction.
For new developments, BREEAM certification is the most common ESG requirement requested by investors, providing them with an easy to use, holistic measure of a building’s sustainability.
Another example investors look at for their portfolio is aligning with the Carbon Risk Real Estate Monitor (CRREM) which sets out a science-based decarbonisation pathway for buildings. The DTRE survey showed that 56 per cent of organisations are costing decarbonisation pathways during acquisitions.
There is also an increasing focus from investors on other related topics including biodiversity, social issues and resilience to climate change.
Occupier demand
There is clear evidence of both increased demand from occupiers for sustainable office accommodation and premium rents being paid for this space.
At Chancerygate, we build multi-let urban logistics developments which attract occupiers ranging from national companies to SMEs. Amongst these, we are seeing some ESG-conscious occupiers who value accommodation with robust credentials, but we have not yet seen evidence that this is driving higher rents. We believe that this will, in due course, follow the pattern of the office market.
However, with operational expenditure being a key priority, tenants are increasingly focused on energy costs. Newly built units are very energy efficient and energy costs are significantly lower than those in older stock. For example, one of our newly built Chancerygate units is estimated to cost over 15 times less to run than an equivalent unit dating from the 1990s.
In time we anticipate occupiers being driven by demands from their clients who are looking to achieve a more sustainable value chain. More contracts now incorporate ESG practices into their terms of service, and accommodation with robust ESG credentials can help to meet this.
We also see an increased focus from tenants on wellbeing and sustainable transport options. These all contribute towards a development’s sustainability credentials. So whilst accreditations such as BREEAM may not in themselves drive occupier demand, many of the contributory factors are becoming increasingly important to occupiers.
Evolving planning regulations
There is an increased focus on ESG during planning. Some planning authorities have increased requirements for BREEAM certifications and the 2021 revisions to the Building Regulations mean buildings must meet more stringent requirements for energy efficiency and reduced carbon emissions.
In addition, the Biodiversity Net Gain Regulations which came into force this year require developers to provide a 10 per cent improvement in biodiversity on their sites.
Guidance and standards in this area are being updated continually – such as the net zero standard for buildings which is was published as a pilot version in September.
Meeting ESG demands with green buildings
There is increasing focus on delivering energy efficient, low carbon buildings. This, alongside incorporating renewable energy measures such as solar panels, can help meet regulations, preserve asset value and meet both tenant and investor needs.
Ensuring buildings are as energy efficient as possible means using high-quality insulative materials, controlling air tightness to reduce air leakage and using energy efficient equipment such as air source heat pumps.
This is seen at Metroplex Park in Tolworth, which has achieved an EPC A+ rating. All of the units are net zero carbon for regulated energy which means that on average the energy needs for running the building are met by rooftop solar panels.
It is also important to consider how a development acknowledges sustainable transport trends. For example, the rise in electric vehicles (EVs) use amongst employees and fleets will affect all businesses, driving the need for EV charging infrastructure.
Increasingly, developers are now considering the material resources that go into constructing buildings, for example calculating and seeking to reduce the embodied carbon emissions associated with their manufacture.
Thinking socially with ESG
To support the ‘social’ pillar of ESG, there is an increasing focus on improving internal working environments and features that promote the well-being of occupants. An example is thermal and visual comfort and daylight optimisation.
The provision of outdoor spaces is also becoming more common. These not only provide well-being benefits for occupants but also provide opportunities to enhance on-site biodiversity and community benefit.
However, finding sufficient and suitable space can be a challenge, especially on tight sites within urban fringes. Where there is a high ecological baseline value, achieving a 10 per cent gain on the site can be a significant challenge and developers may need to look to use biodiversity offsets.
During the construction phase, developers can provide support which can have a lasting community impact such as providing skills and training opportunities to the local workforce.
The wider impact of the whole supply chain of a new development is an important consideration, covering issues such as ethical and responsible procurement.
A strong future for ESG
ESG is a moving area as regulations, standards, technologies and needs of different stakeholders evolve, and the market shifts to accommodate them.
Within urban logistics, this is driving more ESG into developments, although challenges remain, not least the need to build in ESG considerations in an economically viable way.
Chancerygate offers urban logistics units freehold or leasehold in strategic locations across the UK and will soon also do so in Spain and Portugal. To view our latest developments, click here. To learn more about our asset management work, click here.
