Deliver environmental and social impact to benefit from ‘green premium’ in yields
Embedding ESG into modelling financial returns is a no-brainer for residential investors who seek to deliver long term, sustainable rental growth. Not only are tenants increasingly motivated by decarbonisation and a healthy living environment, but the volume of capital that investors are currently seeking to deploy on assets that deliver on ESG and comply with Article 8 funds under SFDR, is already far greater than the volume of suitable available deals.
As the appetite for assets that meet ESG requirements has grown, so has the level of scrutiny. Through their own commitment to ESG, capital partners are increasingly examining the extent of impact generated in terms of environmental and social value. The process involves assessing carbon emissions and health and well-being metrics through the lifecycle of an asset – from the feasibility stage through to procurement and operational stages, including estimations of residual emissions liabilities.
In the residential sector there are significant benefits of embedding ESG principles from the outset – right from securing planning permission at one end to meeting the growing demand from discerning tenants who desire to live in energy-efficient properties with quality outdoor spaces and connected communities. In the short term, we expect that assets that score highly on ESG criteria can deliver a ‘green premium’ in yields, but in the long term we hope that the residential sector as a whole works towards embedding ESG criteria into all projects – not only to avoid being caught out by asset-stranding risks, but to best serve our occupiers and avoid the existential climate crisis that we face.
By making environmental and social impact key project outcomes, we could enhance our sector’s capacity to assesss, specify, procure and deliver against relevant metrics. For example, improving carbon literacy across every department within our organisations and among stakeholders, customers and our wider networks, would help with obtaining the required buy-in to deliver on ESG criteria. The reality of reaching net zero presupposed a greater degree of alignment with funders who care about ESG outcomes. Equally, it also means being more selective with contractors and suppliers, declining to work with those who don’t comply, and making difficult decisions around procurement, finance and HR.
None of this will be easy, and it will only get more expensive if we don’t act today. As the climate emergency deepens we should, by now, be aware that not doing anything is going to cost us all much more over the long-term. The strategy for our flagship co-living project in Kingston, The Rex, pivoted in summer 2021 from a new build to a retrofit to ensure the project achieves the highest possible sustainability credentials due to low embodied carbon use, far surpassing RICS 2030 emissions targets. This meant going back to the drawing board and starting again. Design compromises have had to be made as we work through the challenges that inevitably arise when reusing an existing building. But a fundamental change in mindset is needed to reduce the volume of construction work undertaken in the built environment, meaning opportunities for refurbishment and reuse must always be exhausted before a new build is even considered. To truly transform from a ‘take, make, waste’ economy to a zero-waste economy, the focus must be on reusing resources we have already extracted, considering our cities as material banks, digitalising waste, and connecting companies with non-profits and businesses to redistribute and create circular economies.