Lets go green

As the impact of real estate on the environment becomes an increasing priority, leasing schemes which incorporate ESG principles are gaining popularity.

Most governments are looking to achieve net zero carbon emissions by 2050 and incorporating ESG features at grassroots levels will be a key step in the plan. Governments have been introducing reporting regulations and guidelines for landlords and businesses to be more transparent with their ESG reporting. In addition to this added transparency, consumers in developed countries are increasingly comparing companies' ESG credentials when choosing their products and services, disadvantaging companies that do not factor in these concerns. 

Businesses have also been realising that in the long run, ESG initiatives can help reduce costs. A recent survey found that 72% of organisations sign a green lease to save costs by achieving energy efficiency, while 60% do so to accelerate their net zero carbon ambitions. Landlords can also gain better rental yields on green properties with research indicating that, in London, landlords can expect to receive a premium of at least 11.6% to rents if their buildings have a BREEAM certification.

The three main leasing schemes which incorporate ESG principles:

Green Leases
Green leases are rental agreements that include environmental sustainability clauses and commitments. These can include requirements for tenants to reduce energy consumption, use sustainable materials, and reduce waste. Green leases can also include provisions for green cleaning and maintenance practices, and other sustainable practices. These leases are becoming the model for most large property investors such as Brookfield Properties and Oxford Properties who have been incorporating green clauses within their leasing agreements and future investment decision-making.

Social Impact Leases
These leases are rental agreements that include commitments to support social impact initiatives in the community. These can include provisions for hiring locally, supporting community projects, and other social initiatives. For instance, Outlandish, a tech cooperative, negotiated with Islington Council to provide training and employment opportunities for locals in return for a peppercorn rent on its premises.

Shared Value Leases
Shared value leases are rental agreements that incorporate social and environmental initiatives that are mutually beneficial to both the landlord and the tenant. For example, a shared value lease might include provisions for installing energy-efficient lighting or water-saving fixtures, which would save money for both the landlord and the tenant. US airports such as San Francisco, Chicago O'Hare and San Diego operate green concessions programmes where the airports work with tenants to train employees and implement practices to obtain green certifications. In return, the tenants receive airport fee discounts and recognition at annual events, benefiting both the business and the airport.

Overall, incorporating ESG principles into rental schemes is becoming more common as companies recognise the importance of sustainability and social responsibility.  Going forward, we see these types of leases as being the new normal and both landlords and tenants must look incorporate ESG clauses into leasing arrangements in a manner that is quantifiable and fair.

Pragma Pulse is an ESG goal monitoring platform for landlords and businesses alike. The platform helps create clear, intuitive dashboards and tracking tools that help to set targets, monitor, and drive ESG performance across your portfolio.

Soham Nayak