Backing change with green money

The commercial real estate industry is a fundamental building block of the economy, but also a major contributor to climate change, and so the sector plays a vital part in achieving the government’s net zero goals. This transition to net zero will require transformational change across many sectors and that couldn’t be more the case for real estate. There isn’t a ‘one-size-fits-all’ approach, with distinct challenges and opportunities for every asset class. The challenge facing the industry is stark. Little progress has been made in decarbonising. Improvements have been made in the development and uptake of renewable energy technologies but the same cannot be said for other areas. After a tumultuous 18 months, leaders could be forgiven for having focused elsewhere.However, as we look to 2022, we all need to do more. Simple options, complex solutions The journey to reaching net zero is both simple and complex. On the one hand, the options are simple: reduce energy use, predominantly by increasing energy efficiency, and displace fossil fuels with carbon-free sources. As simple as that sounds, existing buildings, systems and working practices need to be adapted, while maintaining productivity and profitability, in addition to navigating changes in regulation and stakeholder requirements. The report, Towards Net Zero in UK Commercial Real Estate, published by HSBC in partnership with UCL, highlights these two key issues. Retrofitting existing buildings in real time and space becomes difficult when you add in diverse groups of owners, tenants, facility managers, and customers working within different decision-making regimes. This makes a blanket approach challenging. The second factor the report details is the division between owners and occupiers. In simple terms, owners may be reluctant to invest in measures that save energy and money for their tenants and tenants are unwilling to invest when they may not stay long enough to reap the rewards. Yet there are glimmers of hope. The government has recently consulted on what form regulation should take. As the regulatory landscape becomes clear, it will add to the pressure already being seen from investors and drive greater consideration of the decarbonisation agenda. Added to this, many large occupiers are themselves setting clear targets for net zero and are beginning to engage with their landlords and work collaboratively through green leases and similar arrangements. The journey to net zero is also becoming an increasingly important factor for employees. HSBC’s recent Future of Work research shows that salary is no longer the sole focus for employees – wellbeing and the environment within which we work are of equal importance. This will ultimately force employers and occupiers to consider issues such as clean air ventilation and green efficiency in building materials. Achieving rental value may even depend upon it in the not too distant future. Funding commitments The industry wants to make a difference. We know businesses are seeking opportunities to make positive change across their portfolios, and each business is finding its own pathway toward net zero. HSBC has committed to supplying $750bn (£563m) to $1tn of financing and investment to support more sustainable ways of doing business by 2030. We recently provided Unite Group, an owner, manager and developer of purpose-built student accommodation, with an unsecured sustainability linked revolving credit facility. The company is an industry leader in driving the effort towards a greener future and the funding will provide the foundation for Unite to pursue its ambition to become net zero in its operations and developments by 2030. During 2021, we have provided UK commercial real estate clients with over $1bn of green and sustainability-linked funding. A coordinated approach Progress in reducing emissions by taking steps to become more efficient, monitoring change, and pushing for innovation is taking place across the sector, and new ideas are emerging. However, truly achieving the reduction in emissions to hit the government’s targets will require coordination, collaboration, and communication between property owners, facilities managers, occupiers, financiers and investors. This will need to spread across networks beyond the UK, through supply chains and other business relationships. While there are considerable challenges, there are certainly many opportunities to improve both the carbon footprint and the overall sustainability of the UK commercial property industry in the coming decade. More fundamental change will require swift and close collaboration between government, real estate and financial services to unlock the innovation and investment needed. Ultimately, success depends upon the active engagement of all of us in the industry coming together to transform the sector and play a pivotal role in a sustainable and resilient future. Sharon Quinlan is head of real estate finance at HSBC UK