If Dublin is going to deliver on ESG, it must get creative

COMMENT With the Climate Action and Low Carbon Development (Amendment) Act 2021, Ireland’s aim to establish a climate-resilient and climate-neutral economy by 2050 was locked into law. But how well placed is the real estate sector to meet this target?  With key players now adopting more aggressive ESG strategies, the sector might feel optimistic, but while Dublin is in the top 20 of Savills’ “Science Cities” it is also a city with less than 20% of total office space certified as green. If Dublin is going to deliver the ESG agenda, investment and creative thinking will be required.  The sector has had to grapple with rapid changes. Clauses that were previously “nice to have” are now essential provisions, and regularly feature as key issues in negotiations. Many stakeholders now insist on clear and meaningful reporting regarding green finance terms and measures taken towards putting ESG targets, strategies and governance into action. Beyond light touch “Green washing” of leases – including non-binding expressions of intention and good faith co-operation between landlord and tenant – helped put green clauses on the agenda. In our experience, “looser” green lease clauses can quickly fall out of step with a push for more progressive and sophisticated clauses which go beyond data capture and light-touch/low-effort provisions, and head towards more involved clauses that promote collaboration between the landlord and tenant, as well as incentives for tenant performance in relation to energy usage or waste outputs.  Moving forward, traditional sticking points between landlord and tenant need to be tackled with a fresh and energised perspective. ESG is now on nearly every organisation’s agenda as, increasingly, parties recognise it as the only way to ensure continued prosperity for both the individual (whether personal or corporate) and the broader community. Where possible, counterparties should be encouraged to tackle ESG in the true spirit of co-operation and collaboration, towards a goal of better performance that delivers for both parties.  Leases have a key role in delivering ESG objectives. Different approaches can be taken – from a basic position, such as preserving certification at the date of the lease, to a more progressive strategy, which allows the landlord to implement an aggressive asset management strategy to keep up with the increasingly demanding KPIs for building performance.  Tenants and landlords need to acknowledge that each building and relationship is unique, with different appetites and capacities for investment, and that targets can be achieved not only through “green” refurbishment and upgrade programmes, but through alternative methods, such as carbon offsetting.  Such is the pace and rate of change in the sector that it is worth considering if the lease is even the best place to set all the objectives down. For a shorter-term arrangement, it is of little consequence. However, consider the longer-term lease and the current pace of change both in terms of solutions and real knowledge. Parties in the longer-term lease could commit – at the very least – to preserving the status quo and ensuring maximum compliance with the standards as at the date of the lease.  Alert to change Regulatory standards will evolve, with requirements becoming more stringent over time, and investors and asset managers must ensure that a property stays “on its toes” during the lease term. ESG can be at the front of our minds when it comes to the big clauses, such as building provisions in agreements for lease, but it is important to remember the more backseat provisions, such as reinstatement. Tenants should not be required to strip out items that may be repurposed by an incoming tenant.  Equally, when it comes to performance assessment, data sharing is key, particularly for new-builds where, operationally, it might take some time for efficiency standards to match the performance targets in principle. Data capture is crucial to proper management, even for premises with the best and brightest green credentials.  DWF’s real estate insight report explores the challenges and opportunities of implementing ESG strategy, with research highlighting that education and investment are key. One-third of those surveyed said boardroom engagement is still a challenge, and 65% indicated boardroom performance will be linked to delivery on ESG targets.  As ESG continues to dominate boardroom discussions across all sectors, integrating ESG into business strategy and culture can enable growth.  Órlaith Molloy is a partner in the real estate team at DWF Image © imageBROKER/Shutterstock