UK: a long-term vision of ESG shaped by a booming green economy

In recent years, the UK has pursued a strong commitment to green policy-making. In 2019, it was the first major economy to pass laws requiring net zero emissions of greenhouse gases by 2050. The same year, London launched its Ultra Low Emission Zone, requiring polluting vehicles in the city centre to pay hefty daily fees. In October 2021, the scheme is set to cover the whole of Inner London.

The government’s stated ambition is to become the world’s number one centre for green technology and finance. It aims to have two million green-collar jobs by 2030, as well as £170 billion in annual exports from the low-carbon economy. This aggressive strategy of pro-environment law-making has conditioned the ESG market, which is one of the most dynamic in Europe.

Most of the leading investment managers in the UK have signed the Principle for Responsible Investment (PRI), the UN-led initiative that puts ESG considerations at the heart of investment decisions. Many have also committed to achieving carbon neutrality 10 or 20 years ahead of the 2050 target set by regulations such as the European Climate Law.

Among real estate players, this commitment is particularly marked. “There’s an industry-wide drive to proactively address environmental concerns”, says Benoît De La Boulaye, Head of BNP Paribas Real Estate Investment Management (REIM) UK, “and most players are already making efforts in terms of Capex, reinvestment and reallocation of their portfolios, notably to carbon offsetting sources, to attain carbon neutrality in the near future.”

Over the last five years, UK real estate investors have become increasingly demanding in terms of ESG. The due diligence phase is now typified by a thorough investigation of the asset’s energy performance, ecological footprint, and compatibility with future sustainability goals.

“Today, many investors want more than ESG labels”, says Benoît De La Boulaye. “They’re asking us for the assurance their asset will stand the test of time, and that’s creating more and more demand for continual monitoring.” In other words, the trend in the UK is towards a long-term vision of the asset’s ESG performance. 

This long-term commitment is strengthened by the fact that investors can expect relatively rapid ROI when they upgrade buildings. UK property generally has a high rental and capital value, especially in London compared to Paris or key German cities. This means Capex investment will generate a faster return on investment than in many other markets.

The government has done much to encourage the adoption of ESG criteria in the UK. While EU regulations no longer apply since Brexit came into effect at the end of 2020, there is a strong culture of ESG policy-making within the government. 

Last year, Prime Minister Boris Johnson announced a post-pandemic recovery plan to invest £12 billion and create 250,000 jobs in the green economy. And, in November 2019, an innovative carbon offsetting program was launched based on tree-planting. 

The £50 million Woodland Carbon Guarantee scheme offers landowners the chance to plant trees and sell their woodland to compensate carbon emissions. Participants can take part in reverse auctions, held every few months, to receive guaranteed government payments as the trees grow. Alternatively, they can sell their woodland on the open market, helping private companies to offset their carbon footprint as they work towards net zero emissions. 

“The UK has shown it is willing to innovate in terms of ESG”, says Benoît De La Boulaye, “and that’s brought about a cultural change in the real estate market”.
 

This positive ESG culture has been adopted by tenants in the office sector. Today, tenants are not just demanding buildings with exceptional environmental performance; they also want buildings that enhance well-being. The social side of ESG has become a priority for many of the UK’s biggest companies, and, “there is no doubt this will be even stronger on their agenda to attract their teams back to the office after the pandemic”.  

“A few years or a decade ago, tenants would ask how many parking spaces the property had”, says Benoît De La Boulaye. “Now, our London tenants are far more interested in the number of showers and bike parking spaces”. Driven by the city’s heavy investment in bike lanes, the average total daily distance cycled in London hit an all-time high of four million kilometres in 2018.

Many tenants go to great lengths to ensure the well-being of their employees. One client of BNP Paribas REIM requested a clause allowing staff to bring their dogs to work. Another is equipping the roofs of its logistics facilities with thousands of square meters of solar panels. 

“In the UK, we rarely have to convince our tenants to invest in ESG”, says Benoît De La Boulaye. “They usually come to us with set ideas, and we’re more than happy to help them realise their ambitions.”
 

On both the investor and tenant side, the demand for ESG-driven assets is therefore high in the UK. Some investment managers, including BNP Paribas REIM, are now proposing impact strategies, with funds that seek to accelerate and scale up the positive effects of ESG. The aim of these funds is to go beyond current ESG investment criteria to have an even bigger impact by, for example, reducing drastically carbon emissions by 2030.

“Not thinking about ESG in 2020 is a strategic mistake”, says Benoît De La Boulaye, “because the longer you wait, the closer you get to 2050 – and the more ESG criteria become urgent and the wider the property pricing gap between best and last in class ”. That long-term vision of ESG is one of the defining characteristics of the UK market, providing strong foundations for real estate investment in the coming years.