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Where are you with your net zero journey?
1
1
2
3
4
5
36%
Starting to plan
Already have a plan in place and implementing it
29%
28%
No plan
7%
Have a plan but not started yet
Where are you with your net zero journey?
Over half of respondents agree that the increase in costs will cause the most difficulty with their net zero journeys. This is an expected response, as the UK is currently forging its way out of the COVID-19 pandemic and is grappling with high rates of inflation and interest costs.
Businesses are more focused on keeping costs low, while seeking to maintain the level of revenues they achieved prior to the pandemic. Due to the nature of the industry, the costs involved with achieving net zero within real estate are greater than other industries, particularly the costs involved with building new assets or retrofitting existing assets. A refurbishment that meaningfully decarbonises a building is expected to incur a greater cost premium compared to a conventional refurbishment.
31% of respondents believe suppliers’ own targets will also cause difficulty in their net zero journey. The suppliers either do not have plans to achieve net-zero carbon emissions or, if outside the UK, have different targets altogether. Holistic changes would be required in this industry to ensure that the same ESG goals are implemented throughout the supply chain.
Where do you foresee challenges in your supply chain which will hinder your net zero journey?
8%
Suppliers outside of UK having different targets
18%
No expected challenges
23%
Suppliers not having Net Zero plans
51%
Costs increasing
Where do you foresee challenges in your supply chain which will hinder your net zero journey?
2
How are you responding to the impact of ESG on your portfolio?
18%
Using technology to achieve targets
21%
Not doing anything
27%
Building new assets with more environmentally friendly sourced materials
34%
Retrofitting existing assets
How are you responding to the impact of ESG on your portfolio?
3
What is the key challenge to achieving ESG goals?
11%
No challenges, leave as is
22%
Need more grants to be able to meet goals
27%
We should be given longer to comply, to allow the underlying market to develop
40%
There needs to be clear regulations and penalties for non-compliance
What is the key challenge to achieving ESG goals?
4
For residential let properties, do you agree with the proposal for EPC ratings to be C by 2025, and will you be doing anything to your portfolio?
13%
No, I do not agree, but I am spending to improve my porfolio
25%
No, I do not agree, and I will be selling my portfolio and exiting the market
29%
Yes, I agree, and have started spending on improvements to bring my portfolio up-to-date
33%
Yes, I agree, but have not started to bring my portfolio up-to-date
For residential let properties, do you agree with the proposal for EPC ratings to be C by 2025, and will you be doing anything to your portfolio?
5
Our conclusion
With over 40% of carbon emissions arising from the building and construction industry according to a UN report, ESG has become a core focus for this sector. However, it is apparent that the net zero journey for Real Estate businesses will be a challenge. This is due to a number of factors including the estimated costs associated with achieving net zero, a lack of clear regulations and guidance from the government, as well as differing ESG goals by different stakeholders in the supply chain.
With a large proportion of respondents not yet having a plan to achieve their ESG goals, the net zero target by 2050 may prove difficult to achieve. However, with the new regulations in place such as the requirement for EPC rating C by 2025 and the level of PropTech and innovation within the sectors, there are steps in the right direction for the Real Estate market to achieve a shared goal.
We would encourage businesses to consider tax incentives associated with the investments they will be making towards the net zero target, such as the R&D credits. We would be happy to discuss where your business is in on its zero carbon journey and help you navigate forward.
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The ESG agenda is now a core element of Real Estate businesses’ strategies.
To collect views on what lies ahead for ESG, we took a snapshot of the industry.
The ‘Environmental’ part is a significant challenge in supporting the UK government target for Net Zero by 2050.
Find out what the market has to say.
How are you responding to the ESG Challenge?
Real Estate recap
The net zero goal, agreed in the Paris Agreement in 2015, includes a target to cut emissions by
by 2030 to limit global warming to 1.5 C.
45%
An additional target agreed by The European Commission (EC) is to reduce carbon emissions from buildings by
by 2030.
60%
The UK is looking to be at the forefront of the growing global green economy. In particular, policies and proposals that seek to
Our
conclusion
Our findings
28%
31%
61% of the survey respondents are operationalising their ESG values by refurbishing or building new assets fit for purpose. 27% of respondents building new assets are utilising more environmentally friendly sourced materials. A larger proportion are retrofitting existing assets, which is in line with expectations given the nature of the built environment within the UK. The advancement being made in technology more widely allows real estate owners and occupiers to make changes to buildings that would achieve the same goals as that achieved by developing new eco-friendly buildings.
18% of respondents have distinctly highlighted they are using new technological advances to respond to the impact of ESG on their portfolio. Technology has the capability to improve energy efficiency, produce low carbon assets and develop smart, sustainable buildings. Based on our experience, many of these advancements may be eligible for R&D tax credits, a tax incentive often overlooked or underclaimed by the Real Estate industry.
21% of respondents have stated that they are not doing anything to address ESG, perhaps, as a sign of the costs associated with altering and developing an existing portfolio, lack of regulatory consequences for non-compliance as well as an indication of respondents that are yet to develop a net zero plan.
21%
18%
61%
22%
27%
40%
40% of our respondents agree that there needs to be clear regulations and penalties for non-compliance. This is interesting to see, and can be analysed as respondents are looking to standardise the approach to ESG goals for the whole industry. For instance, respondents who indicated that challenges in supply chain hinder their efforts to also achieve their own ESG target, would find this measure helpful to eliminate the burden of suppliers that have different targets, particularly ones that do not include a net zero emissions goal.
If regulations and penalties were in place, these respondents would feel more at ease as the Real Estate market would be developing to achieve the same ESG goals.
Currently, the main perceived consequence of non-compliance appears to be a negative social branding for the company; eco-friendly buildings appeal to occupiers and investors both in commercial and residential sectors.
22% of respondents believe more grants are necessary in order to achieve their ESG goals. As previously discussed, the costs involved with building new assets or retrofitting existing assets are significant in this industry, and the absence of government incentives is being seen as an obstacle.
27% of respondents indicate they would benefit if more time were given to comply to achieve ESG goals. This would allow them to start planning their net zero journey and operationalise goals while the underlying market would develop.
62%
62% of respondents have welcomed the change in rules, presumably, as it is in merit to achieve the markets net zero goals.
As we discussed in question 4, 40% of respondents desire clear regulations, and this proposal is a step in the right direction. 29% of respondents are already spending to improve their portfolio to bring it up to date.
Currently, properties require an energy performance certificate (EPC) rating of E or above. With recent government changes, all new tenancies will require a rating of C or above from 2025. Existing tenancies will see the new rules apply from 2028.
In regards to the 38% of respondents who do not agree with the new proposal, this may be in light of the costs that will be associated with conforming to the rules. The government estimates that it could cost approximately £4,700 per property to make the necessary improvements. Older properties will most likely incur an even greater cost than this as these properties will require more work to become compliant compared to newer properties.
38%
The government proposal also indicated the energy performance investment cap will increase from £3,500 to £10,000 (per property) for landlords. The penalty for not complying with this new proposal could be a fine of up to £30,000. The severity of these costs may be a factor that has been considered by 13% of respondents who do not agree with the changes and will be selling their portfolio. In this case, it is likely the costs of making the improvements would outweigh the benefits or that they are simply not prepared to take up the burden of making such changes.
£4,700
£10,000
40%
51%
all sectors of the UK economy.
Decarbonise
The responses from this survey showed a majority of the respondents are in their early stages of decarbonising.
28% starkly highlighted they have no plan at all while the rest are either starting to plan, have a plan that is yet to be implemented, or are starting to operationalise it.
It seems many Real Estate businesses have yet to make any significant progress on their decarbonising journey, while other businesses are well ahead.
View part one
Real Estate Outlook series
View part three
View part four