Deal insights – ESG in action

As sustainability strategies become further progressed, JLL believes we will see net zero carbon (NZC) related themes continue to move up the priority list during transactions as more real estate players make commitments and supply for aligned assets is put under further pressure. In a one-off podcast special Janey Douglas, JLL’s UK Head of Sustainability, Capital Markets and Kimberly Markiewicz, JLL’s UK & EMEA Sustainability Research Lead sat down to discuss the survey findings, including what is influencing investors today and future trends.

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Despite the economic headwinds in the past year, sustainability has maintained its position as a key focus for CRE stakeholders, as regulations come into force and awareness increases on the environmental impacts of real estate. In JLL’s recent UK Investor Survey, 75% of respondents stated that they have had a greater focus on environmental and social impact over the past 12 months and a further 23% stated their focus had remained the same. Investors realise that future-proofing their AUM with a sustainability strategy is imperative to mitigate against obsolescence and capitalise on immediate financial benefits as part of real estate investment and asset management.

Further findings from the survey evidence that ESG considerations are impacting decision-making in bidding and purchasing; 53% of investors stated they changed their decision based on ESG criteria, an additional 27% either increased or decreased their offers and a smaller 20% stated ESG had no impact on decisions. This demonstrates that ESG considerations have become an integral part of the due diligence process. As expected, the extent of influence varies depending on the different investor profiles. Factors such as investment mandates, risk appetites, regulations, stakeholder expectations, and values are likely to influence the importance placed on ESG criteria and the degree to which they are integrated into investment decisions.

Evidence also highlights that sustainable buildings are now achieving record rents^[1] as occupiers are increasingly looking for spaces that align with their sustainability commitments. In the Investor Survey, we asked respondents what is driving decision-making in transactions and ‘Occupier considerations’ (which includes occupier requirements, occupier business use, and occupier collaboration) was a key factor. Although occupier requirements were previously led by health and wellbeing and employee experience factors, the growing maturity of sustainability commitments made by occupiers has seen them become increasingly driven by net zero carbon requirements. This is further evidenced through the rise of SBTI signatories which have increased 80% in the past two years alone. Therefore, the importance investors place on occupier considerations highlights that they perceive ESG as a way to attract the best tenants, achieve higher rents, drive value and achieve mutual sustainability goals.

^{CRREM - Carbon Risk Real Estate Monitor}

From the survey, it is evident that investment managers, institutional, and corporate investors prioritise considerations relating to compliance risks and factors impacting long-term investment performance. For these investors, the top considerations are ‘EPC & Regulations’ and requirements for NZC alignment i.e., ‘Energy and Emissions data and CRREM’, closely followed by ‘Occupier Considerations’.

This group placed lower importance on ‘Certifications’ (such as BREEAM) compared to the investors in Chart 4 and previous survey results, likely as a result of better proxies becoming more prevalent for understanding actual building energy performance. In cities like London, increasingly all new build offices are certified as a baseline, so it is slowly becoming less of a differentiator in the market.

Private investors, private equity and unlisted propco investors typically have more discretion and the results show slightly different priorities when it comes to ESG considerations. These investors also prioritise ‘EPC and Regulations’ but instead of focussing on longer-term compliance requirements such as NZC i.e. ‘Energy and Emissions data and CRREM’, their next priority is ‘Occupier Considerations’ followed by ‘Certifications’. This perhaps demonstrates the greater importance of opportunities for driving value in the shorter term for this group, their focus is angled on profits and limited longer-term external pressures.

As regulatory pressures continue to mount and occupiers increasingly demand more sustainable spaces, ESG considerations will play an increasingly crucial role in investor decision-making processes. The key factors discussed in this blog will continue to evolve in terms of importance at transaction stage. Investors need to consider how their assets perform from an ESG perspective when planning an exit strategy, to maximise liquidity and have broad investor appeal.

In terms of future trends, 84% of investors responded to say that they have a nature and biodiversity strategy in place or will have one in the future. Having a nature and biodiversity strategy can support and influence competitiveness, compliance, risk assessment, site selection, design choices and sustainability practices; a topic that is explored in more detail in JLL’s Value of Nature & Biodiversity research. Biodiversity conservation and sustainable development will become integral to decision-making for the long-term well-being of ecosystems and communities. Some investors have already integrated nature and biodiversity criteria into their asset acquisition criteria, so we expect it to have a growing influence on decision-making as sustainability strategies continue to progress.

To discuss the article or the themes featured in the podcast in more detail please contact Janey Douglas or via the contact us link here.