The ABC of ESG in Real Estate

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What is ESG, and how does it apply to Real Estate assets?

E stands for Environmental, and in a real estate context is fundamentally about reducing carbon emissions from the construction and occupation of buildings as we seek to achieve net zero carbon emissions by 2050. 

The S and the G cover Social (value) and Governance.  Both of these are of more limited direct application to real estate at asset level, but Social value can include things like placemaking, how an asset fits into the community in which it is located and whether the way in which the asset is used contributes to that community in some way.  Governance is less about assets and more to do with how your business is structured and led, and how decisions are made, eg who is on your board, are they diverse and representative of relevant stakeholders, and do you have the right policies and processes in place (and are they followed in practice)? 

The real estate inputs for the Environmental and Social aspects of ESG are things like your supply chains and the choice and sourcing of materials.  The outputs cover asset management and development.  Community consultation can also be an input for Social value and can influence your asset management through obvious things such as how you use unused property eg for temporary uses like vaccination centres.  The main desired result from an Environmental perspective is net zero emissions, while from a Social perspective it is for your assets to deliver value for the community in which they are located (beyond simply creating employment).  Development will then cover placemaking as well as minimising construction emissions and designing sustainable buildings.  

These are issues that, broadly, investors need to tackle for themselves: 

  • through analysis, which will then inform policy; and then

  • in deciding how best to implement, and importantly, enforce, their policies.  

Very little of that will then spill out into the documentation we as real estate lawyers draft, as how clients choose to implement their own policies generally informs the decision making process  and the main commercial terms, not the legal drafting.  Green lease clauses are one way of seeking to achieve Environmental objectives, but effective engagement with occupiers and the implementation of asset management strategies achieve more than the aspirational “light green” provisions that tend to be seen in leases. 

When it comes to development, Environmental and Social objectives are often best achieved through the planning, design and marketing processes rather than provisions in development or funding agreements and we don’t currently tend to see any specific legal drafting being included to cover them.  Governance may well affect the choice of counterparty (for instance, pre-contract due diligence on a prospective counterparty’s own supply chain and processes might lead to the decision not to deal with someone who is not themselves appropriately governed, or whose own policies conflict with yours) but doesn’t tend to influence the way in which real estate contracts are drafted (although some Governance issues, like anti-bribery and corruption clauses, have been commonplace in legal documents for several years already).  

E, S and G are all important and will only become more so in the future so everyone needs to embed them into their DNA. But for the moment, light touch green clauses aside, real estate documents don’t need to change much, if at all, to accommodate them.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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