_Are occupiers’ ESG targets ambitious enough?
Along with the launch of Knight Frank’s report, Why ESG Matters: A Guide for Occupiers, our panellists Peet Mun Chew, Managing Director of Investment and Development, Capitaland Development (Singapore), Francesco Demarco, Head of Global Portfolio Solutions, ANZ, Knight Frank Australia; Jackie Cheung, Associate Director, ESG, Knight Frank Greater China; and Christine Li, Head of Research, Knight Frank Asia-Pacific discussed some of the key topics around ESG that have come into sharp focus for occupiers. Watch the full webinar replay here, or read on for some of the highlights from the discussion.
On how top of mind ESG priorities are for occupiers
From the landlord’s perspective, Chew shared that ESG considerations are on the minds of Capitaland’s tenants and buyers. However, he notes, “as much as sustainability is in their mind space, every company’s sustainability journey is on a different level, and their priorities may also differ.”
However, he also noted that the pandemic has undoubtedly heightened awareness around the “S” in ESG, with more tenants becoming conscious of indoor air quality and the importance of green outdoor spaces for employee well-being.
On the importance of green leases
Green leases, a framework between tenants and landlords that promote partnership around environmental objectives which can cover areas such as sustainable fit-outs, operations and reporting, have been a growing trend in Asia-Pacific. However, they are offered mainly by landlords voluntarily rather than mandated by government authorities.
Cheung shared that the practice is quite advanced in Hong Kong, and often, developers will pledge an award to occupiers for energy or carbon savings or establish some rules around data sharing between occupiers and landlords. However, the clauses are often not legally binding.
On the other hand, Li shared that Knight Frank is also seeing MNC occupiers proactively requesting their landlords to co-sign green leases, including requesting for emissions reduction targets or even asking landlords to purchase renewable energy or to install EV charging points.
Ultimately, Demarco believes that “we need to go back to partnership to drive results. If the green lease was a static document that we put in place which doesn’t have anything binding upon either party, it’s most likely that nothing will happen from that. I think we need to remember that a green lease is just a tool. It’s not an outcome…we need to start to think about these ideas, these concepts in time, as they progress through time – not only just as a static tick-box exercise.”
How much importance are occupiers putting on sustainable buildings?
In Knight Frank Cresa’s quarterly Corporate Real Estate Sentiment Index, we are seeing a marginally negative sentiment around “increasing the number of sustainably accredited buildings within portfolios”, although this figure has stabilised in Q3 2022 after falling in the previous quarter. However, it remains to be seen whether this represents a softening corporate stance around ESG or simply a short-term inability to transact. Commenting on the results, Demarco shared that the drop is most likely because occupiers’ short-term focus right now is on increasing space utilisation, whereas the focus on accredited buildings is more of a long-term strategic concern.
When faced with a relocation decision, Chew shared that the sustainability rating of a building and whether that will help occupiers better meet their ESG targets is a major consideration and is a trend that he expects to become more prevalent. Furthermore, he expects investors and occupiers to encounter brown discounts or penalties for operating costs in non-sustainable buildings, which can be in the form of a carbon tax, waste disposal fee, or waste generation fees.
However, relocating to accredited green buildings is not the only path to reaching ESG targets, as relocation itself has its own potentially negative impacts on the environment, as pointed out by Demarco. Occupiers can also retrofit their premises as a sustainable option. For example, Li shared the example of how DBS bank retrofitted a 10-year-old building to make it net zero, adding an extensive network of solar panels on the rooftop and using edible oil to power its backup generator.
Are occupiers’ ESG targets ambitious enough?
Closing off the discussion, all panellists concurred that corporate ESG targets are not ambitious enough. “Markets tend to penalise organisations for when they state their ambitions and they fall short of those ambitions,” noted Demarco. “I think when it comes to sustainability and ESG, we need to take the reverse approach.”
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Download the full report, Why ESG Matters: A Guide for Occupiers – which explores how occupiers can maximise their green potential through their real estate here.