ESG: What is in store for 2024?
With the help of my research colleagues, I explore the overarching trends set to continue or expand, uncover emerging themes, and offer up an ESG wishlist.
14 minutes to read
As we dive into a multitude of predictions, I present insights within the cross-sector theme of ESG.
The momentum to integrate Environmental, Social, and Governance (ESG) factors into all facets of the property market, whether driven by government or market forces, shows no signs of abating in 2024.
Looking ahead, I anticipate heightened interest and focus on the following five areas:
Retrofit revolution. One theme that has been gathering momentum in 2023 and is expected to grow in 2024 is the pace of refurbishment. In our survey of property investors, 58% were targeting poor ESG-performing assets in other to upgrade recognising the growing market distinction between ‘the best’ and ‘the rest’. With an increasing emphasis on embodied carbon (my second theme), retrofit and refurbishment will take precedence over redevelopment. I would like to see the emergence of more innovative financial products and incentives, fostering accelerated retrofit adoption across commercial and domestic properties.
A spotlight on embodied carbon. As we progress in decarbonising the electricity grid, operational carbon in electrified buildings will decrease - although this does not negate the importance of making buildings more efficient from an environmental and cost perspective. Therefore, the lion's share of emissions is expected to shift to embodied carbon from 2035 according to the UKGBC, meaning greater attention from industry actors. To fully comprehend embodied carbon, the industry requires more standardised measurement and education on embodied carbon for stakeholders, ranging from engineers and construction professionals to agents and insurers.
Renewable energy to be supercharged. COP28 witnessed a commitment to triple renewable energy capacity by 2030. Recent announcements in the UK regarding grid connection reforms, including proactive queue management and the removal of dormant projects, are set to expedite viable and ready-to-go projects. This presents opportunities for property owners, offering income streams and capital value uplift. Occupiers stand to benefit from enhanced energy cost stability and reduced emissions. It would be great to see the ‘rooftop revolution’ take hold. Last year set a record for domestic installations, and it is crucial to sustain this momentum while enhancing battery storage capabilities to optimise consumption
Resilience and adaption in the conversation. In the wake of the hottest year on record, there will be an increasing focus of ensuring buildings not only optimised for net-zero operation but also resilient to extreme conditions. The ability to withstand more extreme climates, will become of greater importance. Owners and occupiers must adopt a proactive stance rather than a reactive one, and it is critical for new and refurbished projects to ensure they can withstand more extreme heat. This consideration is becoming increasingly crucial for finance and insurance. According to data from the MSCI U.S. Quarterly Property Index, insurance costs as a percentage of income receivable more than doubled to 2.3% from 1.0% over the five years through September 2023. I would like to see more innovative and passive design to ensure that net zero optimised buildings can continue to perform in more extreme weather.
Social becomes a greater focus. Health and wellbeing even had its own dedicated day at COP for the first time, highlighting its ascent on the agenda. The built environment, where we live, work, and spend time, plays a pivotal role. While there are no standardised methods or measurements yet, some innovative actors are pushing forward, providing case studies for future developments. Despite the continued impetus and urgency associated with energy efficiency and environmental factors, wellbeing and the 'S' aspects are gaining prominence in the minds of investors, operators, and occupiers. I would like to see more attention and measurement of social and wellbeing aspects so that we can understand the tangible impact to highlight the role of buildings.
A lot of opportunity within the space. However, there are a number of risks to consider, with my top three being:
- For investors, there is a significant amount of the time and resources (not to mention cost) required to meet regulatory, functional, and financial standards. Understanding that timeline and matching to lease events and other markers is increasingly critical.
- We could face a shortage of skills to effectively deliver the renovation revolution required.
- Governments continue to postpone clear and concise regulation, as seen with the consultation on the Minimum Energy Efficiency Standards, which took place in 2021 and is yet to see a concrete outcome.
What I would like to see is clear and ambitious regulation that eliminates the back-and-forth and debate on the timing of various measures. Delays incur costs - missed opportunities, potential rise in material costs and further degradation among other unknowns - and this ties into the above point regarding the shortage of skills and the time taken to complete projects
While that provides a broad overview, each sector encounters unique opportunities and challenges. To delve deeper, I posed two questions to each of Knight Frank’s research specialists: one regarding the major ESG themes they anticipate in 2024 for their sector, and the other on what they too would like to see.
The responses
Global Capital Markets, Victoria Ormond, Head of Capital Markets Research
Global investors, including those from Asia, are poised to increasingly seek cross-border investments that align with decarbonization and sustainability goals. Despite varying standards, sustainability is expected to remain a key screening metric for bank lenders. We foresee a growing trend in the adoption of ESG strategies by commercial real estate investors worldwide, recognising that this may support asset liquidity for those which also have the right location and quality. Looking even further ahead, the conversation is likely to widen to increasingly consider embodied and life cycle carbon. This is expected to further incentivise the refurbishment and repurposing of existing properties.
Data centres, Darren Mansfield, Head of Data Centre Research
With the demand for data centres rising, ‘environmental impact’ will undoubtedly be a primary focus for operators in 2024. Areas of address will be broad and include sourcing ‘green’ energy, public commitments to carbon neutrality and operational efficiencies such as improving PUE (Power Usage Effectiveness) and reducing water consumption. Each of which acts as a differentiating factor in an increasingly competitive marketplace.
I would like to see a better balance in media reporting of data centres in the context of sustainability, which often only cites ‘reuse’ projects such as district heating on the positive side. Data centre infrastructures also regularly underpin many other societal efficiencies, such as enabling traffic and road management systems, smart home technologies, and advanced manufacturing for example. This indirect involvement is often overlooked.
UK Farmland, Andrew Shirley, Head of Rural Research
The establishment of realistic “green financing” frameworks to encourage funds to invest in the UK’s natural capital and help deliver the government’s ambitious net zero and biodiversity targets will be the ongoing focus for policy makers and investors in 2024. Farming and landowning organisations will be working hard to ensure those frameworks provide equitable rewards to the land stewards who are delivering the natural capital.
I would like to see policymakers of all colours implement coherent and appropriate land-use and planning policies that incentivise the countryside to fulfil its potential to deliver high-quality food, more biodiversity, nature-based solutions, renewable energy, and housing.
Logistics, Claire Williams, Head of UK and European Industrial Research
There will be a continued focus on ESG criteria from developers and investors. From a developer's perspective, a strong ESG offering can mean a significant commercial advantage, with many operators narrowing their search for premises to those that meet specific sustainability criteria and fit-out standards. With vacancy rates having risen recently, developers bringing facilities to the market in 2024 (and beyond) will need to ensure their facilities have a competitive sustainability offering.
I would like to see a greater focus on improving building materials and developing knowledge of embodied carbon and ways of re-using building materials (which is essential if buildings or fit outs have a relatively short shelf life or need refurbishment/upgrading). This is a challenge with specific design requirements that can seem at odds with sustainable construction methods or materials – large column-less expanses, vibration reduction or floor loading requirements, for example.
London Offices, Shabab Qadar, London Research Partner
Many investors have a grasp on the environmental elements of ESG and we are now seeing an increasing requirement to understand the social and wellbeing component of ESG. The big questions include: How do landlords/developers incorporate this in office design? How does this affect the viability of developments? And what examples are there in London that can be shown as the best in class for wellbeing? So many clear questions remain unanswered. What I would like to see is more consensus on metrics for measuring and benchmarking social elements and showcasing of offices that have successfully incorporated and measured wellbeing.
Global Occupier, Dr Lee Elliott, Head of Global Occupier Research
There continues to be huge variance amongst global occupiers and their attitudes towards ESG. These variations are driven by culture, size, and whether companies are publicly listed or not. The larger, listed entities are progressing their ESG thinking much more towards the S and focused on ensuring strong and positive social impact through their real estate and integration into the communities they operate within. Less established entities are still grappling with the E - whether that be the myriad of certifications in operation through to the measurement of improvement around the environmental impact they are having.
As we have consistently argued, the gap between corporate ambition and action on ESG must be closed. There is evidence that it is but much more sharing of best practice between occupiers and indeed across the whole industry would help.
Global Residential, Kate Everett-Allen, Head of Global Residential Research
ESG concerns are increasingly featuring on the agenda of prime residential purchasers, but the residential sector is still behind the curve compared to commercial real estate and there are significant regional variations with Europe ahead of the US and Asia. Last summer’s wildfires, heatwaves and flash floods in Southern Europe are influencing purchase decisions for some second homeowners with the Nordics and Alpine regions attracting stronger interest.
For investors new regulations will push ESG considerations front and centre. In France for example, by 1 January 2025, properties meeting 'acceptable housing' standards in the rental sector must have at least a class F EPC, a class E EPC by 2028, and class D by 2034. Faced with retrofitting costs landlords may opt to sell shrinking rental stock further and putting upward pressure of rents.
I would like to see a greater sharing of knowledge, data and metrics between authorities and policymakers to gauge the success of the numerous initiatives being employed. One city that has set itself an ambitious target is Madrid which plans to plant a new 46-mile (75-km) forest perimeter comprised of almost half a million trees, absorbing around 175,000 tonnes of carbon dioxide each year to help improve the city’s air quality and reduce summer temperatures.
Residential, Tom Bill Head of UK Residential Research
Something we have noticed since energy prices increased sharply is the efficiency of a home is now important for more buyers, especially larger properties outside of the capital. In our most recent sentiment survey, we found concerns centred around rising costs (cited by 28% of respondents), the prospect of future environmental regulations negatively affecting the value of their property (22%) as well as a preference for a ‘greener’ home (21%).
We expect energy efficiency to remain a concern for buyers in 2024, particularly as green finance products become more innovative. The industry would like more consistency and clarity on regulations, particularly for landlords, which could ultimately help tenants by increasing supply.
Residential Built to Rent, Lizzie Breckner, Head of Built to Rent Research
Build to rent homes offer a clear benefit to residents when it comes to the “E” in ESG. Knight Frank’s analysis of EPC data indicates that BTR residents could save 44% on their energy bills compared with tenants living in the wider private rented sector. The increased cost of living means that residents have become increasingly aware of this, which will continue to support occupancy and lease-up into 2024.
I would like to see more clarity around some of the regulation relating to ESG. While EPC ratings are about keeping heat and energy in, the new Part O Building Regulations are about preventing a building from overheating. The market needs clearer guidance on designing buildings that keep residents warm in winter and cool in summer. Investors are motivated to deliver best in class buildings, not only to future-proof their investments, but also to secure access to capital at the best rates. Ironing out inconsistencies in regulation will make the delivery of high quality BTR homes easier.
Residential Development, Anna Ward, Associate Residential Development Research
Nutrient neutrality will continue to be a big story this year, along with water neutrality and biodiversity net gain. The current government tried to do away with the nutrient neutrality rules in 2023 but was defeated in the House of Lords after Labour led a rebellion. This year the focus will be on trying to bolster the embryonic nutrient mitigation market to support the delivery of new homes. But water supply concerns are also still lingering and could potentially spread, while new biodiversity net gain rules are implemented this month with housing developments required to be “nature positive” - a net gain for the local environment of 10%, for example by creating new habitats and green spaces.
I would like to see more clarity and consistency from government around its approach to the bigger questions: Who pays for net zero? How much will homeowners have to contribute and when? Plus, more investment in tech to make retrofitting older properties cheaper and more accessible.
Retail, Emma Barnstable, Associate in Retail Research
Understanding and enhancing the social value of retail assets will likely be a major ESG theme explored in 2024. Ellandi led the way in 2023, quantifying the social contribution of its shopping centres in financial terms - a currency widely understood. Hopefully this will encourage other landlords to do the same, and spark action to better curate and maximise social value for communities. However, strategies employed to achieve this will need to be tailored to specific community need, and be capable of adapting to future demand changes.
In terms of what I’d like to see in 2024? The retail sector becoming bolder and braver. Landlords developing clear, actionable ESG strategies to ensure properties remain relevant in the coming decades. This will involve making difficult, but necessary, decisions to upgrade environmentally underperforming or socially inadequate assets, perhaps repurposing them for alternative uses that better serve future communities. And for retail operators - evidencing ESG claims put to market, rather than leveraging them as marketing gimmicks. It would be encouraging to see ESG reporting go beyond compliance, with greater data-sharing and collaboration among retailers, for industry-wide change.
Additionally, it would be interesting to see a real debate on consumerism. Each year UK retail sales grow and consumers seem to be consuming more product than ever before – which feels misaligned with growing ESG efforts. What does truly ‘sustainable’ consumption look like for the average UK consumer under the global temperature targets pledged? Of course, this reaches far beyond the high street – but is a thought-provoking, and potentially controversial, topic that demands exploration.
Student Housing, Katie O'Neill, Head of Student Housing Research
Our 2023 Student Accommodation Survey demonstrated that the student mindset is evolving towards ESG agendas, and this is influencing their decision on where to live.
On the E element, students identify environmental factors as an important consideration when choosing their accommodation. However, they are largely unwilling to pay extra, with only 17% stated that they would be willing to pay more for technology that made their building more environmentally friendly, whilst just 13% said they would pay extra to live in a building that is carbon neutral.
In contrast, when analysing the S component, there is clear evidence that social factors are translating to price premiums and better retention. Some 80% of students surveyed said that their current term-time accommodation was important in supporting their own wellbeing and mental health. In addition, 81% of first-year students living in private Purpose-Built Student Accommodation (PBSA), said that their accommodation provider’s approach to student wellbeing and mental health was an important factor in their decision to stay in the same accommodation next year.
In 2024, the key themes for ESG in PBSA will centre around the social component, with operators continuing to strengthen their commitment to supporting student wellbeing and mental health, while also improving on the sense of community and belonging within schemes and for their residents. This year also poses a real opportunity for the sector to gamify the environmental component of ESG, for example, operators utilising the ‘green nudge’ towards energy usage or waste management. There are some examples of this in the industry at present, but students are the perfect cohort of the population to get really creative on these incentives to act sustainably.