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Net zero; redemption is possible

ISG's growth and innovation director, Ben Elliott, explores the route to avoiding stranded assets in our future commercial property stock, featured in Property Week.

“It’s not going away, right?” These five simple words, recently uttered by one of my colleagues, neatly encapsulate the issue of climate change on our industry, and on society and humanity in general. Since the issue-defining 2015 Paris Agreement was signed, climate change has rarely been out of the headlines. As the communications apparatus for November’s COP27 kicks into action, global warming is in the consciousness of all but the most steadfast climate-change deniers.

Consider how during the darkest times of the global pandemic, the world took notice and acknowledged the influence of our activities on nature and the environment – the smog-free images from LA or New Delhi or the critically endangered sea turtles hatching on Brazil’s deserted beaches. Wildfires, flooding, record temperatures and drought are a depressingly constant fixture in our daily newsfeeds, but crucially these events are no longer viewed as isolated phenomena; rather they are symptomatic of our negative impact on the climate and environment.

BlackRock’s 2018 announcement that it would prioritise ESG investments was a bold and very public declaration of intent, and it’s clear four years later the momentum towards ethical investing continues to grow. Here at ISG, in May we launched our second Power of  Place white paper, exploring the cost of inaction, as we surveyed employees, employers and asset owners 24 months into one of the most transformational periods in modern history.

power of place graphic | ISG

Research reveals 19% revenue boost for firms investing in hybrid working during pandemic

Featuring insights from employees, employers, investors, landlords and developers across the UK, ‘The power of place: The true cost of inaction’ sees us go beyond the workplace to understand the greatest risks to our assets so we can take steps to overcome them, achieve long-term return on investment and mobilise for the challenges of tomorrow.

It’s no exaggeration to say that ESG factors are front and centre of mind for each of these core societal audiences, and that organisations resistant to change are already reporting negative impacts right across their operations – ranging from talent attraction and retention through to their bottom line.

The term ‘stranded asset’ – once reserved for the most neglected, unattractive, poorly located and unlettable spaces – is now equally applicable to any building with a large carbon footprint that lacks a viable strategy for improvement. It’s clear from our research the days of predictable capital appreciation will now be disrupted by the depreciating effect of carbon performance, as we move inexorably closer to 2050 and the net zero judgement day. 

Download our research and insight report here

 

Role of construction

The counterpoint to this negative trajectory is the large volume of global capital seeking ethical investment opportunities. We know the built environment is responsible for circa 40% of carbon emissions – but redemption may be close at hand. The construction industry, which of course helped facilitate the problem, can now play a key role in the solution, aided by the mobilisation of capital towards net zero infrastructure.

There is real circularity in this approach and many of our clients are now seeing the many benefits that can be derived when starting the conversation at the point of carbon neutrality. 

Our research shows that net zero and operational efficiency of assets are two of the most important considerations for landlords. Stakeholders are often better engaged working on ethical developments and there is a reputational halo effect from schemes and a consequential positive impact on staff retention and attraction. 

In many instances, exemplar buildings are becoming the physical manifestation of an organisation’s commitment to strong environmental standards. The approach and ethical behaviours of contractors have also become a key element of the employing organisation’s ESG credentials. 

We must also remember that a correctly maintained net zero asset will be operationally efficient across its lifetime, delivering significant energy cost savings. Also, addressing a key point from our Power of Place discussions, such buildings are highly unlikely to fall into any future stranded asset classification. 

A version of this piece appeared in Property Week, here.

 

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