Insights

As business owners embrace sustainability, Environmental, Social, and Governance (ESG) considerations are becoming integral to commercial property transactions. ESG isn’t just about meeting regulatory obligations. It offers a framework for adding value, managing risks, and positioning properties to meet future demand. For landlords and tenants, navigating ESG in commercial property transactions requires strategic planning and a clear understanding of how the framework can deliver tangible value.

Whether you’re a landlord seeking to future-proof your portfolio, a tenant aiming to align premises with corporate values, or an investor looking for long-term returns, integrating ESG into commercial property transactions is a key consideration. This guide explores what ESG might mean, in a practical sense, for commercial property owners/occupiers and investors.

What is ESG and why is it important in commercial property?

ESG has evolved from a corporate buzzword into a pivotal framework with the potential for shaping the future of commercial property. Broken down into 3 component parts:-

• Environmental: reduction in carbon emissions, improving energy efficiency, and integrating sustainable practices into property management.
• Social: creation of owner/occupier-friendly spaces fostering inclusivity, and positively impacting surrounding communities.
• Governance: accountability, transparency, and compliance with regulations.

For the commercial property sector, ESG is more than just aligning with climate goals. It offers a strategic platform to enhance asset value, attract investors and occupiers, and future-proof investments.

The impact of ESG on commercial property

The property industry is a major contributor to carbon emissions. ESG requirements translate easily into a need to reduce a property’s carbon footprint by creating more energy efficient buildings. Regulations have already been introduced in Scotland whereby building owners are required, in some instances to look at improving energy efficiency and reduce carbon emissions across commercial property portfolios. Energy Performance Certificate Action Plans and Recommended Improvement Measures are designed to achieve this goal, exposing building owners/occupiers to the risk of financial penalties for a failure to comply.

Meantime, tenants and investors alike expect buildings to be energy efficient for the purposes of meeting their own ESG requirements. ESG compliant buildings may, in due course, prove to be more competitive in the market, attracting higher calibre tenants who will pay higher rent. Conversely, if no effort is made to implement ESG measures to commercial buildings, there is an increased risk of lower demand and loss of value.

Whilst ESG environmental considerations can enhance demand, it is also important to note the influence of the social and governance elements too. There is a growing trend whereby tenants and investors are considering the social and governance impact of properties which attract and retain the best employees, create relationships with the community, increase staff well-being and encourage employee productivity. Failure to address ESG concerns in this context could lead to reduced demand, lower asset valuations, and regulatory penalties.

Key considerations in commercial property transactions

One option for improving ESG compliance is to increase the energy efficiency of the property concerned. Whilst there is no minimum EPC rating for commercial buildings in Scotland (unlike the position south of the border), a higher EPC rating can help reduce operating costs. Furthermore, as part of the Scottish Government’s commitment to reach net zero by 2045, we may see the introduction of a minimum energy efficiency standard for commercial properties in the not too distant future.       

In November of last year, the Scottish Government published its consultation on proposals for Minimum Energy Efficiency Standards (MEES) for homes in Scotland. The first of a 2 pronged attack, the Scottish Government is also looking at introducing prohibitions on ‘polluting’ heating systems in all buildings i.e. systems fuelled by fossil fuels to be replaced with ‘clean’ heating systems such as heat pumps and heat networks. The consultation proposes that all commercial buildings must have ‘clean’ heating systems by 2045 with interim trigger points e.g. when a building is sold. The proposal being that the buyer is to replace a ‘’polluting’’ systems within a defined grace period after purchase. In practice, the associated cost is likely to be a factor in the negotiation over price.

Gaining green building accreditations can go a long way towards meeting key ESG requirements. BREEAM (Building Research Establishment Environmental Assessment Methodology), NABERS UK (National Australian Built Environment Rating System) and LEED (Leadership in Energy and Environmental Design) to name a few, are established ESG accreditations which can enhance marketability, not to mention, the reputation of the landlord or tenant.

When engaging in a commercial lease transaction, increasingly we are being asked to consider ‘green lease provisions’ which are designed to encourage both parties to demonstrate a commitment to ESG. For more information on green leases, please see our article here. Key social and governance considerations within the commercial property sphere also include the creation of green or outdoor spaces for employees.

Embracing ESG in commercial property transactions is more than just a trend. It is fast becoming a critical step towards achieving sustainability, resilience and commercial viability. By prioritising environmental performance, occupier well-being, and transparent governance, landlords, tenants, and investors can position themselves for long-term success.

At Stronachs, we specialise in advising clients on integrating ESG principles into their commercial property strategies. Contact us to discuss how we can help you navigate this evolving landscape.