1. THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES (TCFD)

Under plans announced in November 2020, the UK is set to become the first country to make the Task Force on Climate-related Financial

Disclosures (TCFD) fully mandatory across the economy by 2025, in support of the UK’s transition to net zero carbon. This will enable investors and businesses to:

• Better understand material financial impacts
• Manage and price climate-related risks more accurately
• Support the greening of the UK economy

Some requirements are expected to be in place from January 2021 and investors should start early in preparing for these disclosures. 

2. MINIMUM ENERGY EFFICIENCY STANDARDS (MEES)

The Minimum Energy Efficiency Standards (MEES) requires residential property to have an EPC rating of band E or better to be let in England. In the commercial sector, landlords have until April 2023 before all privately rented property must be band E but any new leases or lease renewals must be at that level now.

However, band E is just the start. There are proposals that new residential tenancies will need to be at least band C by April 2025, and all will need to comply by April 2028. For commercial property, it’s expected that at least a band C rating will be required by 2030, if not a band B.

There is already evidence of property transactions with a band F or G rating being unable to proceed. Investors should futureproof their assets now so when new regulations are introduced, they’re not left with stranded assets. This includes thinking about those that can be upgraded, changed in use or sold.

FUTURE CONSIDERATIONS

The drive to improve the energy efficiency of buildings isn’t just down to regulation and investor demand. Many commercial occupiers have their own net zero targets and want the real estate to reflect these values. In the residential sector, although slower to take off, demand for green homes is increasing.

These are just a few of the ESG considerations for investors in real estate. To have a better understanding of the ESG performance of their investments, investors are increasingly using the Global Real Estate Sustainability  benchmark (GRESB). This enables them to compare results with peers each year and make improvements. Although GRESB is voluntary, investors will have to embrace this type of reporting, whatever the ESG credentials of the assets they hold. 

This is just the beginning of the journey. The UK is not on track to hit its fifth and sixth Carbon Budgets (set to achieve an 80% reduction in emissions by 2050), let alone achieve net zero in 2050. More investment and regulation is  expected, as the built environment, accounting for 40% of emissions, will continue to be a target. This will present challenges but also opportunities for real estate investors to make a significant difference.