Reed Smith Client Alerts

Entering the global spotlight relatively recently, Environmental, Social and Governance (ESG) policies and obligations are designed to make businesses and organisations think about their impact on their sectors, communities and the wider world. Encompassing areas including sustainability, diversity and inclusion, anti-bribery and anti-corruption, this focus on ESG poses a challenge for those operating in the real estate sphere.

Recent developments in the sector have included the issuing of green bonds and sustainability obligations in financing for transactions. Investors are seeking more environmentally-friendly targets such as positive energy and zero carbon effect assets. Leases are more frequently incorporating ‘green’ clauses focused on tenants’ sustainability efforts and utilities use, and social and governance clauses seeking to ensure tenants are operating and behaving ins socially responsible way. In the construction world too we are seeing ESG-focused practices and policies changing the way businesses work and engage.

Authors: Carole Steimlé

What’s driving ESG progress in the real estate world?

A prolific contributor to global greenhouse gas emissions, real estate is right up there with the transportation and energy sectors in terms of environmental impact. There are, however, easy ways to improve our impact, including those measures already outlined above. We’re also seeing yields start to decrease for those unwilling or unable to provide their ESG credentials, providing a huge driver for investors and developers to participate in change and improvement in the sector. Demand drives supply in this case, and the demand is increasing for ESG compliant assets.

Legal constraints are also prompting a shift in the way the sector views ESG considerations. For example, in France we have seen a number of laws aimed at improving businesses’ ESG impact, including:

  • Prohibitions on leasing non energy efficient flats (in the residential sector);
  • Obligations to reduce the building consumptions for logistic, retail, offices, with clear targets and sanctions (Décret Tertiaire, updated in 2021);
  • Net zero artificial land target (Law on Climate, August 2021); and
  • Construction efficiency targets.

With the global attention commanded by ESG issues only set to grow, we can surely expect further legislative methods to be introduced, aimed at improving our impact.