The advancement of ESG has been gathering pace in recent years, to the point that it is now embedded as a rolling agenda point in most board room meetings and a chunky part of most business strategies.
For those that build and manage real estate, however, the challenge is amplified, with the need to manage not only your own operations but also those of your occupiers and your construction supply chain. The industrials sector is particularly prone to this, with portfolios comprising both huge out of town schemes and last mile logistics depots in urban centres, each providing a specific set of ESG challenges.
To discuss how the logistics sector is managing the ESG challenge, we spoke with Alan Somerville, ESG Director and Sarah Chicken, Development Surveyor, at Tritax, a leading investor in critical supply chain real assets in the UK and Continental Europe.
“If you are going to invest in a building, then that building needs to be fit for the future.”
Q. How have you seen the approach to ESG change in recent years?
Alan: I’ve specialised in ESG for 15 years and seen it go from a minority sport to something that is more mainstream. Throughout this time there have been various names and brands, but b y and large it all amounts to the same thing, which is delivering impact, however you want to define that. Whatever is going on in the world at that point in time generally influences what is considered by investors and consumers to be the most relevant impact, be it decarbonisation, climate change, social value, diversity and inclusion etc.
To some extent, ESG reflects the geopolitical, macro backdrop, hence the focus now on the net zero agenda and the ‘E’, which for most people is probably around 50% of the importance of the overall subject matter. Social and governance probably then make up an equal split of the rest. Most people see governance as a hygiene factor – you should have it and be able to demonstrate you have it, whereas the ‘E’ and ‘S’ tend to be around impact measurement.
Where we are now is that the market has moved away from being about what you see to being about what you do. Five years ago, it would have been all about the rhetoric, the headlines, the PR. But now it is most definitely about what you do. People are interested in the numbers, the data, the underlying areas that perhaps are not as exciting to listen to or talk about but are the reality of where impact is being delivered.
Q. Environmental factors are generally quantifiable, but social impact tends to be harder to measure How does Tritax approach the challenge of measurement?
Sarah: Social impact is definitely less quantifiable than the environmental side but you do have some metrics, such as the WELL Building Standard, which is essentially a measure of how much an employee will enjoy working in a building. However, in terms of capturing and reporting on data, it is really difficult. It becomes a matter of identifying what it is that you want to set out to deliver, making sure to do it and then making sure to tell everybody about it, as opposed to just saying you’ve achieved x number of things this year.
Alan: You have to think more laterally about the social impact as it’s about people, jobs, communities, diversity and so on, so it’s quite a wide spectrum. There are various consultants and platforms that are trying to create a more consistent measurement approach to social value and, while some of it is data led, a lot of it is non-financial.
Sarah: It also comes down to things such as the amount of consultation with neighbours throughout a build or making sure to build into our contracts that we would like to see workers on our sites come from the local area. Things that we can build into our suppliers’ operations and the things they do, as opposed to things we necessarily do ourselves.
“The market has moved away from being about what you see to being about what you do.”
Q. Are you seeing innovation in the ESG space?
Alan: We invest right the way down the logistics supply chain, from very large distribution centres to last mile assets, so we are creating a sustainable logistics supply chain, from cradle to grave. One of Tritax’s latest business initiatives is called ‘local2local’, which is about the facilitation of last mile logistics and making sure we have that sustainable endpoint to the process. So, for example, we might have a retail park with six different retailers all delivering locally and using six different vans. Our ‘local2local’ initiative will provide one van and the logistics coordination to put all of those goods onto a single mode of transport, saving the retailers cost but also reducing the carbon emissions of those deliveries.
Sarah: On the development side, there is a real effort to deliver buildings that are net zero in construction. Our objective around this is to deliver net zero carbon across a building’s entire lifespan, and we’ve made a public commitment that all of our construction will be net zero by 2040. Within that, there is all manner of innovations around building materials and construction methodologies. Over the last few years, net zero carbon in construction has been something Tritax, as a business, has been working really hard on.
Alan: Another aspect is our whole decarbonisation strategy. For the Tritax Big Box fund, which invests exclusively in the UK, 99% of our carbon emissions are scope 3, meaning 99% of our emissions come from our supply chain. The fundamental relationships that will allow us to deliver decarbonisation of those scope 3 emissions are between ourselves, our occupiers and our supply chain, so we are spending a lot of time investing in those relationships to make sure we find ways and means to jointly deliver decarbonisation initiatives for our buildings. That could be around building efficiency, renewable energy, the installation of electric vehicle charging infrastructure, and so on.
Q. Are you seeing a heightened push for ESG compliance from your occupiers?
Alan: ESG is a team sport, not only do we have to integrate it across all that we do as a business operationally, but we also have to integrate it into how we go about our business with key members of our supply chain, and occupiers are a fundamental part of that. For Tritax, customer engagement is part of our DNA.
Sarah: We are in a position where we can work closely with occupiers at the inception of their requirements and take them through the development process and then hopefully keep them on as a tenant for the next 15-20 years and beyond, so we have a good opportunity to build strong long-term relationships with them, speaking to them regularly about how their needs are changing. Over the last few years, there has definitely been a shift in approach to sustainability, from the market asking questions around whether occupiers were prepared to pay a green premium and if they were interested in green leases, to now where occupiers are actively clamouring for them, which is great to see.
Q. With a recession looming, is there a risk that ESG will be deprioritised within organisations and budgets previously assigned to ESG strategies directed elsewhere?
Alan: ESG in the real estate sector is really about high-quality asset management. It’s an efficiency agenda; it’s managing the risk of the premature obsolescence of buildings. So, from an occupier’s point of view, firstly, highly sustainable buildings should be efficient and effective – that is, cheaper. Secondly, the risk of obsolescence of a building should be substantially reduced, so the chances of unforeseen capital liabilities arising in the future are also substantially reduced. And thirdly, a sustainable building should be more effective for the people working within it, in terms of staff retention and operational factors.
From an investor perspective, our investors are mostly looking at three to five year timescales, and what they are seeing in the market is increasing legislative and regulatory pressure on sustainable performance. This aligns with changes in occupational demand, as well as the consequential changes in the approach to valuation. All of that adds up to a view that, if you are going to invest in a building, then that building needs to be fit for the future.
Q. Retrofitting old stock is often more challenging and costly than building from new – how do you manage older schemes in order to achieve net zero targets?
Alan: With existing stock, in some ways it’s actually easier because, with new stock built speculatively you have to forecast and guess who the occupier is going to be and what they are going to want. Whereas, with the retrofitting of current stock, it’s an existing occupier who understands its occupational needs so, theoretically, it is easier.
We are also quite lucky as most of our stock is less than 20 years old so they are, generally, quite modern buildings. We don’t have to deal with the challenges of historic buildings that will become more problematic to deal with in the future and have some compromise in their value.
But, in broad terms, collaboration with our occupiers is fundamental to the success of retrofitting. Logistics buildings are not complicated, particularly when compared to a city centre or multi-let office building. So, to that extent, we’ve got fewer issues to deal with, potentially, but part of the challenge is making sure that the stock that comes into the fund and through the development programme is fit for purpose in the first place.
Sarah: On the development side, it is really about how we are pushing that base spec to make sure we are delivering those fit for purpose assets into the fund. We have done a lot of work on the things within the base spec that were easier to change, and it is now about looking to the future to see how we innovate with those more difficult parts of the spec: the steel, the concrete and so on. How can we keep chipping away at the carbon, how can we change what we are doing on those aspects?
Alan: That is a real challenge. Take steel for example. UK-produced steel is manufactured using coal-fired furnaces and European-produced steel is manufactured using electric arc furnaces, so you have this situation where it is more sustainable to import materials from overseas than using what we have in the UK, which doesn’t make any sense. So, for innovation and change to occur effectively, it needs to be down the supply chain, and that includes government interventions as well.
Q. The requirement for all new developments to deliver a 10% net gain in biodiversity (BNG) versus pre-build will come in from November 2023 – how are you preparing for this?
Sarah: With BNG, it is something that has been on our radar for the last couple of years because, with industrial buildings, it can be difficult to achieve a 10% uplift in biodiversity on site. So, it is again about pushing that base spec and pushing what we are doing on site as far as we possibly can to maximise ecology benefits. We’ve been working with surrounding landowners and putting in place agreements with them to keep land aside on which to place 30-year agreements to be managed to ensure ecology benefits can be maximised. We are achieving our biodiversity net gain that way. For some sites, it is almost impossible to achieve on the site itself, but as long as we are offsetting to neighbouring land then we are still hitting our BNG targets.
We consider BNG requirements at the design evolution stage, taking it into account at the outset so that it’s not a second thought, but designed in and considered on day one.
Q. Looking forward, what is needed to further advance the ESG agenda in the UK?
Alan: The market is doing pretty well at the moment in driving change and driving impact, and t hat mainly comes from the requirements of the investors who increasingly want to see evidence of ESG-led performance.
From a decarbonisation and climate change risk perspective, the market is still well behind the science. To deliver the kind of impact that is required to manage future climate risk and to align with the Paris decarbonisation targets, the market is still some way off. However, those decarbonisation targets rely upon governments around the world delivering their part of the bargain. So, politics keeping up with the market would make life a lot easier.
There is change happening in reducing the number of standards which are out there currently as benchmarks of ESG performance. Having less of those, and the ones we do have being more meaningful and data-led, would be very useful.
Sarah: From my perspective, I’d like to see the government putting a bit more pressure on the supply chain of development.
Contributors
Alan Somerville, ESG Director – Tritax Group
Sarah Chicken, Development Surveyor – Tritax Group
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This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.