ESG in Scottish real estate | Dentons

As we continue to navigate the uncharted waters of the COVID-19 pandemic, one point has continued its rise on the boardroom agenda: ESG. It stands for environment, social and governance and relates to the three central factors in measuring the sustainability and social impact of an investment in a company or firm. There is evidence that incorporating ESG considerations into a fund’s strategy results in better performance. Studying ESG issues gives investors a better understanding of what companies not only do, but how they do it.

How does this affect Scottish real estate?

Significant. In Scotland, the Scottish Government recently set a legally binding target to reduce greenhouse gas emissions to zero by 2045, five years ahead of the UK’s overall date (Climate Change (Emissions Reduction Targets) (Scotland) Law 2019). This is one of the most ambitious goals any government has set in the world. The built environment is still one of the largest energy consumers and is responsible for around a third of all carbon dioxide emissions. Given that people can spend between 80 and 90% of their time indoors, the built environment also has a huge impact on the health and wellbeing of our communities. These factors, and the increasing demands that civil society places on all businesses, make ESG one of the most relevant and important concepts for Scottish real estate today.

The E, the S and the G.

The range of factors that can be contained under one of these three heads is extensive. Factors relevant to one sector may be less relevant to another, and there is inevitable overlap between categories, but when we take a closer look at real estate:

  • Surroundings: Think about energy efficiency and building emissions, the use of materials and resources, and resilience to climate change. Good environmental performance can help property owners attract profitable tenants, most of whom now have to fulfill their own ESG agenda and keep investors happy. In Scotland we have seen increased demand for more energy efficient buildings, legislation that requires physical improvements to older buildings and a number of proposals, both domestic and non-domestic, to steadily tighten the existing measures. In terms of climate change, Scotland may not have the same physical threats as other parts of the world, but it is particularly vulnerable to flood risks (the Met Office predicts that intense rainfall associated with severe flash floods could be almost five times more likely by the end of this century ), making climate resilience a very real problem.
  • Social: covers issues such as occupation and community relations; Health, safety and protection; Accessibility and Sociodemographic Change. COVID-19 has undoubtedly increased the focus on the S in the ESG. For example, how companies deal with the health, safety and wellbeing of a fearful returning workforce can be demonstrated in more general questions about employee wellbeing. Closed and empty premises as a result of the bankruptcy caused by the pandemic are and will remain a reality for parts of the Scottish real estate market.
  • guide: This would include issues such as corporate culture, reputation, behavior, and diversity, which are vital to any business, whether it is real estate or not. The power of social media and the speed at which information is now being disseminated around the world mean there are few places where companies can hide when they are doing something wrong. The stock price is usually the first to suffer from bad advertising.

The legal context

The ESG legal framework is still in its infancy at both the European and UK / Scottish levels. While it is easy to point out environmental and energy efficiency laws, regulation that seeks to capture more than one of the three key ESG pillars is somewhat rare. The ESG concept itself has its roots in the requirements and expectations of civil society. The problem with this is that civil society continues to outperform governments around the world when it comes to expectations of corporate environmental and social performance. In other words, the law is struggling to keep up.

Nevertheless, we are seeing the first real progress. In the summer of 2020, the European Parliament passed the so-called Taxonomy Regulation (Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18, 2020), which defines an EU-wide classification framework for enabling financial market participants to determine which economic activities and investments can be treated as “green” with reference to six specific environmental objectives. Similarly, the EU Disclosure Regulation (Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 27, 2019) will require financial market participants and financial advisors to provide investors with ESG information on certain financial products. This enables investors to make informed decisions based on ESG factors. Although the position is still a little unclear, the UK government has announced its intention to comply with certain key EU financial services rules after Brexit. There are also a number of specific industry obligations that already apply to pension funds and insurers, for example, that cover the inclusion of ESG in investment strategies.

Final thoughts

ESG is here to stay. It is beginning to become an integral part of global investment strategies. Scotland, like the rest of the UK, needs to keep pace with European developments in this area. The management of the built environment was and is a central point for ESG.