Brexit has largely taken over the UK political agenda, but one thing that has managed to remain in the spotlight is the growing emergency around climate change and its global impact.

There’s been significant pressure and drive to co-operate to deliver solutions, particularly following the 2016 Paris Agreement, which to date has seen 195 UNFCCC (United Nations Framework Convention on Climate Change) members pledge to limit the global temperature increase to just 1.5C to combat further damage to our planet.

So what does this mean for real estate investors?

Besides safeguarding our ecosystems from irreparable harm, the climate crisis presents businesses and lenders with significant risks against their investments. According to the Bank of England, 70 per cent of banks now actively consider climate change a financial risk. Investors therefore need to have a sustainability strategy and mitigation plan in place.

In July 2019, the Government announced outline plans for a Green Finance Strategy, which is set to have significant implications on the real estate sector.

Firstly, firms will increasingly be expected to disclose their financial risks from climate change alongside their financial reporting. There are already organisations in place, such as the Taskforce for Climate Change Disclosure (TCFD), which help businesses to do this voluntarily, yet despite it gaining traction it still isn’t considered mainstream.

Additionally, since April this year, large organisations have had to start documenting their operational energy usage and emissions in their financial reporting as part of the Streamlined Energy and Carbon Reporting (SECR) regulations. This should help to simplify the process and ensure that both climate risk and emissions are discussed at board level and that appropriate action is taken.

Another part of the strategy is to provide increased access to and availability of green finance initiatives. Until now there has been a considerable policy hole in this area, especially since the demise of the 2015 Green Deal, which was set to give homeowners, landlords and tenants the opportunity to pay for energy efficient home improvements through savings on their energy bills. Consequently, not all investors have access to finance to fund such improvements.

While the detail is still lacking at this stage, in principle under the new strategy there should be more assistance available to organisations to help modernise and upgrade their building stock.

There has also recently been an update to the Minimum Energy Efficiency Standards (MEES) regulations. The Government has announced plans to increase the threshold from the current EPC rating of level E to B by 2030. This will also see changes to the methodology, which could considerably alter existing ratings. 

Looking ahead, we hope to see a plan to overhaul the somewhat limited EPC Registry, allowing for more transparency for lenders when it comes to accessibility and visibility. This will undoubtedly lead to greater scrutiny and borderline non-compliant assets could see considerable valuation impacts.

Ultimately, the devil will be in the detail as we await more formal announcements. However, property investors should be aware that there are requirements to be considered and actioned as part of any investment strategy. Many businesses remain unaware of their level of exposure to climate risk, so to prevent any further damage to both the climate and your bottom line, it’s time to get a plan in place.

Further information

Contact Savills Corporate Social Responsibility