However, the sector has recently undertaken major steps towards rectifying this by adopting higher standards such as the NZEB (nearly zero-emission building) and the LEED (Leadership in Energy and Environmental Design) rating systems, voluntary accreditations created by US Green Building Council to certify sustainable buildings and neighbourhoods. LEED is favoured by US stakeholders, but there are equivalents in other markets such as BREEAM (Building Research Establishment Environmental Assessment Method) which is favoured by UK, Germany, Netherlands, Spain, Norway and Sweden. These accreditations sit apart from the statutory energy ratings of Building Energy Ratings (“BERs”) in Ireland and the UK and Australian equivalents Energy Performance Certificates (“EPCs”) and NABERS (National Australian Built Environment Rating System).

Multinational firms are also increasingly focused on the Environmental, Social, and Governance (ESG) credentials of their real estate assets which they view as a reflection of their brand & culture. These businesses want the best performing and sustainable property which reflects their green values, credentials, and goals (often these firms have sustainability pledges and targets) and help attract and retain quality staff. We have seen increased demand for, and take up of, office space which provides occupiers with the highest ESG standards. Landlords have reacted to this increase in demand and are ensuring new developments or refurbishments deliver to meet occupier expectations. Also, we are beginning to see evidence of a "Green Premium" where buildings with higher ESG accreditations are benefiting from higher demand, obtaining higher rents, letting up quicker and achieving higher values (or the converse often termed “Brown Discount”).

This race to adopt green standards in real estate will accelerate now as the EU brings in higher standards. On the 15th of March this year, the Energy Performance of Buildings Directive passed its vote in the EU parliament to improve standards as part of the goal of climate neutrality in 2050. The directive will now enter trilogues with member states. Elements of the Directive will have wide-ranging implications for the property sector, including:

• All new buildings occupied, operated, or owned by public authorities must be Zero Emission Buildings from 1 January 2026. Also from this date, under the Energy Efficiency Directives, any new leases must be for NZEBs which will likely increase demand for such stock from the State
• When the State is seeking new properties, they will undertake the following decision process:

• If the State owns the building, under the current legislation draft they will have to retrofit 3% of the floor area of their total stock to NZEB every year.

• All new non-residential buildings must be Zero Emission Buildings from 1 January 2028. A Zero Emission Building is a building that meets a certain energy target, where all energy is met by renewable sources that are onsite or nearby and no carbon is produced on site. Landlords and developers will not be able to purchase off-site carbon credits (for instance from buying bog lands or planting trees). The energy must be from Renewable sources that are on site or nearby, defined as directly connected to the building for example a district heating scheme.

The difference between NZEB and ZEB buildings is that:

A Nearly Zero Emission Building is one that:

has very high-energy performance

where a high portion of the energy is met by renewable sources onsite or nearby, for Ireland this was determined to be 20%

Whereas a Zero Emission Building is a building that:

meets a certain energy target (which for offices is less than 85kWh/(m2.y) )

all energy consumed is met by renewables onsite or nearby

produces no carbon on site

• Minimum Energy Performance Standard:

All non-residential buildings must be E rating by 2027 and D rating by 2030

All public and commercial buildings need a minimum performance of E or better by 2027 and D or better by 2030

• There will be a realignment of the BER system in 2025, with the worst-performing 15% being G rated.

• The use of fossil fuels in heating systems will be phased out by 2035 for new buildings, buildings undergoing a major renovation, deep renovation or renovation of heating systems and their use fully phased out (for all buildings) by 2040. 

• The lifecycle GWP (Global Warming Potential) of all new buildings shall be disclosed after 1 January 2027 and targets will be set for new buildings from 2030.

Another EU regulation that has increased focus on the sustainability of property is EU Taxonomy. First published in 2020, EU Taxonomy creates a common classification system for sustainable economic activities. It is now an EU regulation and is, as such, automatically established law across the EU. It sets out a framework for what can be considered Environmentally Sustainable Investment. These investments must substantially contribute to at least one of the six environmental objectives as defined in the regulation, do no significant harm to any of the other five environmental objectives as defined in the proposed Regulation and comply with minimum safeguards. 

The six environmental objectives set out under EU taxonomy are:

• Climate change mitigation
• Climate change adaptation 
• Sustainable (and protection of) water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

From a real estate and construction perspective, the three main economic activities which are covered by the Taxonomy are:

• Construction of new buildings
• Renovation of existing buildings
• Ownership including the acquisition of buildings 

Furthermore, under Sustainable Finance Disclosure Regulations all financial market participants in the EU are required to disclose their ESG credentials (as set out in Articles 6, 8 and 9). EU taxonomy-aligned products are considered “dark green”. Dark green products are considered to be lower-risk investments because they are less exposed to regulatory changes due to the transition to a low-carbon society and are naturally more resilient. 

Anecdotally, properties that are classified as Dark Green benefit from lower yields, higher values, shorter void periods and strong demand, as the market becomes more developed we expect there will be more evidence and research that highlights the value gap between Green buildings and older stock.  

While EU Taxonomy and the Energy Performance of Buildings Directive have major implications for landlords and developers, other EU directives are due to place an onus on occupiers to ensure their office space is of the highest ESG quality. The Corporate Sustainability Reporting Directive (effective from January 2023) requires large companies listed companies and SME’s (classified as large companies within EU member States with turnover greater than €40 million, balance sheets greater than €20 million and with a staff of more than 250 employees. And for non-EU incorporated companies firms with turnover greater than €50 million), to report on their Carbon/Energy Use/dependence on fossil fuels. This directive will require firms to include these reports in their management reports and annual reports. Investors, prospective staff, customers and other stakeholders will have access to the information and will be able to assess companies and investments on risks arising from climate change and other sustainability issues. If, amongst other energy-intensive/carbon-generative activities such as carbon-emitting plants and fleets as just some simple examples)  firms are leasing space in poor, less efficient office buildings, they will in aggregate be required to declare it in their reports, which will affect their ability to attract further investment, and therefore future financial performance. Firms will also be required to report on their share of non-renewable energy consumption and production, energy consumption intensity, waste, and activities regarding biodiversity. This will increase tenants' focus on operational building data reported on buildings and shared as set out in their leases. 

On the ground, the ESG focus amongst occupiers has only accelerated post-Covid. Occupiers are more focused on the actual energy performance of the building, along with BREEAM, LEED, NABERS or BER credentials. Firms are now focused on this from a hiring and talent retention aspect. Very quickly, ESG credentials and efficiencies went from being a ‘nice to have’ to mandatory for many firms.  

These new EU directives will lead to an increase in demand development for energy-efficient buildings. Buildings such as One Charlemont Square (LEED Gold, NZEB Building and A3 BER), EXO (NZEB, LEED Platinum, and A3 BER) and 76 SJRQ (LEED Gold and A3 BER) which are EU Taxonomy Mitigated buildings - and therefore aid occupiers in reaching their sustainability goals and targets - will be more sought after by occupiers.