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Real Estate Horizons is a snapshot of key legal topics and market trends across the globe.

The role of ESG in corporate governance

By Simon Keen

Today’s businesses are under increasing pressure to ensure that Environmental, Social and Governance risks are forefront in day-to-day operations and their strategic business decisions. The shift to ESG-focused thinking has been driven by investors and the public becoming increasingly concerned with sustainability, in its broadest form, and corporate responsibility. Add to this the concern over climate change and the push to decrease carbon emissions and it becomes clear that the Environmental element of ESG in particular is now a key boardroom issue.

In response to these pressures, real estate businesses are concerned to ensure that they can demonstrate a clearly defined, responsible property investment strategy to stakeholders. This wider engagement with stakeholders can also help attract occupiers. Across the globe, occupiers are increasingly eco-conscious and want premises with low energy consumption. Like investors, occupiers want to ensure that they can report to their customers, shareholders and staff that they are reducing their impact on the environment and, in many cases, delivering on commitments to become net carbon zero.

This occupier pressure is matched by political and regulatory pressures, with many governments now focusing on the built environment as a major source of carbon emissions and therefore a key target in delivering on their commitments under the Kyoto and Paris Agreements and their own national net carbon zero policies.

The U.K. was the first country to commit to achieve net zero carbon, with legislation now passed to ensure that it is achieved by 2050. The government is already bringing forward a wide variety of legislative and policy measures aimed at ensuring the real estate industry plays its part in achieving this, including a proposed drastic strengthening of the minimum energy efficiency rating to be achieved by tenanted commercial buildings by 2030. Other European countries and cities are also taking similar steps, and no doubt the UN Climate Change summit next November will seek to consolidate action to reduce emissions as well as review international climate governance generally.

Given the increasing appetite for investments which tick the ESG box, there are opportunities for the real estate market, particularly when it comes to decreasing carbon emissions through energy efficient buildings. Considering the global reach of ESG, real estate businesses need to take a proactive stance in understanding the regulatory framework in each jurisdiction but also in demonstrating that the real estate industry is actively trying to improve its sustainability footprint.

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