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5 reasons why sustainability is climbing up the boardroom agendaBy: Russell Miller

Modern office buildingThe good news for our energy bills is that petrol prices are reportedly at their lowest levels for three to four years. Developing nations’ demand for oil appears to be slowing too, and the US is embracing alternative energy development with shale gas extraction – fracking.

Despite the short term gain, however, we cannot hide the inevitable long term rising trend in energy costs – notwithstanding the almost undoubted climate change implications. Businesses and organisations are accepting that sustainability must be embraced to manage these real financial and environmental risks which are being exacerbated by the ever-lengthening sticks of legislation.

These risks are increasingly significant considerations in the way businesses approach commercial property. After all, property is a significant user of energy.

But where there is risk there is also opportunity – to gain a competitive advantage that feeds into productivity and ultimately the bottom line. It’s something that can benefit property investors and owners, as well as occupiers and tenants.

So with that in mind let’s take a closer look at the five top reasons – from the historic background through to next year’s potential profits – why property and sustainability are rising hand-in-hand up the boardroom agenda.

1. Impact of global environmental targets
It starts as far back as 1987 when the Brundtland Commission of the United Nations defined sustainability development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Alongside the real threat that climate change poses, this ideology has been embraced in global policies: the most influential being the Kyoto Protocol committing countries such as the UK to reducing greenhouse gas emissions to 12.5 per cent below 1990 levels by 2020.

The EU has subsequently gone further with aspirations of achieving CO2 reductions of 80 per cent by 2050, and the UK has followed suit by enacting the Climate Change Act 2008 to set legally binding carbon reduction targets. This has manifested itself in to a key driver at a micro level.

2. Managing rising energy costs
The main financial driver, of course, is energy. ExxonMobil's 2014 'The Outlook for Energy' predicts that by 2040 there will be 2 billion more people on the planet and 35 per cent greater demand for energy, with 60 per cent of this demand supplied by non-renewable oil and natural gas reserves. Globally we need to evolve and diversify our energy supplies as demand will only go one way.

Innovation and investment in this sector is expensive and we must be prepared for energy costs to continue to rise, or do we need to think of energy 'cost' in a different way – perhaps as an investment in the future?

Fracking, as an example of an alternative energy source, may have been around for over 100 years but the recent publicity regarding its expansion within the UK has illustrated the complexities and potential controversy of innovation. We can learn from the mistakes and successes in the US where this alternative source is having such a dramatic impact on their energy policy.

3. Minimum Energy Performance Standards
At this point it is difficult to ignore the impending legislative impact of the Energy Act 2011 and the Government's intention to uphold the Minimum Energy Performance Standards of buildings.

It means that from April 2018, it will be unlawful to privately lease commercial property with an EPC (Energy Performance Certificate) rating of F and G.

To put this into context, it is estimated that 75,000 certified units or 19 per cent of commercial property in the UK falls within these lower levels and will require expenditure to improve its rating.

With three years to go it would be foolish to disregard the seriousness of this issue, especially given the indirect implications. It is likely that many property owners, both occupiers and investors, will have some form of lending exposure and this highlights a further risk that lenders will start reviewing their security in light of these changes.

Fortunately, the requirements for improvements must be considered ‘cost-effective’, which will assist with comparatively low value properties, and it is expected that there will be a transitional period of five years from 2018 to fully enact these changes. However – it is coming and in all probability over the horizon there is likely to be more rather than less environmental legislation.

4. Enhanced asset values
So what about the opportunities for businesses and property owners? To date there is limited quantitative evidence that a so-called green building is more valuable than a standard one.

However, the fact that a more energy efficient building will cost less to run will no doubt be a significant factor for an occupier in their decision-making process. The market is beginning to demand more transparency for data that demonstrates the potential payback; but we need more green buildings in operation over a meaningful period of time to accumulate and analyse this information to form credible conclusions.

The question then will be whether valuation methodology will take account of potential cash-flow savings or continue to rely on comparing transactions of green and “non-green” buildings. New commercial development is leading the way with occupiers often demanding high BREEAM-rated buildings not only to reduce immediate running costs but also for reasons of future-proofing and corporate social responsibility.

5. Business productivity
Sustainability in its broadest context is often closely affiliated with a company's corporate social responsibility policies and values, and although more applicable to larger organisations it is becoming a material influence on business issues such as staff retention and wellbeing, not to mention brand and customer perception.

It can therefore impact on a business's bottom line in relation to staff costs as well as ultimately seeking to improve revenue. It is well established that on average staff costs account for about 90 per cent of business operating costs and therefore if only small improvements can be made from embracing green buildings this could have a material effect on profits.

The World Green Building Council has published a report, 'Health, Wellbeing and Productivity in Offices; The Next Chapter for Green Buildings', which provides the most compelling argument yet on the true payback of green buildings and provides businesses with a toolkit and high-level framework to measure organisational and financial outcomes, such as absence rates, staff turnover and medical complaints. It concludes that at least for offices, issues such as indoor air quality, thermal comfort, acoustics and interior layout can have a material impact on the health, wellbeing and productivity of the occupant.

What next?
Having come through arguably the worst recession in modern times – when it is safe to say that for most businesses sustainability played second fiddle to survival and crisis management – the issue is now re-establishing some momentum.

This is partly because of the sticks of Government legislation, rising energy costs and environmental risks. But the carrots – or opportunities – are also being appreciated by businesses, which are learning how to embrace, through their property and business management, the competitive advantages of value enhancement, PR/brand and productivity.

About the author
Russell Miller, Vail WilliamsRussell Miller is a Partner at Vail Williams.

Features April 2015

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