From risk to resilience: key sustainability issues for the built environment

This article sets out some of the key sustainability issues for the built environment from a legal perspective and explores why and how organisations may wish to go beyond compliance to build a resilient business.

The legal landscape

The need for every business, government and organisation to take action to address the systemic and global threat of climate change and biodiversity loss is clear. The Paris Agreement, the United Nations' Sustainable Development Goals and the Special Report of the Intergovernmental Panel on Climate Change all advocate accelerated and decisive action to reduce global emissions and to move towards a climate-resilient economy which protects and enhances natural capital.

Significant emissions reductions across the built environment are critical to meeting the UK’s 2050 net zero target because buildings are responsible for around 30% of UK carbon emissions. Whilst the scale of the decarbonisation task facing the real estate sector is huge, the pathway to net zero can create and protect value. Conversely, a failure to act may risk a devaluation or stranding of real estate assets. The Green Finance Institute recently predicted that the government’s ambition and pace of change in relation to the decarbonisation of homes will be insufficient to meet the UK's net zero target.¹  The Chancellor's statement on 8 July 2020, which included £2 billion for a green homes grant with a further £1 billion for publicly owned buildings, is therefore an important first step towards climate resilience and net zero whilst boosting the economy and creating jobs in the shorter term.

The real estate sector is also subject to a growing body of legal requirements aimed at measuring, reporting and reducing energy consumption, and improving energy efficiency standards. These include:

• Obligations under the EU Environmental Impact Assessment Directive to assess the impact of significant development on climate and the impact of climate on the development, the latter being a climate resilience assessment.
• Minimum Energy Efficiency Standards (MEES) . The purpose of MEES is to improve the energy efficiency of residential and commercial private rented property. In relation to commercial property, a landlord must not grant new leases on or after 1 April 2018 or continue existing leases on or after 1 April 2023 where the property fails to meet applicable MEES, subject to certain criteria. The government is consulting on a minimum energy efficiency standard equivalent to EPC B rating by 2030 for commercial properties.
• The Energy Savings Opportunity Scheme (ESOS) requires large undertakings and groups containing large undertakings in the UK to carry out an ESOS assessment (unless the assessment has been fully covered by ISO 50001). This involves calculating the total energy consumption of the organisation or group, including all energy consumed by buildings, identifying areas of significant energy consumption and ensuring that those areas are covered by a route to compliance.
• The EU’s Energy Performance of Buildings Directive and Energy Efficiency Directive promote policies aimed at achieving a highly energy efficient and decarbonised building stock by 2050 and other measures such as encouraging the uptake of electric vehicles. The former directive requires all new buildings to be nearly zero energy from 31 December 2020 and the latter includes an energy efficiency target for 2030 of at least 32.5%. 

More generally, companies in all sectors are subject to a range of mandatory corporate reporting requirements. For example, quoted companies and large companies and limited liability partnerships are subject to the streamlined energy and carbon reporting regime for financial years commencing on or after 1 April 2019. While the scope of the disclosure obligation differs between quoted and unquoted companies, qualifying companies are obliged to disclose a range of information in their Directors' Reports, including greenhouse gas emissions.

At the time of writing, the Financial Conduct Authority is consulting on the introduction of a new rule for commercial companies with a UK premium listing. If included, the new rule would require this class of issuers to state whether they comply with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) and to explain any non-compliance.

Risk exposure

Going beyond strict legal compliance may help businesses build greater resilience. There is an increasing focus towards practical adaptation to climate change risks, as physical impacts are primarily manifested in the form of more frequent and severe adverse weather events which may damage property. Secondary physical risks, such as supply chain disruption caused by flooding or scarcity of resources owing to climate-related events, may also arise.

In addition to these well-reported physical risks, the movement towards a low carbon and cli-mate-resilient economy also generates less well understood transitional risks.²  The European Commission identifies five key categories of transitional risk, which companies can use to help identify their risk exposure:

While the extent and nature of these transitional risks is not as well understood as physical risks, real estate companies would be well advised to consider how exposed they and their assets are to a potentially rapid transition to a low-carbon economy. This will, inevitably, involve some innovative and 'out of the box' thinking; as, with a changing climate, you cannot plan for the future based on lessons from the past. These transitional risks present novel and untested risks, requiring novel management approaches. 

Circular economy

The use of materials in the built environment impacts both on climate-resilience and waste and resource management. The construction sector is responsible for over 35% of the EU’s total waste generation. The European Green Deal aims to turn climate and environmental challenges into opportunities at a scale which ensures that the EU’s economy is sustainable and maximises the economic value from materials.

In March 2020, a new Circular Economy Action Plan was adopted by the European Commission as a key part of the European Green Deal. The Action Plan indicates that greater material efficiency could save up to 80% of greenhouse gas emissions from material extraction, manufacturing of construction products, construction, and the renovation of buildings.

Circular economy principles will be followed in the implementation of the Renovation Wave initiative announced in the European Green Deal. This initiative aims to improve energy efficiency in the EU, including by increasing the life expectancy of built assets. The European Commission is also expected to launch a new Strategy for a Sustainable Built Environment which will promote circularity principles throughout the life cycle of buildings.

There has been government support for moving towards a circular economy in the UK. As waste is a devolved matter, waste strategies are implemented at national level. The Resources and Waste Strategy for England sets out the government’s ambition to minimise waste, promote resource efficiency and move towards a circular economy.

There are also regional circular economy plans, such as The London Plan, which is the statutory Spatial Development Strategy for Greater London prepared by the Mayor of London.  The ambition to transition to a circular economy has been set out in the draft London Plan.  As part of the Good Growth by Design programme, research is underway in collaboration with the London Waste and Recycling Board and others.  The research will be used to prepare technical guidance that will underpin the draft London Plan policy S17, ‘Reducing waste and supporting the circular economy’.

Factors when considering changes aligned with circularity principles in a building’s life cycle include the design of buildings, who they will be used by, and how waste will be collected and recovered:

• The design process should look to optimise a building’s life-cycle by taking into account durability and adaptability, and using materials that can be repaired, reused or recycled. This may require new manufacturing techniques, technology and materials to be developed and used, such as construction products that meet the recycled content requirements. 
• Buildings will need to be more energy efficient and designed to be flexible and adaptable so that all space is utilised and buildings are not prematurely replaced, wasting resources. Buildings will also need to be designed to reduce water usage and utilise lower emission sources of heat and energy to reduce the consumption of resources. Owners and occupiers will need to embrace these design considerations to give companies the required confidence to invest in innovative design solutions. 
• The collection and processing of waste throughout a building’s life cycle needs to be streamlined to aid recovery and ensure as many resources as possible remain within the circular economy. For example, unused construction materials can be returned to suppliers for reuse. The potential for recovery is also increased by the use of non-toxic materials. Improvements to existing recovery infrastructure and solutions for residual waste will be needed to achieve a closed loop.  As the Covid-19 pandemic has shown, supply chains will need to be robust.  Economic activities that prevent or reduce waste generation, including waste from the construction and demolition of buildings, could contribute substantially to the transition to a circular economy. 

Taking action to enhance resilience

An organisation's understanding of both its ESG performance and risk is most accurately informed by the data it collects. There are a number of tools, such as the Global Real Estate Sustainability Benchmark (GRESB) and the Carbon Risk Real Estate Monitor (CRREM), used by the real estate sector, and more widely, to help organisations manage ESG risks and optimise value protection and creation.  The Covid-19 pandemic has also highlighted the benefits of using this awareness to make informed and sustainable business decisions to ensure resilience.

Key points to consider include:

• First, invest strategically.  There is a risk that real estate assets become 'stranded' in the coming years and decades. This could happen from a regulatory perspective, e.g. as buildings they cannot meet, or are too costly to retrofit, to rapidly evolving minimum standards. 'Stranding' of property assets could also happen from a commercial perspective, as tenants expect buildings to meet a certain energy efficiency or specification, therefore turning away from poorly performing assets. Investment decisions taken now should take into account evolving policy, particularly in relation to MEES, where the minimum standard is expected to be ratcheted up. Further, investments should take into account current climate modelling, to understand the vulnerability of real estate assets to climate change, in particular to flood risks. While the physical climate risk, such as flooding, may not come to fruition until 2050 or 2080, and so are beyond typical investment cycles, it is likely that the state of knowledge will evolve in the short term to identify which assets are exposed in this way. 
• Second, anticipate change. New behaviours will need to be incorporated into business plans.  For example, the Covid-19 pandemic may have triggered long term changes in property use arising from the pandemic. An increase in remote working and the consequent decrease in daily commutes could lead to a transition away from urban living and consequentially a decrease in the demand for commercial space and in urban areas.
• Finally, take a holistic approach.  For example, conserving and enhancing biodiversity should be at the forefront of developers' strategies. This will place companies in a stronger position by anticipating the introduction of mandatory conditions for the submission and approval of a biodiversity net gains plan for all planning permissions. Conserving and enhancing biodiversity will also promote climate-resilience as green spaces, trees and biodiversity help to improve air quality, sequester carbon and reduce the urban heat island effect.

The Covid-19 pandemic has highlighted the importance of resilience.  Businesses now need to decide whether they will revert to business as usual, adopt some or all of the changes implemented during the pandemic, or utilise the opportunity to introduce new measures to improve their ESG performance and resilience.

Authors: Joanna Fox (Associate), James Nierinck (Senior Associate) and Eleanor Reeves, (Counsel)

^1. https://www.greenfinanceinstitute.co.uk/wp-content/uploads/2020/05/Financing-energy-efficient-buildings-the-path-to-retrofit-at-scale.pdf
^2. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52019XC0620%2801%29