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An Introduction to Carbon Reduction & Achieving Net Zero within Commercial Property

In this Q&A, Jamie Thain, investment Partner at Galbraith, talks with Anne Johnstone, founder of Fair Futures Partnership, about ESG and Net Zero Carbon Strategies.

Environmental Social and Governance (ESG) and a commitment to decarbonise across the whole of society has gained significant momentum over the last year.

On 27 June 2019 the UK Government took the historic step of making a legal commitment to deliver 100% greenhouse gas emissions reduction by 2050 – Net Zero.

This was the fastest implementation of a recommendation by the Climate Change Committee since it was created under the Climate Change Act in 2008. But changing the legislation is the easy part. Introducing the policies, regulations, support mechanisms and changes in behaviour that will be needed to deliver the Net Zero target will be much harder.

In December 2020 the Climate Change Committee published its advice to Government on the 6th Carbon Budget and a path to Net Zero in 2050 compatible with the UK’s commitments under the Paris Agreement.

The built environment has a crucial role to play in the path to Net Zero and the Galbraith Commercial Team will be covering the subject and its impact on buildings, their owners and their occupiers, in this and future issues of Commercial Matters.

Jamie Thain (JT): Welcome to Commercial Matters, Anne. Thank you for taking the time to discuss this important subject with us. Simply from reading the papers or listening to the news, I’m sure our readers are aware of the subject and the commitments that both the UK and devolved governments have made to tackle the climate emergency. Recently, the UK Government announced an enhanced commitment to cut carbon emissions by 78% by 2035 as a path to Net Zero by 2050. This commitment became enshrined in law in June this year. 

Can you tell us what has driven this change and what are the key pieces of legislation we need to be aware of?

Anne Johnstone (AJ): The youth climate movement has raised awareness of climate issues generally and influenced governments to be more ambitious in their climate policies. They have been very effective at turning a spotlight on businesses and calling out green washing. There have been many surveys published showing that the number of businesses actively trying to become more environmentally responsible is increasing (e.g. huge uptick in interest in B Corp status, [businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose]) and there is growing recognition that being environmentally responsible is important to future success. Although the trend is stronger amongst younger people and start-ups, it’s happening across the board. This is partly in response to customer demand, but also in response to demands of the workforce. It is increasingly important to show that you are an environmentally and socially responsible business to attract and retain good staff. It is also, importantly, in response to the demands of investors, and there is no sign of this diminishing even with the pandemic.

In terms of legislation, the 2008 Climate Change Act and the 2009 Scottish Climate Change Bill are key as these are the instruments that enshrine Net Zero targets in law (2050 for the UK and 2045 for Scotland). Many other pieces of legislation will be forthcoming over the next few years, from banning sale of ICE (Internal Combustion Engine) vehicles in 2030 to phasing out fossil fuel heating systems in homes (starting with a ban on gas boilers in new homes by 2025). 

JT: The transition to Net Zero emissions from where we are today seems a huge task. What does Net Zero mean and what are the main components we need to consider in order to make the necessary changes and adapt the way we live and work to achieve this?

AJ: The basic definition of ‘Net Zero’ means taking the same amount of carbon out of the atmosphere as is put in, either by sequestering it (e.g. planting trees or restoring peatland) or via technology (carbon capture and storage). However, actually applying this definition to a particular sector and having consensus on that definition is very difficult. Recently, a number of eminent climate scientists, including the scientist who originally coined the term ‘Net Zero’, have expressed concerns that it is being used to put off decisions about what we really need to do to keep global warming below 2oC. What we really need to do is focus on absolute reductions in carbon, which means curbing our demands. We need to stop burning fossil fuels, as simple as that. The main components of that change are we need to electrify everything and generate electricity from renewables. This has to be driven by policy, but what we can all do is think about ‘absolute' zero rather than Net Zero – what can you do to reduce your consumption and therefore emissions, rather than offsetting it?

JT: The built environment clearly has an important role to play here. The Government has accepted the advice of the independent Climate Change Committee’s (CCC) Sixth Carbon Budget report, The UK’s Path to Net Zero. The report says that low-carbon investment must scale up to £50 billion a year in the UK to achieve these targets. According to the CCC report, buildings currently account for around 17% of the UK’s direct greenhouse gas (GHG) emissions (77%) from homes, 9% from public buildings and 14% from commercial buildings). This increases to 23% when indirect emissions are taken into account.

What is the difference between direct and indirect emissions and what are the main areas of opportunity for emissions reductions within the built environment?

AJ: To start off, you need to know your carbon footprint. You need to identify the sources of your emissions, and then measure them. Those sources generally fall into three categories – Scope 1, 2 and 3. Scope 1 and 2 emissions are direct – that is, they are within your control. In commercial real estate this includes things like landlord-purchased gas and fuel and landlord-purchased electricity. Scope 3 emissions are those over which you do not exert direct control but are still generated as a result of your investment or core business activity. For example tenant purchased energy, embodied carbon or via your supply chain. It has previously been commonplace for strategies only to include Scope 1 and 2 emissions, because Scope 3 were deemed too difficult to measure. That is now becoming less acceptable, because Scope 3 emissions can account for as much as 95% of a business’ carbon footprint, particularly in commercial real estate. 

The ‘easy wins’ for emissions reduction are:

  • Switch to 100% renewables as soon  as possible
  • Develop an energy reduction plan
  • Look at business travel emissions – compare pre - and post-COVID habits, what changes can you keep?
  • Buildings – retrofitting and automation, e.g. replacing light fittings with LEDs, introducing smart meters and submetering
  • Look at your company pension scheme – according to Make My Money Matter, making your pension sustainable can be 27x more effective at reducing your carbon footprint than giving up flying and becoming vegan, combined
  • Review staff incentives and compensation to encourage behaviour change – e.g. working  from home, support creation of neighbourhood work hubs
  • Provide/promote the choice of plant-based food/drink where possible
  • Invest in engagement across your whole business – training, communication and empowerment.

JT: Turning to commercial buildings now, many of our readers are owners or occupiers of commercial property. We are all now used to reviewing the Energy Performance Certificates (EPCs) of buildings which have been a legal requirement when selling or leasing for some time. EPCs recommend measures which can be taken to improve the energy efficiency of buildings in certain ways. 

Do you see this system being adapted to take account of the enhanced UK target for achieving Net Zero?

AJ: EPCs are useful as benchmarking tools and are likely to continue to be used for the foreseeable future, however, what they are not good at is accurately reflecting a building’s energy performance in operation. The UK government is currently consulting on proposals to introduce new annual ratings and mandatory disclosure for large commercial and industrial buildings (> 1,000 m2) in England and Wales. This is the first step in the government’s plans to reduce the energy consumption of commercial and industrial buildings by 30% compared to 2015 levels by 2030. The policy is based on the Australian NABERS scheme, which has recently been adapted for the UK market by the Better Buildings Partnership. This is clearly a significant change from obtaining an EPC that only has to be updated every 10 years. Further phases of the government’s proposals will extend mandatory disclosure to other types of buildings and to smaller buildings. The focus on how buildings are actually used, rather than how they are designed, is crucial in achieving Net Zero. I would anticipate new regulations to be in force in England and Wales by next year.

JT: Owners and occupiers of commercial property will be at different stages of addressing the efficiency and emissions of their buildings. We know that most large scale property owners such as pension funds and large property companies now have a focus on ESG and are increasingly applying these factors in how they operate their businesses and invest in their properties.

Is there any general advice you would give to property owners and occupiers who are perhaps less well progressed in this area but who want to take steps to improve their assets from an environmental perspective?

AJ: My main advice would be: it’s not just about carbon. Yes, asset owners should be trying to decarbonise their assets, but they should also consider other important environmental and social aspects such as the health and wellbeing of occupants, opportunities to enhance biodiversity and the connection between their asset and the surrounding community. A good example is indoor air quality, something that will become a material consideration to occupiers as we adapt to living with COVID-19. 

JT: It seems to me that as society in general embraces the changes required to achieve Net Zero by 2050 and behaviour and mindsets evolve, buildings with strong environmental and sustainability credentials will become increasingly more attractive to occupiers and investors as they seek to achieve their ESG goals. There is clearly a requirement for investment, which in some cases will be significant, in order to improve or upgrade buildings, but it must surely follow that at least some of this investment will be repaid in added value and reduced running costs.

Do you agree and have you seen any examples of this already?

AJ: Yes, absolutely. For most large corporates setting Net Zero carbon targets, the two biggest areas of scrutiny are their offices and their business travel. I’m aware of examples of companies exerting lease breaks purely because their existing building is not carbon neutral, and of a Net Zero carbon building being the number one criterion for those seeking new premises. In response to that, many recent Grade A office developments have been constructed with fully electric systems that previously would have utilised gas, for example HFD’s Bothwell Exchange in Glasgow. Other examples include Peel L&P, who had 11 office buildings in Manchester and Liverpool verified as Net Zero under the UK Green Building Council’s 2019 definition - the first to do so. Also the Better Buildings Partnership Climate Commitment currently has 24 signatories, representing more than £300 billion AUM and 11,000+ properties, which demonstrates the importance of achieving Net Zero to investors. It would be disingenuous to say that there are no costs associated with transitioning to Net Zero or improving climate resilience, but the issue for investors and occupiers alike is that asset owners who do not address these issues now represent increasingly greater risks as time goes on. 

JT: The UN Climate Summit (COP26) is due to take place in Glasgow this Autumn. What is the significance of this and will you be attending?

AJ: COP26 is the most important global climate meeting since COP21 in Paris in 2015. It is a ‘global stocktake’ of how the nations of the world are doing in meeting their commitments under the Paris Agreement. Every country will find its plans and targets for achieving Net Zero emissions – its Nationally Determined Contributions – under scrutiny. The challenge in Glasgow will be threefold: significantly increasing the level of ambition that developed countries, in particular, have displayed thus far to reducing greenhouse gas emissions; adapting to a low carbon economy; and financing the transition. Industrialised countries must make the largest emissions cuts and must also provide the finance needed to help developing countries. This is not all going to be solved in Glasgow during the first two weeks in November. COP26 is part of a process, not a solution in itself. The role of other parties in that process is crucial – cities, institutions, investors and society at large. I am working on an initiative called After The Pandemic, developing a cultural and creative hub for COP26 centred around an area of vacant and derelict land on the River Clyde, less than a mile from the location of COP26. After The Pandemic is an accelerator for change, incubating and enabling creative projects that impact our society, cities and the environment for the better. 

The initiative develops ideas through the collaboration of local communities, creative practitioners and like-minded organisations, in order to create, fund and deliver: 

  • Cultural & arts installations, programmes and content
  • Educational toolkits, design schools and research
  • Events, community engagement and outreach. 

Our mission is to rethink, reimagine and redesign the world around us to be greener, more resilient and more vibrant. Our aim is to provide a space for the people of Glasgow, first and foremost, to engage in COP26 in a way that is meaningful to them. Huge global questions will be discussed at COP26, but the solutions will have to start at a local level. We are activating this area of vacant land to showcase the creativity and innovation, which is happening throughout Glasgow and Scotland as a whole, while also addressing global challenges at a local level. And we are forging links around the world to highlight responses to the climate emergency, biodiversity loss and other converging challenges including the pandemic. So I will be around COP26, but not at it. Instead dedicating myself to ensuring that it’s not something that just happens to Glasgow without a lasting legacy. If any of your readers want to know more about After The Pandemic, they can head over to our website www.afterthepandemic.scot 

JT: Clearly this is a massive subject to cover and we will continue to address it in future publications but hopefully this Q&A provides a useful overview of the subject to build upon. Anne, thank you very much indeed for your contribution to this issue.

Anne Johnstone is a leading environmental and sustainability consultant specialising in the built environment. Anne founded Fair Futures Partnership in July 2020 to focus on working towards a just and fair zero carbon economy. She was formerly a Partner at Hollis, where her key achievements include establishing and growing a successful environmental team across the UK, Ireland and mainland Europe, developing an ESG due diligence product and driving the development of an innovative approach to establishing Net Zero carbon pathways for existing building stock. Anne is also a prominent figure in the wider property industry. She was Chair of the UK Environmental Law Association (UKELA) from 2017 –2019 and is also on the board of the Investment Property Forum in Scotland, a member of the Scottish Vacant and Derelict Land Taskforce, a board member of the Construction Scotland Innovation Centre and a Fellow of the RSA.