Environmental, social and governance (ESG) are no longer optional considerations in the industrial and logistics sector; they are essential. This is true for occupiers, investors and developers alike, who have been placed under increasing pressure to take responsibility for sustainable initiatives.
There has been an increase in occupier demand for Grade A stock, leaving buildings with poor ESG credentials sat vacant for long periods. While retrofitting offers a potential solution for ageing stock, rising costs and the difficulties/delays in securing planning consents (or planning consents free from onerous conditions) has hindered progress.
For occupiers, many seek sustainable buildings that align with their internal ESG initiatives and ultimately help to reduce their operating costs long term (energy costs being one of the biggest expenses within the sector). Green warehousing also assists occupiers with ongoing government pressure to maintain sustainable supply chains.
With the increased pressure from occupiers, investors and developers are ensuring ESG is high on their agenda. This is particularly true of investors with big box logistics within their portfolio. The strong demand for energy-efficient space is impacting site selection, with considerations such as access to power, public transport links and green spaces being key items. With speculative developments on the whole decreasing (due to a variety of factors such as climbing vacancy rates, increasing regulation and constrained power supply), developers are prioritising speculative development in core locations that facilitate the construction of sustainable assets.
On the contrary, while it is clear there is a profound shift in the sector towards sustainable developments, affordability is a key component to consider and threatens to become a barrier to achieving ESG outcomes. Who is to bear the cost increases associated with responsible growth?
The upfront capital costs for assets with strong ESG credentials can be passed onto occupiers by way of higher rents. However, those increased rents can adversely impact other commercial terms, such as lease length and break options, as occupiers are nervous of stretching long term rents in the context of other cost increases, such as business rates and supply costs. Lower yields due to shorter lease lengths can creating difficulties for investors, for whom reduced income certainty and higher costs incurred from higher tenant turnovers can be an issue.
Ultimately, for ESG to be truly sustainable, the responsibilities for ESG costs must be shared across multiple stakeholders and the right balance struck. “Green clauses”, which are now commonplace in leases, can formalise shared ESG ambitions and responsibilities across matters such as collaboration, data sharing and sustainable upgrades. “Green financing” can also offer support to help fund upgrades and developments and linked to ESG targets, create an environment which incentivises continued improvements.
ESG is showing no signs of slowing down as a core consideration within the sector, but the stability of the market dictates its ranking in the hierarchy of significance.
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.