Last week, Great Portland Estates launched a new "sustainability statement of intent", comprising four ESG pillars. One pillar is a commitment to decarbonise the business to become net zero by 2030. This follows the REIT's £450m "ESG-linked" financingearlier this year, with potential margin adjustments linked to KPIs, including decarbonisation. It is a commendable start to the decade.
As GPE was making its announcement, I was leading a discussion at Forsters on the state of regulation in the commercial sector. As a reminder, the government has consulted on an increase in the minimum MEES threshold to a B (or alternatively a C) by 2030. The BPF is fully behind the shift. See my previous blogs here and here. A regulatory shift upwards is inevitable.
Are building owner's anticipating this change? By 2030, we are set to see a much wider proportion of the built environment fall within the scope of MEES restrictions on letting. At the same time, we are seeing a plethora of sale-and-leasebacks/ reversionary leases, where landlords are committing to occupational arrangements that span the 2030 date, including energy inefficient stock. In these circumstances, arguably the time to think about this regulatory shift is now. In short, who is going to pick up the cost of improvements down the line, landlord or tenant?
GPE seem very much ahead of the game. As Chief Executive Toby Courtauld said: "When we think about strategy, it may well be that over the next few years we look at certain buildings that we are unable to retrofit – not just green roofs and similar, but actually more fundamentally where we think the carbon footprint is only going to get worse – and I’m sure it will be the case that we will make strategic decisions based upon that sort of input, which historically we wouldn’t have done". Is there set to be more talk of "evicting" energy inefficient stock from portfolios? As MEES thresholds increase in law, and ESG continues to gain prominence on the business agenda, surely the answer is yes? Perhaps even on a par with the current rush to minimise portfolio exposure to retail...?
Great Portland Estates buildings that are not suitable for retrofitting to a new set of standards launched by the REIT today could find themselves evicted from the portfolio