What does an ESG-friendly office look like?

The demand for quality

This transition represents an opportunity for investors because companies are willing to spend more on high-quality office space that is attractive to staff, while helping them meet their sustainability commitments.

Mercer says: “The constrained supply of low-carbon refurbished buildings and growing demand from larger occupiers is creating rental tension in many markets. In many instances this has created competitive bidding situations. This upward rent pressure is needed to help encourage developers hit by construction cost inflation and higher yields to justify speculative development projects.”

LGIM and Mitsubishi, for example, sold their Central Saint Giles joint venture in central London for $1bn in 2022. That property had a BREEAM Excellent rating, showing its strong sustainability rating.

Creating net zero buildings

Because buildings are responsible for 40% of all CO2 emissions, many across the country will need to be brought in line with increasingly strict environmental standards. This change will happen slowly as it needs to take place at times that are agreed with occupiers. While simple steps are already being taken in many offices, such as the introduction of LED lighting, other interventions may require changing the fabric of the buildings to, for example, make them more insulated.

To be truly sustainable the embedded carbon throughout the entire lifecycle of an office must be reduced, from initial construction, to operation, maintenance and refit, to eventual demolition. This includes everything from the kind of energy that keeps the lights on to the carbon involved in making materials like concrete.

Chan says: “We’ve got minimum government energy efficiency standards which are articulated by Energy Performance Certificates and like the whole industry, we are working towards them. We are also part of a coalition including the UK Green Building Council and RIBA that is working to develop Net Zero Building Standards. And we aim for our offices to achieve the BREEAM Outstanding certification and the Neighbours design for performance standard that was developed in Australia and which we have been encouraging government to adopt.”

LGIM owns thousands of buildings within its portfolio and its Roadmap to Net Zero sets out the plan by which it intends to reach net zero by 2050, with interim targets before then. It has begun the task of assessing every building and designing a plan to make the necessary improvements for the climate transition, starting with those with the greatest emissions. Over the next few years every office building in the portfolio will be brought in line with the net zero roadmap.

LGIM has already made strides in reducing emissions in areas where it controls them, but occupiers are responsible for a lot of the emissions once a building is in use. LGIM has been supporting them to be more sustainable through smart meters and remote data analysis.

And in addition to its fitted offices product, Capsule, LGIM launched a managed concept in 2021, whereby it provides property management for occupiers, looking after factors such as operational energy efficiency for an all-inclusive cost. This has enabled companies with short-term leases that do not have the time horizon needed to invest in an ESG-friendly office to improve their sustainability credentials by paying LGIM to amortise the cost over a longer period.

Mercer comments: “We recognise that many SMEs are rent sensitive in the current economic climate and Capsule Managed allows SMEs to benefit from LGIM’s expertise and economies of scale when delivering a pathway to net zero of its offices.”

Creating social impact

Office buildings can also have a social impact and Legal & General is considering how it articulates and measure this across its real estate portfolio. Chan explains that investors are starting to realise that delivering social impact does not always come at the expense of risk-adjusted returns. At Legal & General, social impact goes hand in hand with our environmental and social objectives, which is why we developed the Legal & General Place-based Impact Framework.

This framework is based on three core themes: inclusive economy; health and wellbeing; and nature and climate. Using this framework, Legal & General aims for positive impacts on society. It focusses on the specific needs of each community, the positive commercial impact of our offices, and developing strategic partnerships with local organisations to address the needs of local people. These organisations can range from social enterprises to local schools and universities.

With 245 Hammersmith Road, which we developed just before the pandemic, social value has been delivered by fostering a variety of local skills and employment within the borough of Hammersmith and Fulham. This has contributed to the growth of local businesses, enabling a stronger and healthier community, and helping to preserve the surrounding environment. The project used the Social Value Portal to help measure the value of the development to society.

Gathering data

Only by collecting data can we really understand the progress being made towards future-proofing offices. LGIM is working with a data partner to gather data on everything from wastewater and other environmental data to social metrics. Chan explains: “If the person managing the building doesn’t have data, they don’t know whether their activities are translating into improvements. They don’t know if their waste management initiatives are reducing waste or if their social initiatives are translating into positive outcomes for the community. So having a technology platform that’s able to collect consistent data so that we can show the impact to our occupiers and investors is really important.”

Good communication is also essential to an ESG-friendly office, and LGIM has introduced Vista, which is an occupier engagement dashboard. Because LGIM owns thousands of buildings, contacting all the occupiers by email or phone can be difficult but this system enables us to reach them easily and provide information.

Mercer explains: “Having live utility data, for example, allows our Asset Managers to engage with our occupiers to identify carbon reduction strategies. This might include turning off plant running during out of office hours and adjusting plant to accommodate Fridays, when offices tend to be quieter.”

ESG-friendly offices are already proving popular and valuable. Government pressure is also being brought to bear on the market, with a target of EPC C for non-domestic private rented properties in England and Wales by 2028 and B by 2030.