As published in Business Scotland on 13 June

A hot topic over the past decade, ESG has grown in both popularity and understanding. Budgets for ESG improvements have increased, subject knowledge has grown, and sustainability is starting to be prioritised. But with every country following a slightly different rule book, there is some disparity between advice given; ESG consultant Calum Mackenzie from real estate consultancy Hollis tells us how to navigate the ESG real estate market in Scotland.

ESG in Scotland

Whilst there are certainly similarities in advice and trends, Scotland does mandate different legislation to that of England and Wales. For example, the Scottish Government have set a target of becoming net zero carbon by 2045, five years sooner than that of the rest of the UK. To reach this ambitious target, the country as a whole will need to progress quickly to cut emissions.

To do so, Scotland is already seeing an increasing proportion of low-carbon electricity supplied to the national grid; this is reflected in a recent update to Section 6 (2022) of the Scottish Building Standards. Effective as of 01 February 2023, the carbon factor used for grid-supplied electricity has changed, resulting in the same buildings receiving lower EPC ratings. Even if a potentially improved EPC, owners should still undertake energy efficiency improvements to comply with more stringent regulations expected in 2025 and to reduce emissions in line with the net zero target.

Whilst an important measure of energy efficiency, the environmental impact of a property is more than just an EPC, and this is reflected in the market shifting towards using other certifications in addition to Government targets.

Assessing ESG

There are multiple accreditations to quantify the environmental impact of a building, with the most relevant to commercial property owners in Scotland being the BREEAM certification. BREEAM measures not only the energy efficiency of a building, but also a range of sustainability and wellbeing factors.

Another certification to be aware of, which is starting to grow in popularity in Scotland’s office sector, is NABERS. NABERS measures a property’s operational energy consumption (regulated and unregulated) and provides a rating comparing it with other similar buildings. It then requires regular reassessment with the aim of reducing real energy use over time.

Moving beyond the E

The market has focused heavily on improving a property’s environmental impact which, whilst still incredibly important, is not the only contributing factor of ESG. Delivering the social elements, or the ‘S’, is what occupiers are now looking for to impact the market.

Demand has grown for certifications such as Well and Fitwel that focus on the health and wellbeing of the occupier, considering factors such as daylight and occupier comfort. A higher Well or Fitwell score translates to a higher productivity and occupier satisfaction.

In Scotland, we are noticing increased investments into social value following the pandemic, especially into the workplace. To attract occupiers and employees back to the office, tenants are focusing on amenities and outdoor space to improve the social elements and wellness factors of the property. This in turn increases the attractiveness of the property leading to increased rental prices for occupiers, often referred to as green premiums.

Green premiums are the higher prices that occupiers and owners alike are willing to pay when renting or purchasing properties that hold higher sustainability credentials. So, whilst owners may carry concerns over the initial expenditure of undertaking ESG improvements, or the time needed to complete further accreditations, the green premiums that the building may present over the long term will likely exceed costs.

There are both subtle similarities and differences between countries on ESG market trends and Government regulations, but with a joint effort to becoming net zero, real estate can start to make real strides in decreasing its global carbon emissions. If you would like to hear more about the ESG regulations across Scotland, get in touch with ESG consultant Calum Mackenzie.