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UK property CEOs see profit opportunity in investors' push toward ESG

The increasing interest in environmental, social and governance issues among institutional investors offers landlords and developers a golden opportunity to attract investment and boost profits, according to some of the U.K.'s leading property CEOs.

Speaking at the recent EPRA Insight 2020 conference in London, the bosses of British Land Co. PLC, Great Portland Estates PLC and SEGRO PLC discussed how the property sector could meet the demands of investors focused on ESG principles.

Chris Grigg, CEO of British Land, which owns a diversified property portfolio of mostly prime office and retail assets worth about £11.72 billion, said real estate had an advantage over other sectors as buildings have a huge impact on environmental and sustainability issues. By developing environmentally friendly and sustainable buildings, landlords could profit through increased interest from tenants and investors.

“We're in the unusual situation that this could be an opportunity," said Grigg, who compared the property sector to aviation where he believes the potential to profit from ESG is much more limited. "At least in our industry there is an opportunity to make this a profitable part of our business for the reason [that] people will be prepared to pay for those incremental steps toward sustainable business. That potential path to something that is genuinely profitable for the industry is simply not available to many other industries."

British Land is increasingly hearing from current and prospective tenants about the importance of energy efficiency and low carbon intensity in the buildings they occupy, said Grigg. "There are a bunch of companies wanting to make a statement [with their buildings]," he said. A chief executive from a major U.K. bank told Grigg that one of the few ways a financial institution can make a noteworthy ESG statement is through a head office that has excellent green credentials, he added.

Toby Courtauld, CEO of Great Portland Estates, which owns about £2.65 billion worth of prime London office property, said one of the main drivers for his tenants' increased interest in building sustainability was the attitude of young workers who often refuse to work for companies seen as unethical or environmentally damaging.

"We as landlords and developers have to get the building bit right so that the companies that come to our buildings can align their brands with the sustainability component," said Courtauld. "If that works, we're making money. For the first time in this whole debate in the last few years, [investing in sustainable design] has become economically sensible as well as just socially and environmentally sensible."

David Sleath, CEO of industrial and logistics landlords SEGRO, the U.K.'s largest listed property company by market capitalization, said his company had found a simple and direct way to boost the environmental contribution of its properties. "Because of the nature of our business, the big thing for us that we're doing a lot of work on putting photovoltaic solar cells on [the roofs of our properties], he said. A facility SEGRO built for European e-commerce firm Zalando SE in Verona, Italy, has 7,800 PV panels on its roof, which can generate enough energy to power 3,000 homes, Sleath said.

Still, Sleath expects the increased interest in ESG from investors and stakeholders to lead to even greater demands on landlords in the years ahead. "One thing is for sure, the bar has been raised," he said. "Shareholders and investors are asking a lot more questions and so are many more stakeholders, and I think that the requirements of us as businesses are going to be quite challenging in the decade ahead."