Greener than green

The Warsaw branch of law firm CMS is very proud of its staircase that connects the five floors of its offices at the top of Varso Tower. The stairs themselves are made of light grey granite, while on one side of the stairwell there is a green wall that periodically sprays out a light mist to water the various plants. The opposing wall is covered in a bright mural depicting Warsaw’s numerous landmarks, while the outer-facing side is dominated by a vast glazed window that looks out over a sea of buildings from one of the highest points in the city. The stairs provide access to one of the many kitchen areas where a series of signs encourage employees not to take the elevator to travel between floors and to eat healthily, by, for example, eating the apples and tomatoes that are freely provided. All of these features have contributed to the company’s office being awarded a Well rating of ‘Platinum’ – the very first distinction at this level in Warsaw. However, the law firm does sheepishly admit that the chocolate bar vending machine snuck away in a corner did lose them a few points in the assessment that was conducted by JLL. But to a large extent, its offices also showcase what can be done when a company takes ESG seriously.

Curbing the carbon footprint

As you may already know, the real estate sector accounts for around 40 pct of all global carbon dioxide emissions and, according to CMS, it is also responsible for 40 pct of energy consumption and 40 pct of raw material usage. These shockingly high figures seem a little more comprehensible when you consider that on average we spend 90 pct of our time indoors, but it is still the case that the sector has unsurprisingly found itself in the crosshairs of EU environmental policy. Such numbers suggest that a huge scope exists for carbon footprint reduction. Currently, EU policy is largely based around the notion of a self-regulating market, although the future introduction of so-called brown taxes cannot be ruled out. “The EU regulations do not oblige you to be green – what they actually do is force you to disclose whether you are green or not. This represents a huge gamification of the whole system. It’s forcing the market to regulate itself,” points out Aleksander Grabecki of CMS.

EU taxonomy and its Green Deal have obligated more and more companies to report on their impact on the environment and, as a result, investors and financiers have already begun to shy away from businesses that are too environmentally harmful. “Financial institutions are increasingly integrating ESG aspects into their financing decisions, since a growing number of loans are being linked to sustainable development principles and ESG KPIs. With the strict ESG reporting requirements for companies being introduced as part of the European Green Deal, the importance of non-financial reporting and a clear ESG commitment and strategy will increase significantly in the years ahead of us. Although green leases are not yet binding, they signal a positive step towards sustainable building operations. We expect their share to increase over the next couple of years,” explains Susanne Steinböck, the group head of corporate communications and sustainability at CA Immo. Indeed, most of the pressure for what is being dubbed a green revolution has been both coming from and being exerted on larger corporations. “We can see that for the more sophisticated large companies that are obliged to report under EU rules, green leases have become very important and they have been pushing landlords in that direction. But for smaller tenants, it is just an additional hassle. It’s not something they yet rate as of high importance, but rather something that landlords now have to have in place. Nevertheless, this attitude may well change when it comes to their position in the supply chain, when their clients ask them how green they are,” argues Agata Jurek-Zbrojska, the head of the real estate and construction department at CMS. Susanne Steinböck also points to the larger multinationals spearheading the move towards greener policies. “Larger international companies with comprehensive ESG policies could place more emphasis on sustainable, certified buildings and be more willing to adopt green lease clauses due to their non-financial reporting obligations. In our view, the willingness and interest of our tenants to sign green lease agreements is now substantial in all our markets,” she says.

Moving away from the triple-net lease

And so it seems that we have already entered an era when companies are vying to outgreen one another – and this means that they are having to reassess all parts of their operations to see how environmentally sustainable they are, including their leasing contracts. Previously, the market standard was defined by the triple-net lease. “A triple-net lease is a market standard that turns a lease into an investment product. You don’t put any money into such a lease as a landlord, but you get the money back,” explains Aleksander Grabecki, a senior associate at CMS. Although the landlord would be responsible for any maintenance to the property, all the work has be paid for by the tenant, hence, just like a bond, any financial investment is accompanied by a predictable revenue stream. The problem with such a model is that landlords have little incentive to do anything more than maintain the property, since any improvements made would be at their own cost, while all benefits would accrue to the tenant, who may have signed a lease that for anything between five and fifteen years. Reporting obligations also present issues. Much of the data required by the landlord can only be collected by the tenant since the landlord normally does not have the right to enter the tenant’s premises. “If you share information, you normally have to sign a non-disclosure agreement so that the data collected is only used for a certain purpose. There also might be procedures dictating how conclusions are drawn. For example, you receive the raw data, but this always has to be presented in aggregate or anonymised when shared with consultants. Data breaches are a serious issue for many organisations,” points out Aleksander Grabecki.

Susanne Steinböck of CA Immo also acknowledges the importance of sharing data in the spirit of partnership. “ESG is a highly data-driven topic, and without accurate and complete data we’re flying blind – which is quite unfavourable if you want to achieve climate targets. Data transparency is a first step towards raising awareness and tenants subsequently using space more efficiently, but it is also an important basis for transparent and targeted energy management and for improving our portfolio’s energy efficiency,” she insists. The solution to these issues is to establish formal dialogue procedures between the tenant and the landlord. And under such an arrangement, if tenants want to see the benefits from renovations, then how the costs are split will also be up for discussion. Such formal structures also make reporting much easier, as such information would be freely shared between the tenant and the landlord. “It’s important to devise collaborative procedures. This means not just monitoring but having an open dialogue and ways of implementing new solutions,” points out Aleksander Grabecki, who adds: “One example would be a ground floor tenant who might not want to pay their share for replacing the elevators, so the tenants would need a way to discuss this. It’s good to secure a means of having a dialogue with other stakeholders in a green lease contract – with others who use the building or who are in it.”

The importance of discourse is also stressed by Susanne Steinböck of CA Immo: “Our green leases include voluntary clauses that are integrated into the lease contract, introducing standardisation and transparency in the day-to-day operations of landlords and tenants. That means that the tenant and landlord agree on the most sustainable use and management of the property possible – for instance, opting for environmentally friendly practices, such as green energy procurement, the use of sustainable materials for the tenant fit-out, or environmentally friendly cleaning products. All in all, this does not necessarily mean higher costs. But the disclosure and monitoring of tenant consumption data can provide opportunities to optimise consumption – and thus significantly reduce operating costs,” she explains.

The first step: certification

Just because a building has been awarded a green certificate, such as BREEAM or LEED, this does not mean that a building is environmentally sustainable. Nonetheless, green certification has become the standard for modern office developments. Much depends on how a building is used and many such certificates require periodic renewal. However, ensuring a building is used optimally can be difficult, since a tenant could employ hundreds or maybe even thousands of people in one location and, as Aleksander Grabecki points out: “Not everyone reads the lease – and nor should they.” A green lease, therefore, should include clauses requiring employees to be trained.

The concept of the green lease presents different challenges for different sectors. For the retail segment, the challenge is often that the dialogue is between many different parties and not all have the same negotiating strength. Anchor tenants, such as hypermarkets, are in a very strong position and can make much greater demands on how a retail centre should be run; whereas smaller local stores might have little to no awareness of ESG issues. Furthermore, a unified energy policy can be complicated by each of the individual retailers having separate contracts with electricity providers. Despite these challenges, according to Agata Jurek-Zbrojska: “Many shopping centre owners are very ESG sensitive. They are really doing their reporting and implementing their policies.” With warehousing, green leases are often far simpler, because the buildings will often have just one tenant, so any dialogue only involves two parties. The flat roofs also provide excellent platforms for the installation of solar panels, although the regulatory environment in Poland often makes such installations difficult to hook up to the grid. “The energy regulatory environment is not moving at the same speed as the changes in energy efficiency and energy supply,” adds Agata Jurek-Zbrojska.

Setting the pace of change

The pressure is on to green up real estate – and under current EU legislation, this is pressure is now beginning to bite. “Around 80 pct of buildings will still be here in twenty years’ time, but by 2050 all of those in the EU will have to be carbon neutral. There is no other way of achieving this without refurbishing them. This is a common problem for both the tenant and the landlord because there are not enough new buildings. A building has to be modernised to achieve the benefit of lower operational costs – and this really is a revolution in comparison to the split incentives that we have under the triple-net model. With a triple-net lease, when landlords want to refit buildings they are responsible for all the costs, but the tenant is the sole beneficiary. But a green lease removes the barriers of split incentives,” argues Aleksander Grabecki. In the UK, it is already illegal to lease out a building that does not meet minimum environmental standards. But the revolution is already underway. “I am convinced that every single landlord and every single tenant has at least one clause in their contract that contains a green provision. Everyone who enters into a new lease or renegotiates an ongoing contract in Poland should at least seriously consider implementing some of the aspects of green leases,” urges Aleksander Grabecki.