Navigating ESG within urban logistics

ESG is becoming a more prominent consideration in urban logistics developments, driven by increasing regulatory requirements alongside wider societal factors such as climate change.

Investors are focusing increasingly on buildings’ ESG credentials as a result of disclosure and financial transparency requirements covering the UK and EU markets. For new developments, BREEAM certification is the most common ESG requirement requested by investors.

Efforts to mitigate carbon emissions are also high on the agenda to align new buildings with investor portfolio decarbonisation strategies. For example, many investors are aligning with the Carbon Risk Real Estate Monitor (CRREM), which sets out a science-based decarbonisation pathway for buildings. There is also an increasing focus from investors on biodiversity, social issues and climate resilience.

Occupier appetite

Occupiers, too, are more focused on sustainable buildings. In the office sector, this is translating to higher rents. However, the picture is less definitive for urban logistics.

At Chancerygate, we build multi-let urban logistics developments that attract a wide range of occupiers from national companies to SMEs. While we see some tenants who are ESG aware and value accommodation with robust credentials, we have not yet seen evidence that this is driving higher rents.

However, tenants are becoming increasingly focused on reducing energy costs given recent price volatility. These costs can be significantly reduced in a newly built, energy-efficient unit compared with older stock. For example, one of our newly built Chancerygate units costs more than 15 times less to run than an equivalent unit dating from the 1990s.

SMEs may be more driven by demands from their clients looking to achieve a more sustainable value chain. More contracts now incorporate ESG practices into their terms of service, and greener accommodation can help to meet this demand. Other areas of focus for tenants include wellbeing and sustainable transport options. These all contribute towards a development’s sustainability credentials.

Regulatory requirements

The changing regulatory landscape is also having an impact. We have seen some planning authorities increase their requirements for BREEAM certifications and the 2021 revisions to the building regulations mean buildings must meet stricter requirements for energy efficiency and reduced carbon emissions.

In addition, the biodiversity net gain regulations, which came into force this year, require developers to provide a 10% improvement in biodiversity on their sites. Guidance and standards in this area are being updated continually, the UK Net Zero Carbon Buildings Standard, which is coming out this year, just the latest example.

Building greener

In response, developers are now incorporating more ESG features into schemes. There is increasing focus on delivering energy efficient, low carbon buildings. This, alongside incorporating renewable energy measures such as solar panels, can help meet regulations, preserve asset value and meet both tenant and investor needs.

Ensuring buildings are as energy efficient as possible means using high-quality insulative materials, controlling air tightness to reduce air leakage and using energy efficient equipment such as air source heat pumps.

It is also important to consider how a development supports low and zero emissions transport. For example, the rise in electric vehicles (EVs) use amongst employees and fleets will affect all businesses, driving the need for EV charging infrastructure.

However, the increase in EV charging and solar panel installations in new developments presents a challenge for grid capacity, and therefore needs careful planning. This is also an area where technology is changing rapidly, with the emergence of micro-grids and battery storage, for instance.

Increasingly, developers are now considering the material resources that go into constructing the building, for example calculating and seeking to reduce the embodied carbon emissions associated with their manufacture.

Socially conscious developments

There is a growing focus on improving internal working environments and features that promote the wellbeing of occupants, for example the thermal and visual comfort of office spaces and optimising daylight.

The provision of outdoor spaces is also becoming more common. These provide wellbeing benefits for occupants and provide opportunities to enhance on-site biodiversity and community benefit.  However, finding sufficient and suitable space can be a challenge, especially on tight sites within urban fringes. Where there is a high ecological baseline value, achieving a 10% on the site can be a significant challenge and developers may need to look to use biodiversity offsets.

During the construction phase, developers can provide support that can have a lasting community impact such as providing skills and training opportunities to the local workforce. The wider impact of the whole supply chain of a new development is an important consideration, covering issues such as ethical and responsible procurement.

Looking ahead

ESG requirements will continue to evolve as regulations, standards, technologies and needs of different stakeholders change. Within urban logistics, this is driving more ESG into developments, although challenges remain, not least the need to build in ESG considerations in an economically viable way.