Regulation in this area is still in its infancy globally, but there are a number of requirements being implemented in Europe that are impacting how businesses are structuring their projects and their property portfolios. The rest of the world is expected to follow their example.
Publication
10 Nov 2023 ·
United Kingdom
Regulation driving change
7 min read
Minimum Energy Efficiency Standards - England & Wales
Since 1 April 2023, there is now a fine imposed on landlords of commercial property that continue to let properties (whenever the lease was first entered into) with an energy performance certificate (EPC) rating of either ‘F’ or ‘G’ (“sub-standard”), unless certain exemptions apply.
There is currently no minimum energy efficiency standard for EPCs in Scotland. The Scottish Government is currently reviewing how to achieve the improvement of energy efficiency in buildings and has committed to introduce an equivalent to a minimum energy efficiency standard of C for EPC by 2025. Details of what this will look like are awaited.
Building Safety Act 2023 – UK-wide
Being implemented in stages, this will aim to improve the safety and quality of buildings, especially those that are high rise. It will strengthen the enforcement and sanctions of breaches of building regulations and safety standards, as well as defining new role and responsibilities for building owners, developers, contractors and managers.
NEC Contract – clause X29 – UK-wide
The NEC4 Contract, used within the construction sector, now includes an optional sustainability clause: X29. Option X29 has been incorporated into each main form of contract. The Option allows for ‘Climate Change Requirements’ to be included in the scope, with the supplier required to prepare a ‘Climate Change Plan’ setting out their strategy for achieving those requirements.
It includes:
- a requirement to include ‘climate change requirements’ in the scope. A failure to meet these will be a defect.
- the inclusion of a performance table which incentivises the contractor’s performance of certain targets.
- the need for an early warning to be provided where it is considered that the ‘climate change requirements’ cannot be met.
- an obligation for a ‘climate change execution plan’ to be produced and updated from time to time.
- a requirement for the scope to set out the extent to which the climate change requirements are disclosable e.g. to enable an organisation to confirm it has met its climate targets.
- the ability for the contractor to propose changes which reduce the impact of the project on the climate - either during the build or the future use of the project.
Biodiversity Net Gain – England & Wales
Biodiversity net gain (BNG) is a principle that aims to enhance the overall biodiversity of a development site, by seeking a quantifiable increase in biodiversity through ensuring that the area’s ecological value is higher post-development that it was pre-development. Come January 2024, most developments (some exceptions do apply) will be required to demonstrate that the development achieves a 10% net gain uplift in biodiversity. Developers will be required to submit a Biodiversity Gain Plan which details how the 10% objective is to be achieved, which must then be approved by the local planning authority before the development can lawfully commence. This mandatory requirement, as introduced by the Environment Act 2021, will apply also to small sites in April 2024, and National Significant Infrastructure Projects in November 2025.
A standardised biodiversity metric set by Natural England will be used to calculate how many biodiversity ‘units’ are required in order to meet the 10% net gain. The 10% objective can either be achieved on-site (as part of the development), off-site (either on different land owned by the developer or through the purchase of biodiversity units from a separate land manager), or, as a last resort, through the purchase of statutory biodiversity credits from the government. Where off-site biodiversity gains are used, these must be legally secured via either planning obligations (within a s106 agreement) or a conservation covenant, and must be maintained for at least 30 years. A biodiversity gain site register will open to record allocations of off-site gains in order to make this information publicly available.
Planning ahead with CMS
For more information on Biodiversity Net Gain, watch the video series on the topic Planning Ahead with CMS. The video series was recorded when the the Biodiversity Net Gain rules were originally due to start in November 2023.
Gender pay gap reporting – UK-wide
The real estate and construction sectors are heavily male-dominated. The gender pay gap that exists may dissuade more women from joining the sector. According to the Office of National Statistics, in 2022 there was a 12.8% pay gap in the construction sector and 17.5% pay gap for those working in the real estate sector.
As diversity is an important pillar of the S within ESG, all businesses should be aware of their reporting requirements and ensure they have the processes in place to report on their performance.
Corporate Sustainability Reporting Directive (CSRD) – UK-wide and EU
On 5 January 2023, the CSRD entered into force. It applies to companies listed on regulated markets in the EU (apart from listed micro-enterprises), non-EU companies meeting certain thresholds for net turnover in the EU and companies with securities listed on a regulated EU market.
CSRD includes 82 different disclosures using 1144 different data points. These data points include the environmental performance of a company’s property portfolio, and so having the ability to measure and report on sustainability-related metrics will be an increasingly important consideration for buyers and tenants.
Carbon Border Adjustment Mechanism – EU-wide
The EU Carbon Border Adjustment Mechanism (“CBAM”) entered into force on 5 June 2023. It aims to reduce carbon emissions and also discourage producers from moving their production outside the EU by incentivising the decarbonisation of non-EU production processes.
CBAM primarily targets carbon-intensive sectors that are at high risk of carbon leakage, such as real estate and construction. Its application will materially affect importers and extra-EU producers of in-scope products, which includes cement and steel.
Corporate Sustainability Due Diligence Directive – EU-wide
The purpose of the Corporate Sustainability Due Diligence Directive (CSDDD) is to ensure that companies in scope address any potential or actual adverse environmental and human rights impacts of their business activities, including along their wider value chains, within Europe and beyond. Whilst the CSDDD is still being negotiated at the EU level (with the EU Parliament and EU Council taking different positions from the original Commission proposal on a number of key areas, including scope) and the final text is not expected to be agreed until 2024, companies that may be affected by it should consider pro-actively preparing for it now. Even those companies not in scope should prepare as they may operate in the supply chain of a company that is.
The CMS CSDDD Navigator
The CMS CSDDD Navigator, which is based on the original EU Commission proposal for the CSDDD, can be used to help you prepare. The CMS CSDDD Navigator is free to use and you can access it here.
Energy Efficiency Directive - EU
Article 8 of the Energy Efficiency Directive requires companies of a certain size to conduct an energy assessment of their businesses and report on the results or implement changes following the results. This impacts developers, landlords and occupiers as they seek to ensure that their buildings are as efficient as possible.
The Energy Savings Opportunity Scheme is one of the mechanisms used and this is a mandatory assessment scheme for businesses with over 250 employees or a turnover of more than £44m.
Modern Slavery
Businesses within the real estate and construction sectors are typically well-versed with modern slavery and human trafficking legislation. It can exist at any stage of an organisation’s supply chain and present risks at multiple levels.
Both formal regulation and commercial pressures are expected to grow in this area, requiring organisations to be increasingly transparent about the steps they take to ensure that modern slavery and human trafficking are not taking place in their business or supply chains. Organisations that are proactive on this issue will be better placed to respond to these demands and the regulatory and business challenges they present.
