CMS Expert Guide to ESG in Real Estate 2025

Despite the ongoing challenges, there's an unwavering legislative push towards environmental, social, and corporate governance (ESG) aspects. Surprisingly, the European regulator is taking the lead in creating new regulations, with deadlines for reducing greenhouse gas emissions, achieving energy efficiency thresholds, and other sustainable development goals drawing closer.

Many owners and occupiers of buildings have their own sustainability goals, as for the buildings across the world, there are different regulatory and zoning requirements. In addition, the market has developed green leases.

The concept of the "green lease" stands out as a pivotal solution for both owners and occupiers navigating the evolving landscape of sustainable real estate. In an era where environmental consciousness drives decisions, the green lease emerges as a strategic tool to help secure and optimise the value of commercial properties.

Furthermore, green leases go beyond the ordinary lease obligations, with both landlord and tenant committing to additional obligations. Essentially, the green lease clauses revolve around three pillars: optimising emissions and resource consumption, providing for future construction and property modernisation, and sustainable management and utilisation.

A business goal shared by both landlord and tenant is to reduce operational costs by minimising emissions and resource use. This shared focus drives collaboration and encourages a level of dialogue which is more challenging to achieve with standard leases. Tenants may benefit from reduced operational costs and may  agree to higher rents to reflect the benefits of occupying space in a more sustainable and technologically sophisticated building. Tenants will have their own ESG and net zero carbon targets. It is now quite common for tenants to request the inclusion of some green lease provisions and to carry out appropriate due diligence on the sustainability credentials of the buildings they occupy.

Green lease clauses often include wording to allow for shared benefits in case of building modernisation. Often the landlord is permitted to enter the premises or building to carry out works to improve their environmental performance. In addition, the tenant may be required to consider the environmental impact of any works it carries out to the premises.

The collaboration between landlord and tenant which is encouraged by the green lease clauses means that the landlord-tenant relationship is transformed to more of a partnership model, rather than having a more binary approach. Owners and occupiers who actually collaborate around sustainability issues are likely to make improvements to the sustainability credentials of their portfolio.

Some property owners prioritising ESG often anticipate higher rents and increased market value for their assets. Assets that can't be classified as "green" are considered less attractive and riskier, leading to discussions about new concepts: green premium, brown discount, and a focus on stranded assets, reminiscent of Darwin's theory of evolution.

It is often said that you cannot change what you cannot measure. Therefore, data collection is key to making actual improvements. One of the key green lease terms is therefore the collaboration around data collection

Implementing a green lease often involves various tools and legal instruments to address specific aspects such as defining and interpreting ESG guidelines, monitoring and sharing emissions data, building management policies, energy sourcing, waste management, energy efficiency issues, provisions regarding fit-out, retrofitting or repurposing issues, and many other aspects related to the environmental footprint of a given asset. The nuances of green lease clauses vary, indicated by shades of green, reflecting the depth and detail in addressing sustainability concerns. local regulations and the approaches of real estate professionals vary significantly across different markets. While green leases have been in use for quite some time in certain markets and jurisdictions, they are now becoming much more accessible across  the entire real estate sector and in an increased number of jurisdictions, largely due to advancements in building technology and increased market interest in the importance of sustainability and ESG.

Many market players agree that given the inevitability of a sustainable future, the prime time for green leases has arrived. According to some industry insights, these clauses are poised to become a market standard across Europe in the second half of the 2020s. It means that green lease provisions should be a consideration in every new commercial lease today.

For the EU real estate market, meeting climate goals means taking radical steps. For instance, all new buildings from 2030 should be carbon neutral during their operational phase. However, 80% of existing properties is estimated to remain in use for another 20 years, necessitating significant modernisation.

We have reviewed the legal environment and market practices for green leases in several European countries and have summarized them in this study. We have also reviewed what investors and financing institutions would expect to see.

Although green leases are important, they are not the only topic covered by this guide, as we also cover the requirements for EPCs and other building certifications, as well as certain regulatory requirements.

We would be pleased to assist you including green lease clauses in your standard form leases or advising on specific building requirements across different jurisdictions.