Is ESG part of your lease? If not, here's why it should be

Environmental and social clauses are becoming top priorities in lease negotiations

In the past, the property lease was only used to outline the commercial terms under which a landlord-tenant contract has been entered into. 

But the lease agreement today has evolved. Increasingly, it is now doubling up as a platform for landlords and occupiers to band together to achieve their Environmental, Social, and Governance (ESG) goals.

At a time when the built environment accounts for nearly 40% of global carbon emissions, environmental initiatives are becoming a necessary component in lease agreements that set out clear objectives on how a building is to be managed, sustainably occupied, and even improved over time.

These agreements, increasingly known as green leases, feature clauses that generate efficiencies and support sustainability goals through data sharing, transparency, energy efficiency, and waste management.

The sense of urgency for sustainable solutions, especially in the drive for the decarbonisation of real estate to meet net-zero goals, has rubbed off on some organisations that have turned to embrace green leases.

Up to 42% of organisations surveyed by JLL have already signed a green lease, with another 43% planning to do so by 2025.

Some forward-thinking corporates have even pressed forward to incorporate the social value agenda into their leases by adding social impact clauses related to diversity and inclusion (D&I), health and wellbeing, and community building.

Are green leases a no-brainer?

The structure and clauses of green leases still vary widely, but few landlords and occupiers would argue its benefits.

Through green leases, the improvements in energy efficiency and building performance can generate overall cost savings for both parties alike.

Though this might call for structural modifications or capital-intensive deep building retrofits, landlords and tenants with common sustainability goals still have a solid business case to jointly finance the futureproofing of assets, and ultimately reap the long-term rewards.

In some countries, support from the government is accelerating the pursuit of greener buildings.

Take China, where organisations investing in green initiatives, such as energy-saving technologies or environmental projects, can tap into tax incentives from the government. In Singapore, the government is providing grants for building owners to lower upfront capital costs for energy efficiency retrofits.

From a commercial perspective, landlords who adopt green leases also have plenty to gain from having a greener asset.

Our research shows that highly efficient, green-certified buildings can command a green rental premium of anything up to over 20% over less-sustainable buildings in high-cost markets such as Hong Kong. Conversely, assets with lower energy efficiency, and without green provisions in place, may risk incurring a “brown discount” on their valuation.

By creating shared incentives and outlining key responsibilities, landlords and occupiers can jointly leverage green leases to improve the environmental performance of both the building and its surrounding areas.

Social priorities come to the fore

While environmental clauses remain the key focus in green leases, a push for stronger social responsibility clauses is gathering pace.

More corporates are beginning to look at green leases to help create a positive social as well as sustainable impact for building occupants and local communities.

Up to 87% of sustainability leaders have already implemented criteria in their leases to ensure regular engagement with local communities compared to 43% across all organisations, according to JLL’s social value report.

This includes supporting local economic growth by offering employment opportunities and implementing responsible procurement practices.

Part of the reason for this inclusion is the ongoing war for talent. Increasingly, the top talent has a social agenda, which needs to be reflected if we are to get them in the door, let alone retain them. These social clauses are likely to play a more integral role.

In fact, our recent survey indicates that over 50% of the employees in Asia Pacific would prefer a sustainability leader as their future employer.

Employees today are no longer silent on their stance towards sustainability. They are proactively demanding action and expect their employers to be supportive of and aligned with their goals.

This means organisations jostling for talent, when designing and building their facilities, must build a socially inclusive, welcoming environment that consider employees’ health and wellbeing as part of the overall business goal.

For instance, one of ESR’s logistics facilities in Ichikawa, Japan houses a relaxation lounge, a children day care centre, and retail shops on-site — amenities seldom seen for employees in warehouses.

Providing quality amenities and incorporating office features, such as accessible restrooms and workstations, dedicated social spaces, or adjustable desks, will become a mainstay in green leases, especially for companies aiming to come out on top in the quest for success.

As of now, four in 10 organisations surveyed by JLL have yet to firmly embed their environmental goals, much less their social value agenda, in their real estate strategies. We believe that when companies lag in outlining ESG goals and realising a responsibility to the environment and their communities, they will struggle to achieve their goals.

If ESG isn’t yet a consideration, the next leasing agreement is an opportune time to act and chart a sustainable course towards responsible real estate.

This article, written on behalf of Jeremy Sheldon, was first published on JLL’s Trends & Insights.