A collaborative approach between landlord, tenant and customer is key
ESG and retail
Over the years the retail sector has never been far away from controversy surrounding its environmental and ethical footprint. In recent years criticism has been aimed at the sector’s record associated to fast fashion, single-use plastics, the living wage and ethical issues arising from complex international supply chains. The Blue Planet effect and the coming of age of more ethically conscious millennials has led to a microscopic assessment of operations and an increase in the expectation that retailers are being transparent when it comes to their impact upon climate change.
Investors and REITs have also been following their own path. Environmental Social Governance (ESG) has rightly been gathering considerable momentum as organisations rush to take a long-term view on their investment strategies. The sector has been framed by increasing numbers of investors committing and reporting to internationally recognised standards and benchmarks such as the United Nations Principles of Responsible Investment (UNPRI), the Global Real Estate Sustainability Benchmark (GRESB) and alignment to the UN Sustainable Development Goals (UNSDGs). In 2019 over $4.1 trillion of gross asset value was submitted to the GRESB benchmark covering over 1,005 investment entities and over 100,000 assets. It’s fair to say the industry believes measuring ESG is essential to understand where is best to invest financial capital with lenders are increasingly adding ESG criteria to lending decisions.
So, what is ESG and how does it relate to the retail sector? ESG can be seen as the professionalisation of the sustainability agenda. A structured requirement stretching across environment and climate, social and wellbeing backed up by a strong spine of improved governance, transparency and financial returns. Investment strategy and asset optimisation are intrinsically as much a part of the programme as more traditional environmental metrics such as energy and carbon.
It’s important to remember that there is no strict definition as to which elements of ESG should be given priority and that it will differ depending on the organisation’s strategic priorities. However, we would suggest that in 2020 – particularly in a climate heavily impacted by Covid-19 - that people, wellbeing, jobs and skills are central to a good retail-led ESG strategy. It’s in the best interests of both landlords and tenants that consumer confidence returns, to increase footfall to retail schemes and drive economic activity. ESG can be placed at the heart of that process.
Two ESG themes that align well to the theme of re-imagining retail space are within the social value and collaboration between landlord and tenant. These aspects will be key to the post-pandemic recovery of retail. Environmental impact is of course central to everything, but will be examined more closely in the next Re-imagining Retail publication.
Social, Community and Wellbeing
The trend of people and community being central to retail strategy was already occurring although the events of 2020 have accelerated this process. In the case of retail-led schemes, they are centres within the community, a place that provides employment, social engagement and leisure time. For a centre to be sustainable it needs to consider how the scheme can give back to the local community through wellbeing considerations, community and charitable programmes, apprenticeships and skills and, on a very basic level, being a pleasant and clean environment. All help enhance community ownership towards a scheme and drive footfall.
Examples of how property investors can support the community and nurture goodwill through initiatives include offering vacant space to local grassroots organisations, SMEs or social enterprises. Initiatives like these provide a platform for organisations to fund raise, to improve skills or to provide drop-in support and advice. We advise on several schemes with pop up cafes, social hubs and space for community art projects. At one of our managed centres we have supported the wellbeing of local residents, employees and visitors, a wildlife habitat, a living wall and outdoor community table tennis tables were introduced. These are regularly used by local residents. Alongside fundraising events such as One Great Day, these initiatives help increase footfall and improve visitors’ wellbeing.
Linking back to Covid-19 and community health, many retail schemes have been providing storage space for PPE supplies for neighbouring NHS facilities, ensuring that space at health facilities is maximised for care.
Forward thinking investors understand that they also have occupiers on their schemes that can buy into this community programme. Many independent retailers have offered free meals to school children during half-term this year. Others ensured that vulnerable residents had access to essential items during lockdown by offering free delivery and working with local volunteers to reach everyone. Recruitment programmes that target local residents, in particular those with disadvantaged backgrounds, can also support ESG aims.
As more investors choose to dive into social value assessments and wellbeing certifications such as WELL and Fitwel, we will continue to see the increased expectation on local authorities and lenders that investing in the community elements of a scheme underlines its long-term sustainability.
Increased Collaboration
The second major trend is the divergence of investor and occupier strategy. Traditionally both have developed their ESG and sustainability strategies in isolation of one another. Tenants have often been wary of landlord requests for information and performance data for their stores, they’ve also historically made it difficult for green leases to be agreed on retail-led schemes.
We would emphasise however that ESG implementation is most successful when investors and occupiers work together to meet a common goal. For example, entering into collaborative green lease arrangements to deliver energy and carbon savings can have mutual benefits for both parties and it is becoming increasingly common to see organisations trying to think ahead to co-develop opportunities. Likewise data sharing arrangements as both parties seek to understand their assets, improve performance and be able to disclose these to the market.
Environmental
Net Zero Emissions / Energy / Waste Management / Active Travel / Biodiversity
Social
Health & Wellbeing / Jobs & Skills / Innovations & Partnerships / Social Value / Charity
Governance
Corporate Structure / Transparency / Equality & Diversity / Supply Chain Management / Corporate Reporting and Disclosure
Financing ESG
A question that frequently gets asked is who pays for ESG commitments? The answer to that is there are definitely shades of grey, however there are a few general principles. Landlords will often be required to pay or fund for house level governance, benchmarking, strategy and may choose to invest in audits, building certifications or efficiency works or social programmes for their sites.
Occupiers also can be made to pick up costs where there may be opportunities to utilise existing service charge arrangements – for example these are typically in areas where the occupier is deemed to benefit from the expense (examples could include energy or waste auditing, efficiency projects, landscaping and placemaking). Dovetailing with landlord-tenant collaboration – the opportunity to share costs of improvements also can deliver benefits to both parties. Increased fund performance for the investor and increased asset improvement and efficiency at site level.
Our Approach to Delivering ESG
At Savills, we are working alongside a number of investors to deliver ESG programmes on the ground at retail schemes across the UK. Our sustainability team has experts in the field and is working with a number of national and international retail specialists including The Crown Estate, Landsec, Schroders and Nuveen.
