Don’t judge an office by its emissions

Over the past year, an interesting resistance to ESG principles has been taking place in the US investment domain.

In a stark U-turn from 2020, when corporate America and investors scrambled to follow the lead of the world’s largest money manager Blackrock CEO Larry Fink, who’d pledged to put “sustainability at the centre” of its investment approach, many businesses and investors have quietly stepped away from climate pledges, sustainability agreements, and equity programs. In Europe meanwhile, funds have continued to promote their efforts to reach net-zero greenhouse gas emissions as quickly as possible.

The role of ESG, which was perhaps the most influential force in finance over the past few years, is now on uncertain footing. As geopolitical volatility and high interest rates have challenged many businesses, investors have become uncertain whether ESG is a necessity or a luxury. Clients demand returns and certainty, and other considerations have increasingly been seen as a hindrance to that. In the meanwhile, existing CSR efforts have been treated with a rising indifference, often regarded as token gestures rather than substantive policy changes.

During these parsimonious and uncertain times, investors must think hard about how to balance both their responsibilities to the environment and their commitments to stakeholders. Castleforge remains confident that ESG considerations will continue to play a significant role in the commercial real estate sector, particularly in terms of office spaces. At the same time, we must recognise that the viability of an office asset hinges on more than just its carbon footprint. While ESG is important, it is not the sole determinant of viability or success.

Equating an office asset's financial viability solely with its carbon footprint overlooks several critical factors. Assuming that tenants will only occupy "ESG-positive" buildings disregards the everyday interests of employees and businesses. Employees rarely consider their office’s carbon emissions. LEED or BREEAM certifications won't influence their views on return-to-office policies if their commute is treacherous, or if their office location lacks after-work amenities.

Business owners, on the other hand, prioritise affordable rents and employee engagement. While carbon-neutral office spaces are desirable, in the current macroeconomic climate, business owners are only willing to pay a limited premium for them. Investors risk missing out on these crucial practical factors when assessing office spaces by focusing narrowly on one-word ratings such as “Gold” or “Outstanding”. Overlooking aspects like floor layout, location, and amenities can significantly impact an office asset's investment potential. This narrow focus can leave viable offices underutilised, which is detrimental to the environment, cities, and investors themselves.

It is therefore vital to explore ways investors can maximise building value through operations, amenities, and hospitality improvements. Office spaces with lower ratings often trade at a discount, and investors should consider how potential savings can be effectively used to reduce carbon footprints, enhance experiences, and increase asset value.

This is the approach that guides our flagship redevelopments of Uno and 75 London Wall. Both sit in prime locations and were already high-quality spaces, but by ensuring that both buildings satisfy the highest available ESG standards and offer best-in-class amenities we can create spaces that are attractive flagship locations for globally renowned blue-chip occupiers.

Despite recent hardships, ESG is here to stay. However, investors should not fall victim to credentials alone when choosing which projects to undertake. ESG criteria are just one part of a complex puzzle that developers must solve to satisfy the ever-growing needs of today’s office tenants.