As the UK transitions to Net Zero by 2050, the UK commercial property market is coming to a tipping point. Those involved – landlords, owners, surveyors – either follow the path to a low-carbon economy or face multiple climate-related risks that could threaten their business.
In this blog, we delve into the biggest risks businesses in the UK commercial property market face. A note of hope before we begin: while the following threats are very real and happening now, it’s a simple process to stay ahead of the curve and avoid all of these risks. To learn how to future proof your business, contact one of KGM’s advisors today.
In 2020 the World Economic Forum listed the top five global risks identified as ones related to environmental or climate- related.
- Extreme weather events
- Failure to adapt to climate change
- Man-made environmental damage
- Biodiversity and ecosystem loss
- Natural disasters.
What is the impact of the UK’s commercial property market on climate emissions?
UK Green Building Council estimates that the UK property market as a whole contributes to 42% of greenhouse gas emissions (GHG). The non-domestic property market currently accounts for 23% of UK GHG emissions.
A study in 2016 found that offices and retail were the top two energy consuming non-domestic sectors, followed by industrial, health and hospitality. These sectors accounted for 71% of total non-domestic energy consumption.
A look at the state of commercial property doesn’t make for good reading either. Due to the outdated nature of many buildings in the UK it is estimated that the average property holds an EPC rating of D with 18% rated as F or G – the worst for energy efficiency.
So what does this mean for risk to property businesses in the UK?
Climate change is a risk multiplayer and we divide into the following:
- A physical risk due to changing weather conditions (e.g. flooding)
- Liability risks from legal claims against the company
- Failure to transition to a Net Zero economy
Let’s start with:
The physical risk of climate change
These are impacts that a company might see as a result of damage caused by a change of weather conditions such as earthquakes, hurricanes, flooding, extreme heat. These are real and are happening now as seen with the following examples.
There are a few ways you can gauge potential physical damage on your property.
To check whether your property is susceptible to flooding in the future, use this government tool. You can also read this article detailing areas in the UK that are at risk.
Following COP26, The Cross Dependency Initiative, released a report of the commercial properties in the UK at risk from climate change issues. It details that 1.9 million properties are at risk from extreme weather that will:
“In some cases see reductions in property value raising the spectre of negative equity.”
Rohan Hamden, CEO said “Many large banks now have the capability to identify and therefore avoid addresses where extreme weather and worsening insurance costs could give rise to default risk.
“Without access to the same information, small and medium size lenders are potentially at risk of absorbing these assets, thus skewing the proportion of high risk addresses in their portfolio.”
You can read the full XDI report here including which areas of the UK face more challenges due to flooding, high winds, extreme heat and other weather changes. The report also outlines a list of preventative measures to take to reduce these risks:
- Assess risks to individual Mortgage Portfolios
- Require comprehensive insurance coverage for High-Risk properties
- Screen Incoming Mortgages as the Point of Sale
- Be proactive with building resilience in the portfolio rather than relying on insurers or government.
- Develop climate-ready products and policies
- Test Adaptation Strategies
- Prepare for Shareholder and RMBS Scrutiny under TCFD
Liability risks emerging from climate change
Liability risks cover the failure of corporations to take actions to reduce its impact on climate change, especially relating to businesses whose activities are high in CO2e emissions.
The same also applies to greenwashing – a term stuck to a business that is misrepresenting their carbon footprint and climate impact for their own gains.
The demand for climate change litigation is growing and will do so even more in the future. New legislation to protect the environment has opened up opportunities for litigation cases against companies, governments and even individuals.
In 2018, a historic ruling in Colombia saw a group of individuals from around the country sue the government for its deforestation exploits in the Amazon.
In 2012, the first ever Climate Change ruling against a company demanded that Shell reduce its carbon emissions.
Closer to home, the UK government was found guilty in court as its Net Zero strategy breached its own Climate Change Act.
Not only are high carbon emitting companies at risk, but those who claim to be “green” could also find themselves in court in the future. Though there have not been any high-profile greenwashing cases in the courts so far, it’s only a matter of time as businesses boast about their Net Zero plans and claim to be “green.”
In an interview with Compliance Week, Commercial Litigation partner Elaina Bailes said:
“There is currently no specific anti-greenwashing legislation in the UK. However, businesses falsely advertising products as ‘green’ or sustainable may be caught by existing laws including for misrepresentation or consumer protection laws which prevent false advertising.
“We can expect to see increased regulation across all sectors as the UK seeks to keep up with US and EU regulators in this sphere.”
Failure to transition to a low-carbon economy
No one wants to be left behind. But there is a very real risk of this for any business that does not go along with the UK in transitioning to a low-carbon economy.
You may have heard of a stranded asset? Well, this is when this comes into play as ignoring the country’s transition to net zero could deem your property no longer profitable and can indeed lose your business money.
Ignoring your company’s climate responsibility will also mean ignoring the public’s perception that climate change is important. This could lead to a decline in customer confidence and brand marketability.
Here are a few stats from Wrap.org
66% of people agree that businesses should do more to help customers reduce their own impact on climate change.
41% of customers want businesses to be transparent on climate targets so they can be held accountable.
40% of customers believe UK businesses should be working with each other to tackle climate change issues within their sector or industry.
The overall consensus is that customers demand that businesses are green and this trend is only going to increase in forcity. The same goes for employees.
In 2021, Corporate Climate Crisis report from PLAY, released a survey detailing employees and their demand for sustainability. The results were as follows:
Almost a third (29%) said they would not work for a company that profits from unsustainable practices.
78% of employees agree that companies should be more transparent about their environmental impact and how they need to improve.
The list of risks from remaining behind the curve on transitioning to a low-carbon economy is long. A few more examples would be:
- The failure to take advantage of tax breaks such as the super deduction.
- Shifting stakeholder opinions as they demand more sustainable practices.
- Failure to implement greener technologies or renewable energy sources like solar panels.
- Fall behind competitors who are taking climate change seriously.
- Been stuck with added taxes on carbon intensive practices.
To discover how to future proof your business against risks relating to climate change, arrange a free consultancy with KGM today.
