ESG, Sustainability, and “Green” Leases

It is impossible to ignore the climate change issue. But what does it mean for the future of commercial leasing arrangements in NZ?

More and more businesses, particularly big corporates, are making their own environmental, social and governance (ESG), sustainability and net zero carbon (NZC) commitments, as they look to contribute to the climate issue. Buildings can create significant emissions through their use by the owner and the occupants. As more and more businesses look to turn their ESG, sustainability and carbon commitments into actions, some will look to align and integrate this into site selection decisions and leasing commitments. Some will look to implement “green” leases to help them achieve their targets.

What is a Green Lease?

A “green” lease is a lease that includes clauses that set out environmental objectives on how a building is to be managed and/or occupied in a sustainable manner and are regarded as essential to establishing landlord and tenant alignment on sustainability initiatives.

Green lease clauses first emerged over 15 years ago. Historically, they have been owner-led, with obligations mainly imposed on the occupier to preserve a buildings “green building” certification. Increasingly, it is anticipated that green leases will become occupier led.

A recent survey by JLL of over 300 corporates in the Asia Pacific region found that:

• the adoption of green leases (within that survey group) is set to double by 2025;

• of those surveyed, 65% think green leases will replace conventional leases by 2025;

• data sharing (77%), energy efficiency (70%) and waste management (65%) are the top clauses included in green leases, making them focused only on the “E” of ESG;

• moving forward more corporates will also be wanting social and governance clauses, widening the scope from green leases to “responsible” leases.

Admittedly, this will seem a long way from the reality that most building owners and managers around NZ are, or will, experience. However, for some, particularly those wanting to retain or secure major tenants, green or responsible lease clauses are something to be aware of.

Benefits to Owners

Of course, there are benefits to building owners for incorporating green lease initiatives into their leases too. With agents reporting a “flight to quality” dynamic, owners who embrace sustainability initiatives may see the benefits through lower vacancies, higher rents, and increased asset values. Also, for building owners with their own environmental objectives, recognising that the owner and the occupier are responsible for a building’s impact, the lease provides the basis to ensure both parties are made accountable. Accessing lower financing costs through “sustainable finance” offerings that most banks are now providing is another potential benefit for owners.

What can Green Lease Clauses Cover?

Some examples of what green lease clauses can be drafted to cover are:

• Sharing of data on energy, water and waste

• Waste management and recycling obligations

• Adopting building performance goals

• Lowering emissions / electrification strategies

• Commitment to energy efficient fitouts

• Commitment to renewable energy procurement

• Submetering to track energy usage

• Installation of EV charging stations

• Amortising cost of energy reducing capital improvements as an Operating Expense

• Carbon and /or energy targets

• Collaboration to ensure ESG performance

The greatest opportunity for an owner or a tenant to exercise the most impact or influence over sustainability initiatives and collaboration is when negotiating a new lease or the renewal of an existing lease. Outside of one of those lease events it is likely to be much more difficult, although not altogether impossible.