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Forever greener? More laws to combat climate change

Posted on 06 November 2019

The real estate sector is responsible for more than 20% of the world’s carbon emissions, according to the 2016 World Economic Forum report.

The past decade has already seen unprecedented efforts by lawmakers to reverse this, but at a time when school children are making the world sit up and pay attention to climate change, it is not surprising that more legal duties are on the horizon. This month we report on two of these:

  • New proposals to beef up the minimum energy efficiency requirement, known as "MEES", which prevents landlords renting out properties with a poor energy rating.
  • A looming deadline for large companies to audit their energy use under the Energy Savings Opportunity Scheme (ESOS), and report their results.

The Minimum Energy Efficiency Standard

MEES has been in force since April 2018. These regulations mean that a landlord cannot now let a property with an EPC rating of F or G, unless an exemption applies.

In March 2019, the Estates Gazette published useful data on the impact of MEES:

  • Up to April 2018, 16.4% of all EPCs were below the minimum standard.
  • In contrast, by December 2018 this had fallen to just 4% of all new EPCs, which sounds encouraging, but …
  • … the number of E grade properties (the minimum legal level) rose to a record high of 19.6%. So some buildings may have narrowly scraped into an E grade with fairly minor improvements.

However, the government has always made clear its intention to raise the EPC rating from the current E threshold, and recently announced a consultation to address this. Its preferred long-term target is for all commercial properties to achieve an EPC rating of B by 2030, provided the works are cost-effective. An alternative proposal is to achieve a rating of C by the same date.

The consultation estimates that an EPC B trajectory would bring 85% of buildings into the scope of MEES, compared with 42% of buildings under a grade C trajectory.

The government is also consulting on whether to have a single target date in 2030 for achieving the higher rating, or gradually increasing the minimum standard until it reaches an EPC B (or C) by 2030. The latter could involve, for example, a minimum grade D by 2024 and grade C by 2028.

Although larger landlords have publicly committed to sustainability policies, there could be resistance in some quarters of the real estate industry. Some landlords may see a jump to a B rating as too much or too expensive. Although office tenants are increasingly calling for greener buildings which can make energy improvements a worthwhile investment, this may not always be true for industrial and even some retail properties.

The "ESOS" reporting scheme

Another environmental scheme with a four letter acronym is ESOS. The "Energy Savings Opportunity Scheme" came into force some years ago. Back in 2015, we summarised the main provisions of the scheme in Real Insights ahead of the deadline for the first compliance period.

To recap, ESOS applies to any UK undertaking which:

  • employs at least 250 people; or
  • has an annual turnover over €50m AND a balance sheet total in excess of €43m; or
  • is part of a corporate group where at least one UK member satisfies either of the tests set out above.

If ESOS applies, the organisation is required to carry out an energy audit of its business. There is no obligation to implement any recommendations identified in the audit, but the idea is that the pressure of publicity will spur responsible organisations to improve their performance. In future, implementing the recommendations may become mandatory.

Four years on, the deadline for the second compliance period is looming. Qualifying organisations have until 5 December 2019 to carry out their energy audit and notify the Environment Agency.

The Environment Agency published a name and shame register of over 30 companies who failed to comply with ESOS first time round. The maximum penalty imposed was £45,000, so not a huge sum for a large company, but the public relations implications cannot be ignored.

Although ESOS is an EU project, we would not bet on the UK abolishing these rules even if there is a no-deal Brexit, given the current climate.

 

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