Blog May 21, 2021

Why ESG and green lease clauses matter for your property

By Chris Vroman

While the concept of sustainability once served as little more than a marketing ploy for commercial landlords, with special plaques and wall-hung certificates to mark a company’s “green footprint,” it now serves as a critical factor in the formation of the lease. According to research from Savills Investment Management, institutional investors believe that green lease clauses will become universally implemented by 2026. But how exactly is the sustainability of a property measured? And what makes sustainability valuable? The answers to these questions revolve around the concept of how properties operate on an environmental, social, and corporate level.

What is ESG?

When commercial landlords or tenants enter into leases, those contracts can include “green clauses” that set sustainability requirements based on the property’s environmental, social and corporate governance (ESG). For example, landlords could agree with tenants to fit a space with environmentally sound equipment, such as energy-saving light fixtures, or use socially responsible processes and procedures.

ESG isn’t about making “eco-friendly” pledges that lack actionable plans or concrete steps on how to achieve that standing – it’s about setting guidelines for sustainability within a lease and then remaining in compliance with those standards by benchmarking your progress.

Why ESG is important for the future of commercial properties

ESG has seen a rise in popularity of the past several years, and trends are pointing to a future where most investors in commercial properties will require landlords and tenants to establish “green clauses” in their leases. The value they see in ESG is multi-pronged.

  • Avoiding waste (and wasted money). In addition to protecting the environment, monitoring utility usage can help point out where money is being left on the table through unnecessary use. Sink faucets designed to conserve water save investors’ money on water bills for that property.
  • Driving value to workspaces. As today’s workforce gets younger and younger, sustainability is top of mind for employees everywhere. Additionally, as companies seek to empower their employees and reinvent the workplace, properties that meet and maintain certain certifications based around ESG laid out in leases will be more attractive to tenants.

Sustainability is more important than ever to commercial property owners, their tenants and their investors. While landlords and tenants may be able to establish ESG within the lease, maintaining those requirements can be a challenge, especially when it comes to applying for sustainability certifications. MRI Contract Intelligence has a unique experience and pre-trained algorithms to identify green clauses and allow landlords and tenants to quickly identify and act on this data to help inform and drive ESG strategy. Learn more about MRI Contract Intelligence.

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