Environmental concerns and sustainability are high up the political agenda, not least for private landlords.
However, ESG, short for Environmental, Social and Governance, is more than just the environment. It’s a way of assessing an organisation’s impact on society and the environment, and how transparent and accountable it is.
For landlords, the societal aspect is key, as people live in our properties. Put simply, if landlords don’t provide decent homes, this might result in someone’s poor health or even death. We have legal, moral and social responsibilities to provide safe, decent homes for people to live in.
In this blog post, I argue why ESG and sustainability are priorities for all landlords – big, small, private and social.
ESG for Landlords at a Glance
What is ESG?
The term ESG was coined by British law firm Freshfields in their 2005 report for the UN Environment Programme Initiative, which paved the way for ESG investing.
Institutional investors now routinely integrate environmental, social and governance issues into their investment decision-making and ownership practices. This in turn has encouraged companies incorporate ESG factors in their strategic planning, in order to attract more investors.
ESG is a flexible concept that can be adapted to different industries. This is because it’s not only about the principles, but also about how to apply them in practice in a given sector.
It’s now routine for large companies to produce a sustainability or ESG report using different metrics. For example, many companies adopt the UN Global Compact and/or the 17 UN Sustainability Goals methodology.
In property, the European Public Real Estate Association (EPRA) has detailed ESG sustainability metrics for listed real estate companies to report against. The British Property Federation has published a guide to the myriad of different frameworks and accreditation systems for the institutional PRS.
ESG reporting has certainly become big business. But the essence of building a sustainable business with solid ESG foundations is more than reporting. It’s about applying these principles in practice.
ESG and the Private Rented Sector
Let’s look at how to apply ESG to landlords in the PRS.
The PRS is very diverse, with 82% of English landlords owning under 5 properties. However, the remaining 18% of landlords who own 5 or more properties represent 48% of tenancies. (Source: English Private Landlord Survey 2021). UK’s largest private landlord, Grainger plc, is a FTSE 250 company with almost 10,000 properties.
Clearly there can’t be a one size fits all approach for ESG and sustainability in the PRS.
Large listed companies have resources to develop and integrate formal ESG policies into their business strategy.
For instance, Grainger embeds its approach to ESG in its “sustainability strategic pillars”. It has adopted the EPRA sustainability metrics, and reports against them in an annual Sustainability Performance Measures Report.
On the other hand, the average private landlord with a couple of properties doesn’t need detailed ESG reporting. Nevertheless, they can and should consider ESG matters when sourcing, refurbishing, maintaining and managing their portfolio.
ESG for Landlords: Environmental Factors
1. Energy efficiency
Of all the ESG factors, the energy efficiency aspect of environment has received the most attention by landlords in the PRS. This is because rental properties currently need a minimum energy efficiency of EPC Band E. Also, the increase in the price of heating has caused renters to value energy efficiency.
There are pending proposals to increase the minimum standard to EPC Band C by 2025 for new tenancies. That said, as the delays in the legislation have been so long, the date is likely to be pushed back to 2028, and maybe even watered down. Michael Gove was quoted in The Daily Telegraph on 22 July 2023 as wanting to “relax the rules” and also that “we should relax the pace that’s been set for people in the private rented sector, particularly because many of them are currently facing a big capital outlay in order to improve that efficiency.”
Whatever the date and transition arrangements, upgrading to an EPC Band C for those properties with a D or E rating would require significant investment. Particularly because 39% of homes in the PRS have an EPC C. (Source: English Housing Survey 2021). The PRS is in a state of limbo due to the radio silence from the government in parliament about the future of this proposal, and whether the EPC scoring will continue to favour gas boilers over electric, given they have higher carbon emissions.
However, property investor Thomas Conneely of East Twenty cautions against waiting until the EPC proposals come into force, when it comes to insulation. Instead, they should take the opportunity to improve sustainability and energy efficiency when the opportunity presents itself. For example, it’s a good time to improve insulation during refurbishment, even though it’s not currently a legal requirement.
Not only is it more cost effective to include during refurbishment, it’s simpler when the property is empty. Also, leaving it until the law changes is likely to mean a bigger bill, due to supply and demand. Contractors are bound to be difficult to secure, as anyone trying to book an EICR in 2019-20 will remember! And materials will only increase because of inflation.
Improving the energy efficiency of a property contributes to a more sustainable private rented sector. It’s part of being a good steward of assets, and in turn, a good landlord.
Of course, environment is more than energy efficiency. A bigger issue is decarbonisation, and moving towards the target of Net Zero by 2050.
According to the Climate Change Committee, 16% of greenhouse gas (GHG) emissions in the UK come from residential properties. The main source of GHG is the use of gas for heating and cooking.
Some of the larger landlords like Grainger have targets to achieve net zero carbon by 2030. These targets are part of the ESG element of their Annual Bonus Plan? That said, ESG is only one of 6 non-financial objectives, which themselves only make up 30% of the bonus opportunity. (See page 94 Grainger 2022 Annual Report).
However, the existing housing stock is where the biggest challenge lies for decarbonisation. The graph below shows that the carbon foot print of existing dwellings is more than double that of new builds.
There’s also a significant difference in the emissions between London and the rest of England and Wales. A possible explanation is that the higher value properties attract more investment in reducing carbon emissions, as refurbishments are more extensive and extensions more common.
3. Waste management
However, there are lots of simple things that individual private landlords can do to reduce their carbon footprint. This is particularly true during refurbishment.
There’s a lot of waste, and property investors should think twice before pulling out bathrooms and kitchens that are in good order. In my last project, I kept the basin, toilets, shower and bath, and just replaced the taps. This meant less in land fill and a lower environmental impact.
Thomas Conneely says that the industry is working on reducing the amount of waste going into landfill and increasing recycling. It’s important to think about waste when buying a new build or refurbishing a property.
4. Outside space
Why is it that gardens of many rented properties end up looking like the one above? This is the “before” picture of what the garden looked like of a property I bought in 2022.
It was a depressing place for the renters. They didn’t like to spend time out there, and only used the space to dry washing. They didn’t bother looking after the garden because it wasn’t a garden. It was a wasteland.
Why astroturf isn’t a good option
Many landlords will pave it cheaply, or cover it in astroturf, like the north-facing garden of an Airbnb I stayed in. On the plus side it’s somewhere to sit outside, but it’s not environmentally friendly. It’s a sterile environment where no birds or insects can live in.
Astroturf is bad for the environment. It’s made out of polypropylene or nylon (polyamide). Fragments can make their way into the soil, as microplastic pollution. The life span is around 10-20 years and it’s difficult to reuse or recycle. Astroturf also does get grubby, and it needs to be swept regularly so leaves don’t form a slippery mush on top.
Be careful about too much paving
Paving forms an impermeable surface, unless gaps are left between the paving slaps. This can create problems with run-off, and increase the risk of flash-flooding, because it can’t absorb rainfall like soil and plants.
The rain has to go somewhere, and if drainage isn’t taken into account, it can end up permeating the building and cause damp. It also contributes to the amount of water in storm drains.
A more environmentally friendly approach
A more environmentally conscious approach is to put in good quality turf, and simple low maintenance beds, using railway sleepers and wood chipping.
Here is a photo of the raised bed I put in at the end of the “wasteland” garden shown above. I returfed the garden, and planted hardy shrubs, seasonal bulbs and a small apple tree in the slamm raised bed. Not only is that better for the environment, but it helps to improve renter well-being as they have a nice outside space to enjoy.
ESG for Landlords: Social Factors
The social aspect of ESG tends to attract less attention than the environmental, but it underpins everything. It refers to the extent to which businesses interact with people fairly and ethically, with care for their wellbeing. This includes their employees, customers, suppliers and the wider community.
For landlords, the primary focus is how our actions impact our renters, who live in homes we provide. According to the British Property Federation, it’s all about “high quality, sustainable, affordable and functional places to live.”
No-one can fail to be moved by the death of toddler Awaab Ishak as a result of conditions in the social housing flat where he lived. The Coroner’s Report states that his death was “entirely due to the prolonged exposure he had to mould in his home environment.” The coroner also found that the landlord, Rochdale Boroughwide Housing, should have taken “a more proactive […] response to treat the mould which was present and [taken] steps to prevent its re-occurrence.”
There was no extractor fan in the kitchen despite the mould shown in the photo above. The extractor in the bathroom wasn’t working properly. Bureaucracy, poor decision-making and victim-blaming at the housing association meant that the source of the mould was never dealt with.
Shockingly, the 2020 ESG Report of Rochdale Boroughwide Housing claimed it listened and responded to the needs of its tenants, and that 100% of its homes met the Decent Housing Standard. The section on social factors just discussed gas safety certificates and fire risk assessments and didn’t mention damp and mould as risk factors.
Their ESG report was a tick box exercise that failed to address the real social question: the safety of the people who live in its housing.
I know margins are tight and mould can be tricky to deal with, but landlords need to work with renters to keep them safe. This means assessing the real risks, and working to minimise them.
The first rule for landlords should be, like doctors, “first do no harm”. We need to have the safety of our renters at the heart of our decision-making.
ESG for Landlords: Good Governance
The final strand, governance refers to making decisions: the internal system of practices, controls and procedures that help organisations make effective decisions and comply with the law.
It’s about making sure it acts ethically and responsibly. For instance, are its accounts accurate and transparent, is its leadership diverse, is there accountability, how does it manage risk.
For the average private landlord, who won’t have a complex corporate structure, governance largely means complying with the law. In other words, understanding the laws, and putting systems in place to ensure that they are followed. Not only does this include the various landlord responsibilities, but also registering with the ICO, wider data privacy laws, tax laws, property law etc.
This is a tall order for any small business, let alone an individual sole trader.
My advice as a former lawyer, and a current landlord, is to become an NRLA accredited landlord. The core Landlord Fundamentals module provides a good guide to the key obligations. Also, there’s a help line for other matters which can provide a different perspective on issues.
Lastly, when making decisions, good governance is about taking into account feedback from “key stakeholders”. For private landlords, this means speaking to our renters often, so that we understand their perspective and how to improve their experience of renting.
Being a landlord carries great responsibility for the safety of renters, in a context of low margins, rising costs and more regulation. The vast majority do provide good quality homes for renters, despite the challenges.
Nevertheless, ESG is key to help private landlords make the right decisions to build and manage a sustainable portfolio of safe and decent homes for renters.