How Hong Kong’s landlords can work with companies to better achieve ESG and carbon goals

Hashing out a memorandum of understanding allows the setting of more ambitious, flexible and long-term targets, compared to fixed green leases
By adopting ‘ESG as a service’, landlords can make buildings greener, attract tenants committed to sustainability, and differentiate themselves in a competitive market

Neil AndersonandMark Lam

Published: 3:30am, 9 Aug 2023

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The Hong Kong government has set an ambitious target to reduce its carbon intensity by 65-70 per cent by 2030 compared with 2005. Given that buildings consume 90 per cent of the city’s electricity, it’s clear that landlords – and their tenants – must work together if Hong Kong is to reach its goals and become a more sustainable city.

Fortunately, there has been growing momentum from developers and tenants to prioritise sustainability and environmental, social and corporate governance (ESG) considerations when selecting properties to lease.

Over the past two years we have noticed tenants placing a high priority on sustainability and ESG considerations when selecting properties to lease. They expect deeper collaboration with landlords on sustainability initiatives, including energy efficiency, waste management and green building certifications.

For example, when Hongkong Land initiated a pilot project for its Green Fit-Out and Operation Recognition Scheme, we expected only a few tenants to participate. When word got out, we received more than 30 requests to join the scheme.

Tenants now see their office space not just as a necessity, but as part of the company’s ESG strategy and employee wellness programmes, and they’re willing to pay for the service. According to consultancy JLL, Grade A office buildings in Hong Kong with green certification can charge rental fees up to 28 per cent higher.

Some people have called for green leases with legally binding clauses that compel landlords and tenants to comply with specific year-on-year targets or face penalties. But one problem with such contracts is that conditions beyond the signee’s control can have a huge impact on performance.

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For example, energy use could dip one year due to an economic downturn or a pandemic that forces people to work from home, then skyrocket the next year due to extreme weather. In practice, this encourages landlords and tenants to set lower goals to avoid the threat of painful penalties.

Instead, we have found that when tenants and landlords work from a memorandum of understanding, they are able to set more ambitious, flexible and long-term targets together.

Likewise, contractually obliged targets encourage short-term thinking, with resources focused on hitting each year’s target at the expense of deploying solutions with a longer payback period.

That’s why, for example, the Hong Kong government has set its carbon neutrality target for 2050, and other major global decarbonisation targets have been set even later. Working from a foundation of partnership, as embodied in an MOU between landlord and tenant, allows both parties to strive for meaningful sustainability.

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Landlords can provide a wide range of ESG services to help tenants achieve their sustainability goals. Energy efficiency upgrades in lighting, solar panels, artificial intelligence-based energy management platforms, climate control systems, insulation and weatherisation improvements, are examples of the services landlords are best-positioned to provide.

While some of these solutions can be implemented by tenants, in most cases it’s easier, cheaper and more effective for the landlord to take a whole-building approach. Landlords can also implement recycling and reuse programmes, and provide composting facilities to encourage tenants to reduce waste and promote sustainability.

Landlords can also help tenants achieve green building certifications, such as the Leadership in Energy & Environmental Design (LEED) rating system or Building Environmental Assessment Method (BEAM) Plus. By pursuing these certifications, landlords can show their commitment to sustainability and differentiate themselves in a competitive market, while also helping tenants achieve their ESG goals and reporting requirements.

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For landlords and tenants as well as the Hong Kong government to hit their carbon reduction targets, the existing stock of buildings must be made to operate as sustainably as possible. The reality is that most buildings that will be operating well into the late 2030s and 2040s have been built.

By adopting an “ESG as a service” model, landlords can make buildings greener, attract and retain tenants committed to sustainability, and differentiate themselves in a competitive market.

Collaboration between tenants and landlords is crucial to achieving sustainability outcomes and driving business success. By working together, positive outcomes can be achieved for all stakeholders, including cost savings, improved ESG performance and higher market value.

Neil Anderson is director and head of the office of commercial property Hong Kong at Hongkong Land

Mark Lam is head of investor relations and corporate sustainability at Hongkong Land

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