With the increasing push towards greener business operations, many companies are factoring these considerations into their policies and lease contracts. Investors and lenders often assess a business’s long-term prospects based on whether the company addresses specific environmental, social and governance (ESG) as part of their corporate dealings. Higher ESG performance can reduce operating costs and improve property and asset valuations.
Wofsey Rosen’s business transactions team presents this overview of how ESG clauses are utilized in commercial lease agreements for our corporate and commercial clients, as well as those who may need our guidance in including ESG for their future endeavors.
Breaking Down What ESG Means and Means for Your Company’s Lease Agreements
According to the Equipment Leasing & Finance Foundation, ESG monitoring and reporting has been a part of many industries for several years. Recent global events, including climate change, the COVID-19 pandemic, and social unrest, have accelerated the need for transparency and accountability so lessees fully understand the priorities of commercial leasing providers. ESG isn’t just a public relations technique – it’s a critical measure of corporate dedication to its communities, countries, and planet.
Shareholders also expect greater attention to global concerns. They know that a stricter focus on improving the environment and industries overall will reap greater benefits for themselves and companies as a whole. Let’s examine what each part of the ESG acronym is:
E is for Environment
Commercial building owners must follow codes to ensure their properties are safe and meet standards set by their state construction agency, such as the Connecticut State Building Code. Once they begin leasing, they must maintain it properly and repair or rebuild it when needed. By adding ESG clauses in their commercial leasing agreements, owners can improve their contribution to the environment through collecting and reporting data on:
- Cost allocation for energy-efficient initiatives
- Energy use in the building, as well as rectifiable waste opportunities
- Limitations or prohibitions against tenant operations that would negatively affect the environmental and energy initiatives.
- Tenant waste management, including composting or recycling programs
- Toxicity and environmental friendliness of cleaning products
- Use, monitoring, maintenance, and seasonal cycling for lighting, heating, and AC systems
While it’s advisable to include appropriate certification requirements, such as LEED or BOMA BEST, building owners should take a measured approach to quickly accommodating evolving environmental standards.
SG Stands for Social & Governance
Social and governance aspects of ESG are less commonly incorporated into lease agreements but are becoming more important to investors, lenders and tenants in evaluating a company’s community and market presence. By establishing positive associations with a business’s brand, executives can build goodwill and attract forward-thinking tenants and business partners. Social and governance factors include:
- Employee health
- Human rights acknowledgment and support
- Anti-discrimination policies
- Safety and well-being for tenants and the public
- Employee compensation and benefits
- Diversity, equity, and inclusion considerations
- Corporate policies, programs, and training on these aspects
According to Capital Group’s ESG Global Study, half of all respondents intend to commit more resources to multi-thematic approaches to ESG. In the past, some companies feared being accused of “greenwashing” or issuing statements about ESG concerns without actually walking the walk. Those days appear to be fading as extreme weather events, global upheaval, and economic concerns motivate businesses to use every tool at their disposal to succeed.
How AI May Impact Data Collection and Other Aspects of ESG Efforts
Many business owners are using AI (artificial intelligence) to assist in ESG efforts. The use of AI in this context is not without challenges. Some of these challenges are caused by the fact that the computers that generate AI require extensive power and water resources to operate. The Capital Group study cited above names the following topics as primary concerns with the use of AI:
- Labor compensation and benefits
- Pollution mitigation efforts
- Data privacy
- Greenhouse emissions
- Anti-competitive practices
- Supply chain risks
On the positive side, AI may benefit ESG initiatives by improving the speed and breadth of data collection and analysis. It can also aid companies in these areas:
- Validating data to qualify ESG efforts
- Analyzing public impressions regarding the company’s ESG presence
- Predicting future trends and emerging risks
- Identifying new ESG opportunities
- Assessing and collating legislative and regulatory changes across jurisdictions
While AI is a tempting companion to give a boost to ESG programs, it remains a growing area that has yet to fully meet its promise. Understanding how it could be useful to your business in the implementation of ESG clauses for commercial real estate can be challenging without experienced and knowledgeable advisors.
Contact Us Today to Discuss How ESG May Benefit Your Commercial Lease Agreements
Whether your company is new to ESG clauses or has maintained them for years, you may need guidance from experienced business transaction and contract lawyers to ensure you’re meeting your desired goals. As regulations evolve and other critical factors change, your company can benefit from regular maintenance to ensure compliance, growth, lowered operating costs, and lessee retention.
Feel free to contact a Wofsey Rosen lawyer to discuss ESG matters, and any other issues pertaining to the drafting and negotiation of real estate contracts and leases, or land use and landlord tenant matters and disputes.