New carbon reduction legislation is about to put the green agenda back in the spotlight. But will the costs outweigh the benefits, asks Liz Morrell

As little as a year ago the green issue was top of boardroom agendas for retailers and developers alike. But for some, as the economic downturn has taken hold, sustainability has slipped down the priority list. However, the business efficiencies it can drive can be vital in today’s cost-cutting world.

The introduction of two pieces of legislation – the Carbon Reduction Commitment (CRC) and Energy Performance Certificates (EPCs) – will help focus the matter.

The latter were launched in April to measure the energy efficiency of buildings. David Symons, director of sustainability consultancy WSP Environment & Energy, says: “The concept behind EPCs is fantastic because they are a way of providing good information on energy performance when a retailer is looking to lease or buy a building.” But, adds Symons: “The guidance on producing an EPC is relatively weak, which has allowed the quality of them to fall.”

Land Securities environmental director Dave Farebrother says he has witnessed different EPC consultants awarding different energy efficiency gradings to near-identical neighbouring units in his centres. Many would like Display Energy Certificates, which measure the actual usage of a building, to be introduced instead.

CRC – a cap and trade scheme that  will force the biggest users of energy to pay for their carbon emissions – will be introduced from next April. But most retailers and landlords already says they are focused on saving energy and emissions, and worry the scheme will divert vital cash and attention away from where it is really needed.

Farebrother says Land Securities has cut its level of CO2 emissions by 28 per cent over the past four years. “I’m not sure we need CRC to achieve anything extra. We are being encouraged to do something we have already been doing and will have to pay more for it.”

He adds that the administration costs of CRC alone will be a six figure sum for Land Securities. All major centre landlords will be affected, while any retailer with more than 120 stores is also likely to be liable. Symons estimates the cost will be a minimum of £76,000. A typical high street retailer will pay £500,000, while the UK’s retail giants will be out of pocket to the tune of about £1m. “You will get the money back with the recycling payments, but finding the cash is going to be the key issue,” says Symons.

There is also the question of who will bear the initial cost, because unless a retailer’s lease allows it, landlords will not automatically be able to bill the tenant. Farebrother says: “For a lot of our centres the only energy we buy is for the common areas, but for some of our centres we are buying energy and charging retailers through their service charge.”

Even if leases do allow the recovery of such costs, landlords will face the dilemma of whether they really can afford to charge their tenants. David Leedham, partner in real estate at law firm Speechly Bircham, says: “Do you want to pass on the extra cost when trying to get tenants in is already hard, rent reviews will be affected and you will get tenant kickback?”.

Organisations including the British Property Federation (BPF), British Retail Consortium and BCSC have collaborated on the Carbon Reduction Commitment – a Guide for Landlords and Tenants, which suggests how the costs and benefits of the scheme could be split. However, it is only a guide.

Jeremy Collins, John Lewis head of retail development and president of the BCSC, says: “The problem that is likely to emerge is there isn’t going to be a legal framework in which this new financial mechanism can be legally distributed between landlord and tenants. It will require landlords and occupiers to co-operate with each other. When it comes to transferring the potential cost, that is going to be quite a contentious issue.”

Developers and landlords admit they might simply be forced to absorb the cost but, again, the complexities of CRC mean even this is not as easy as it sounds. CRC will include a league table that will rank retailers and shopping centres as to how they have fared in terms of reducing energy use. However, many are against the idea. Farebrother says: “A tradable permit system simply says: ‘Is it cheaper for me to reduce my carbon or pay you to reduce yours?’
A league table has no place.”

But, says Leedham: “A lot of businesses are based on reputation, so for them a league table is important.”

With the CRC consultation period only just ended, some retailers are still adopting a wait and see approach, but it is a dangerous game. At John Lewis,
Collins says there has been an internal team focused on CRC for the past couple of years. “It will have an impact on our business in terms of cash flow and we are working on how we manage that while also ensuring it doesn’t distract us from a whole raft of energy saving measures that include how we procure energy, to other measures such as the design and materials we use.”

However, smaller retailers are likely to struggle. BPF senior policy director Patrick Brown says: “There is a lack of awareness that this is coming.”

Of course, the biggest impact is that both retailers and landlords will be more accountable for their energy usage, which will prompt both parties to place more demands on each other. British Land sustainable development executive Sarah Cary says: “For the larger retailers like M&S and Next, CRC could be quite painful so we are going to see stronger demand for buildings that are more energy efficient.” Equally, the landlords will want their tenants to be as energy efficient as possible because of the scale of landlords’ liability. “Of our CRC carbon exposure around a quarter is controlled by us – the other three quarters is tenant consumption that we have no control over,” Cary explains.

Shopping centre design and day-to-day operations are changing as all parties strive to reduce their energy usage. Many changes are simple but effective measures, such as turning down heating levels and naturally lighting and ventilating areas where possible. Hammerson head of sustainability Paul Edwards says: “We spent £1.4m on sustainable investments last year and they will pay back in 12 months to two years. For example, changing the tubes in our lights in our car parks reduced those carbon emissions by 35 per cent.”

Landlords and developers are also giving practical assistance. Thecentre:MK shopping centre in Milton Keynes was recently rated the highest retail-related company in The Sunday Times Green List at position 13. Centre director Robert Goodman says it is carrying out water consumption and energy audits with its retailers, and it also has a lights-off pledge.

Land Securities last year rolled out a best practice retail operations sustainability guide to its centre managers and will shortly launch a carbon fit-out guide for smaller retailers as well as free energy advice for its independent tenants. Hammerson is doing the same and offered the use of consultants on sustainability for recent developments such as Bristol’s Cabot Circus. Edwards says: “There are tenants like Boots and M&S that are charging ahead with this and are very proactive but there are other retailers that aren’t moving quite so fast.”

Joel Quintal, sustainability and environment manager at Prupim, says his company has been addressing the challenges of sustainability for some time. “We are implementing waste strategies to reduce the volumes of construction waste during development projects and have also begun rolling out automatic metering which will allow us to better monitor energy consumption.”

The new legislation is forcing change all round as retailers demand more sustainable buildings and developers attempt to deliver them. But CRC highlights bigger issues in terms of economics and sustainability. In an era of volatile energy prices, leanness and greenness go hand in hand as store and centre designers want ever more environmentally sustainable developments.

As Quintal says: “Ultimately, retailers and real estate investment managers are in the same boat: public and regulatory scrutiny of what they do on a range of sustainability issues will simply not go away, and they need to address these issues for ethical, financial and reputation reasons.” Being green is creeping up the boardroom agenda once more.

5,000

The number of businesses affected by the Carbon Reduction Commitment

£1m

The potential cost to the largest retailers of meeting obligations

The carbon reduction commitment explained

The Carbon Reduction Commitment (CRC) will be introduced next April. Around 5,000 businesses including large landlords and retailers will have to forecast emissions and buy allowances for these through a cap and trade scheme. After a three-year introductory phase, allowances will be auctioned – meaning their price could rise.

Although payments will be recycled, meaning the scheme will be revenue neutral, the UK’s largest retailers could have to find up to £1m to meet obligations and face penalties if they perform poorly in an associated league table.

CRC – A Guide for Landlords and Tenants can be downloaded at bpf.org.uk