Having moderated a panel discussion on sustainable investment at UKREiiF, it’s clear that the conversation has evolved from whether we should invest in green assets to how we can afford not to.
The New Reality: Green is Good Business
The message from our panel was unequivocal: sustainable finance isn't a separate category anymore, it's simply finance. As Kazeem Afolabi from BBS Capital said during the panel, "when we're talking about sustainable finance, actually we're just talking about finance."
This shift is being driven by hard commercial realities and the changing investment landscape. Developers can now access cheaper financing, with spreads of up to 150 basis points, simply by meeting environmental criteria. More importantly, tenants are increasingly unwilling to occupy substandard buildings. In the office sector particularly, the post-COVID world has created a flight to quality where only the best-in-class buildings command prime rents.
The Stranded Asset Challenge
A key insight from our discussion was the scale of the retrofitting challenge. With 80% of buildings that will exist in 2050 already built today, the question isn't just about constructing new sustainable developments—it's about what happens to the existing stock.
Danielle Sheppard, Director and Head of Performance and Impact at Barwood Capital, highlighted the stark economics: "You could buy an office building in Milton Keynes for £100-120 per square foot, but you'd need to spend £240 per square foot to make it EPC A or B rated. With prime rents at £40 per square foot, it's simply not viable."
This viability gap is creating a two-tier market where buildings that can't be economically retrofitted risk becoming stranded assets. The implications for pension funds, insurance companies, and other institutional investors with significant property exposure are profound.
Scale and Maturity: Moving Beyond Niche
One of the key questions raised during our session was whether sustainable asset classes are mature enough for institutional investment. David Gardner, Chief Investment Officer, Forestry at Gresham House, manages £3.5 billion in forestry assets, provided a compelling case study. Whilst forestry has been perceived as niche in the UK, it's been a mainstream institutional asset class internationally for decades.
The UK market is catching up rapidly. What was once the preserve of high-net-worth individuals and family offices is now attracting serious institutional interest. The long-term, liability-matching characteristics of assets like forestry make them particularly attractive to pension funds seeking stable, inflation-protected returns.
The Carbon Conundrum
The carbon credit market remains one of the most complex aspects of sustainable investment. Whilst there's clear demand for local, credible carbon credits, the UK market is still in its infancy compared to more regulated markets like New Zealand and Australia.
The challenge, as our panel identified, is credibility. The reputational risk of being associated with poor-quality credits is enormous. This is driving a flight to quality, with investors increasingly focused on additionality and carbon sequestration rather than merely avoided emissions.
Policy: The Missing Piece
When asked what single change would most benefit the sector, our panellists' responses were telling. The calls were for clearer policy frameworks, streamlined regulation, and better incentives for retrofitting existing buildings.
The contrast with international markets is stark. Australia's regulated voluntary carbon scheme provides the kind of certainty that enables investment at scale. Meanwhile, the UK's complex and often contradictory policy environment continues to create uncertainty across a range of real estate sectors.
A Collaborative Future
Perhaps the most encouraging aspect of our discussion was the genuine desire from all participants to drive positive change. The old narrative of tension between profit and purpose is being replaced by recognition that sustainable investment often delivers superior returns.
As one questioner noted, there's a crucial role for public capital through initiatives like the National Wealth Fund. The most successful projects will likely be those that bring together public and private capital, combining commercial discipline with public purpose.
Looking Ahead
The transition to a sustainable built environment won't be easy, but it's inevitable. The economics are increasingly compelling, the policy direction is clear, and tenant demands are unmistakable. The question isn't whether this transition will happen, but how quickly and efficiently we can navigate it.
For investors, the message is clear: sustainability credentials are no longer optional extras but fundamental requirements for creating and preserving value within investment portfolios.
The future of real estate investment is green - not because it's morally right, but because it's commercially smart.
