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How green is retail property, what types of stores have the best green credentials and which operators are leading the green charge?

Environmental, Social and Governance (ESG) themes have risen up the agenda among property professionals as consumers, occupiers and investors attempt to do better in the race against climate change. The UK hosting the global climate conference COP26 this November has, of course, massively amplified all things ESG. The retail sector urgently needs to get a handle on the topic as government ramps up regulation and investors gravitate toward high quality, future-proofed assets.

Sustainable stores account for a small proportion of retail property but have a big impact

Currently, just over 1,300 UK retail properties possess or are targeting a sustainability rating. This is an absolute drop in the ocean of total retail stock, accounting for less than 1% of all retail properties. With 48% of retail investors having experienced little or no progress in terms of commitment to ESG according to survey by PERE, it鈥檚 blatantly obvious that the sector has some way to go.

Despite the desperately low number of sustainable shops currently in existence, the standard of sustainability achieved in those that do conform is actually extremely high. The majority of green stores achieve either 鈥榁ery Good鈥� (68%) or 鈥楨xcellent鈥� (22%) ratings, indicating a high level of ambition to achieve a sustainability standard that goes far beyond compliance. In the limited cases where it is done, it is clearly done very well. Scrutinised against nine environmental elements, buildings with 鈥榁ery Good鈥� ratings reflect scores of 鈮�55% and 鈥楨xcellent鈥� 鈮�70%.

Figure 1: Retail Property by level of BREEAM sustainability standard

Sustainable stores more likely to be new build

The ability to enhance sustainability among historic retail stock has many challenges and can come with a hefty price-tag, which landlords ultimately must weigh against the benefits. Stores already constructed are likely to contain higher levels of embodied carbon, made with less efficient materials at time when sustainability standards were lower.

The retail landscape reflects this: 97% of all sustainable stores are newly-constructed, and 100% of exemplary 鈥極utstanding鈥� stores exclusively new build. Brand new developments have a far better chance of integrating the most cutting-edge and technological sustainable features, with greater opportunity to influence multiple stages of the lifecycle 鈥� from store design and location, through to eventual operation by a retailer.

As a consequence, brand new malls, retail parks, and supermarkets dominate the sustainable landscape, with less than 1% of stores achieving their ESG credentials through green refurbishment or retro fit-out.

Milton Keynes鈥� MK1 Shopping and Leisure Park is one of the UK鈥檚 greenest, among the first out-of-town retail parks to receive an 鈥楨xcellent鈥� rating. Its series of new build sustainable restaurants has attracted major occupiers actively seeking to bolster their own ESG credentials, including Bella Italia, TGI Fridays, Chimichanga, and Pizza Express.

Similarly, Aberdeen Standard鈥檚 Sustainability Portfolio was able to attract a significant new anchor, H&M, through the construction of a new sustainable 38,000 sq ft high street unit in The Moor in the regeneration of Sheffield City Centre. H&M is among the most engaged participants in the world鈥檚 largest corporate sustainability initiative 鈥� UN Global Compact 鈥� seeking real estate which helps it achieve ambitions for a fully circular built environment. At the same time, it is fair to say that green credentials would not totally override commercial considerations 鈥� few retailers would take a green store if it didn鈥檛 also hit stringent trading targets.

Figure 2: Green Retail property by sustainable rating category

Sustainable retail can breathe life into communities

With so much doom and gloom around the state of the retail market, it鈥檚 easy to gloss over the fact that modern, sustainable assets are playing a key role in revitalising our communities, and will prove integral to the future resilience of the sector.

The Capital has been quick to enforce this, with 90% of 32 London Boroughs requiring significant non-domestic developments to achieve a minimum BREEAM rating of 鈥榁ery Good鈥�, and half requiring a minimum of 鈥楨xcellent鈥�. This is proving effective, with 34% of all green retail stock located in London.

Lendlease has demonstrated the value of leveraging an ESG-led strategy at Stratford鈥檚 International Quarter London (IQL), a new £2.4bn neighbourhood lying at the gateway to the Queen Elizabeth Park. The Pavilion, its landmark leisure hub, provides a vibrant social offering with cafes, restaurants and rooftops and is constructed almost entirely from responsibly-sourced glue laminated timber. Containing less embodied carbon than traditional steel and concrete, use of a more sustainable construction material helped it achieve a top-tier 鈥極utstanding鈥� rating of 92% (above average 87%).

The Pavilion has made significant strides in helping Lendlease achieve its target of absolute zero carbon by 2040 without the use of offsets 鈥� sending a clear message to the market about its commitment to ESG. The Pavilion now sits within the top 1% of sustainable buildings in the whole of the UK.

It鈥檚 not just in the Capital where waves are being made. Development of Hereford鈥檚 Old Market, a new retail district on a former cattle market, has attracted several major anchor tenants (Waitrose, TKMaxx, Costa Coffee, Frankie & Benny鈥檚) with sustainably constructed units, putting the Cathedral city on the international map, competing against retail developments in Toulon and Stockholm in Best of BREEAM awards.

Retailers with social conscience have the most sustainable properties

Unsurprisingly, companies with strong brand association with ethical and sustainable retailing have invested most in greenifying their stores.

The John Lewis Partnership has the highest number of green stores (ca. 7.3%) with a commitment to certifying all new department stores and Waitrose supermarkets using the BREEAM certification. This is little surprise given its quality ethical brand positioning - Mintel surveys showing JLP as the most trusted consumer brand in the UK.

The 鈥楤ig Four鈥� grocers (Tesco, Asda, Sainsbury鈥檚, Morrison鈥檚) are the second biggest green retail owners, responsible for a combined 5.9% of green stores. Partly a result of a strong new build pipeline in recent years, the figure is equally reflective of major grocers鈥� efforts to tackle wider ESG issues such as food and package waste.

Morrison鈥檚 has the largest share of sustainable stores (2.1%) of all the grocers 鈥� a product of its high share of store ownership (ca. 85% freehold). The grocer has been named the UK鈥檚 most environmentally-friendly company and has won over many ethical consumers by offering quality value-based British produce, largely by virtue of its vertically-integrated supply chain.

German discounters Aldi and Lidl are also major players in the green retail space, owning a combined 2.7% of green stores. Although achieved in part by their significant expansion over the last decade (growing combined market share by more than 10 percentage points), German corporations generally appear to have greater social conscience. A recent survey by the Carbon Trust found 83% of German companies view environmental priorities as 鈥榮ignificantly important鈥� vs. just 58% of UK ones.

Global flat-pack furniture giant IKEA also has an impressive number of green stores considering the size of its UK store portfolio. Famous for their enthusiasm to create a 鈥榖etter everyday life for the many people鈥�, all IKEA stores must achieve a minimum 鈥榁ery Good鈥� sustainability standard. Its most notable green store in Greenwich has become a standout asset, achieving an 鈥極utstanding鈥� rating. With a biodiverse rooftop from which it can harvest rainwater to cool the store, it provides lessons others can learn from, as showcased in . Its connectivity to the wider community has also made a major contribution to its sustainability credentials, having excellent 鈥榳alkability鈥� by being located within 500m of key public amenities.

Figure 3: Proportion of Green Buildings 鈥� by Retailer

Retail landscape will continue to green over next decade

Retail鈥檚 green building landscape will continue to develop in the coming years as investors, developers, landlords and retailers realise the value of integrating high quality environmental, social and governance into their store assets. Those greenifying their stores are using the opportunity to go above and beyond minimum requirements, sending a clear message about their stance on ESG.

But there are complications and conundrums. Retail is an over-supplied market and the development pipeline is extremely limited. Green credentials are far more easily achieved in new build properties. But very little is being built, putting an onus on creative green retro-fitting of existing stock. Potentially a major stumbling block in a sector that is highly challenged and cash-constrained. At the same time, regulation is tightening and ever more stringent environmental targets are being set.

Where there鈥檚 a will, surely there鈥檚 a way?