ESG stands for environmental, social and governance. These three factors combined establish a
framework that helps stakeholders understand how an organization is managing risks and
opportunities related to ESG. ESG adopts a holistic view that sustainability extends beyond
environmental issues, thus, in order to attain sustainability, one must look at the three factors as a
whole. Developers, owners and occupiers are increasingly scrutinizing the ESG credentials of their
properties, which has led to heightened due diligence on buildings’ societal wellbeing and
biodiversity benefits. This has resulted in the incorporation of ESG in conveyancing which takes
various considerations under each factor.

Under the environmental factor, energy efficiency, water conservation, waste management and
carbon footprint are taken into consideration. Under the social factor, community engagement and
the relationship between the parties to the conveyancing agreement are taken into consideration.
Finally, under the governance factor, regulatory compliance, ethical behavior and transparency
and accountability are taken into consideration. Therefore, real estate presents a key area through
which legal professionals can advise clients on navigating environmental concerns and
opportunities, and a good seat choice for aspiring solicitors wishing to upskill on ESG issues.

ESG considerations are now integral at every stage of the conveyancing process. For example,
landowners intending to sell their property are now factoring in the future value of the land’s
natural capital potential. An example of these heightened concerns in practice is evidenced in the
growth of green leases and natural capital schemes. Green leasing involves using clauses related
to a building’s environmental performance into a lease agreement or a separate document that
forms part of the agreement. It is an arrangement between a tenant and a landlord where both
parties share the responsibility for managing and enhancing the property’s environmental
performance. These leases, also known as energy-efficient leases, high-performance leases, or
aligned leases, aim to align the interests of tenants and landlords around sustainability. This
includes measures such as energy efficiency, water conservation, and other eco-friendly practices
in the construction, operation, and use of commercial spaces.

Another mechanism that can be used to incorporate ESG into conveyancing is natural capital
schemes. Natural capital schemes are initiatives that aim to enhance and protect the environment
while also providing financial benefits. The natural capital resources are water, sunlight, soil, and
trees. The natural capital schemes take two forms: privately funded or government initiatives.
Privately funded natural capital schemes involve a long-term approach, creating units and credits
that can be bought or sold. They incentivize new environmental improvements or changes in land
management. They give the land owner three options:

1. Selling the land to a developer to another party interested in environmental purposes
2. Lease-back models which allow a third party to lease the land, enhance habitats, and sell
   biodiversity, water, or carbon units.
3. Self-delivery model this where the land owner directly creates or enhances habitats, sells
   units, and takes a higher risk for potentially greater rewards.

Despite being in the early stages of incorporation, privately funded natural capital schemes offer
promising opportunities for landowners. On the other hand, government initiatives arise from the
state’s obligation under international law to build resilience towards climate change in order to
achieve net zero and the long-term temperature goal of the Paris Agreement. In this context,
governments are developing tools to better assess and value the environment. Resultantly,
governments are increasingly acknowledging the value of natural capital through benefits such as
flood risk reduction, wildlife enhancement, improved water and air quality, and opportunities for
biodiversity net gain.

Examples of natural capital schemes are the “payments for ecosystem services” such as Woodland
Carbon Code, Woodland Carbon Guarantee, England Woodland Creation Offer, Carbon Banking
and Environmental Land Management (ELM) schemes. The natural capital resources are water,
sunlight, soil, and trees.

In conclusion, environmental, social, and governance considerations are becoming increasingly
important for investors and businesses across all industries, including commercial real estate.
Environmental, social and governance factors have a significant impact on the value, performance
and sustainability of commercial real estate assets. Incorporating ESG considerations in
conveyancing ensures sustainable land use, enhances long-term property value, and mitigates
environmental and social risks. It also aligns properties with regulatory requirements and growing
investor and buyer demand for responsible and ethical investments.

Contributor
Yvonne Muriu
Legal Intern, MNA Law Africa LLP