The financial profession loves an acronym. While most are just obscure jargon, some are more straightforward, such as ESG. To put it simply, this acronym means environmental, social and governance – it’s primarily about the new wave of greener, more ethical, and better managed investments. There is an argument, however, that says if you accept ESG as a positive force, then it should be applied to every part of your wealth, including buy-to-let property, not just investments. ESG can, therefore, be a key consideration to apply to any rental properties you own.
The United Kingdom: a nation of renters
We might think of ourselves as a nation of homeowners – homes as castles and all that – but over the long run, we’ve been a nation of renters.
Most people used to rent their homes, farms, or business premises from landlords. Mass ownership only really started a few generations ago.
Today, around one in five homes is rented from private landlords[i]. Put another way, some 4.6 million families live in houses owned by someone who isn’t a local authority, housing association or other regulated organisation.
Other statistics show that just under half of all landlords own one rental property, and nearly half of tenancies were owned by landlords with five or more properties[ii].
In other words, there are a lot of landlords out there – and rental income is a key component of many of our clients’ wealth portfolios.
Given the recent rise of environmental, social and governance approaches to investing in shares and bonds, the question of ‘should ESG also be applied to your rental property?’ is a frequent one.
Let’s start with the E in ESG: environment.
Government data for England shows that private rented dwellings achieve the lowest scores of energy efficiency. Their numbers fall below that of social housing and owner occupiers.[iii]
This discrepancy begs the question: is this because landlords see little advantage in reducing greenhouse gas emissions through better insulation or new technology, such as ground pumps or solar panels? While they lack progression in these things, social landlords and homeowners are installing them in old and new buildings alike.
Landlords who wish to upgrade their environmental approach are likely to find a willing tenant audience. Most tenants are in the 25-44 age bracket – 57% of them to be exact[iv]. This is ‘generation Z’, the very same demographic most interested in sustainability. According to the World Economic Forum, they are not only principally motivated by sustainability factors in lifestyle choices – but are also most likely to influence other generations about sustainable issues[v].
These are the people who pay your rental income. They hope for environmentally friendly features as standard, from insulation that keeps heating bills down to low-energy bulbs that minimise electricity use. And, increasingly, regulations such as Minimum Energy Efficiency Standards are mandating landlords to take such measures.
Setting the right tone
Now for the S in ESG: social. Social factors are perhaps the easiest to get right. You’re probably doing it already.
Intuitively, landlords who respect tenants’ privacy rights and seek their permission before entering their home, except in emergency or when permitted by law, are probably going to have better working relationships with renters. This can also mean open lines of communication and prompt responses to concerns or complaints.
Many renters will be experiencing financial difficulties or other challenges. Research[vi] last winter suggested there are 1.3 million privately renting households who were both in serious financial difficulty and are worried about the following 12 months.
That’s almost a third of all households in this sector. Such renters will hope for compassion and forbearance, making your commitment to the social even more important than before.
Getting the regulation right
Finally, let’s talk about the G: governance. Not so long ago, landlords could do almost whatever they liked.
Now, it’s a well governed and regulated sector – and not all that oversight comes from central authorities.
This year is arguably seeing some of the biggest changes to the laws and rules that landlords must adhere to. The end of the second home tax ‘loophole’, the energy efficiency standards mentioned above, and the renters reform bill are just three major changes facing landlords. The latter includes more clarity on what is expected of landlords, plus a new ombudsman for tenants.
But pressure isn’t just coming from above. These days we are all pretty familiar with publicly rating our experiences – from restaurants to rides, holidays to healthcare – and now tenants are rating their landlords.
Websites like Marks out of Tenancy and Asktenants enable anyone renting a property to publicly comment on their experiences. For any landlords that care about their public reputation, public ratings such as these (impacted by the ways in which you govern your properties) are now essential considerations.
Owning rental property within your portfolio may now be a little more complex once ESG is factored in. But – as with your shares, bonds, and other assets – ESG is designed to improve the experience for all parties and generate positive returns beyond the purely financial.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.