The Hidden Costs of Delaying Decarbonisation in Commercial Buildings

Decarbonisation delays and the mounting risks for commercial property

Driven by energy-intensive heating, cooling, lighting and equipment use, commercial buildings are a major contributor to the climate problem, accounting for around 10% of global carbon emissions. 

In the UK specifically, 80% of commercial buildings must undergo energy upgrades within the next four years to meet the proposed Minimum Energy Efficiency Standards (MEES). 

Although they account for a smaller share of total buildings, commercial premises contribute disproportionately to carbon emissions. That’s due to several factors, including:

• High and continuous energy demand - Many commercial buildings, such as hospitals, warehouses and data centres, operate 24/7, requiring constant lighting, heating, cooling and ventilation.

• Ageing and inefficient building stock - Commercial buildings tend to be older and less efficient than residential properties, with poor insulation, single-glazing and inefficient systems. Retrofitting these older buildings can be challenging and complicate decarbonisation efforts.

• Long lease cycles - Long leases can limit the opportunity for major upgrades. Retrofits are likely to disrupt tenants and infringe on contractual obligations, with decarbonisation efforts often postponed until lease breaks or ownership changes.

• Split incentives for owners and occupiers: There can also be a disconnect between who pays for decarbonisation measures and who benefits. Building owners typically fund the upgrades, while tenants benefit from lower utility bills. That can reduce the financial incentives for owners, with decarbonisation often deprioritised.  

Given these challenges, it’s easy to see why delay might appear to be the prudent decision, particularly in the short term. However, that ignores the hidden costs of carbon inaction, which quietly erode profit, performance and reputation.  

What are the financial risks of delaying a decarbonisation strategy?  

The cost of energy inefficiency goes far beyond the monthly utility bill. There are also hidden operational costs of carbon inaction, including everything from dissatisfied occupants to mounting compliance issues.

Declining asset values

With sustainability becoming a priority for many organisations and increasingly stringent energy performance standards to meet, properties that fail to keep up can suffer from value write-downs, declining market appeal and falling yields. The risks include:

• Lower valuations due to poor energy ratings

• Reduced rental demand from tenants due to high energy costs and existing net-zero commitments

• Rising and often unplanned capital expenditure requirements to remain compliant

• Refinancing challenges with lenders that integrate climate risk into their credit decisions

• Higher insurance premiums due to ageing systems under higher loads

In some markets, investors are already discounting businesses with poor environmental performance. That can lock owners into underperforming assets and weaken long-term returns.

Belated retrofits  

The next stage of the government’s plans to strengthen Minimum Energy Efficiency Standards (MEES) for commercial buildings in England and Wales is yet to be formally confirmed. However, the proposals include raising the minimum legal EPC rating to ‘C’ in the late 2020s, and then to ‘B’ by the early 2030s. That would require significant retrofit work for many older, energy-inefficient buildings.

While most building owners recognise the need for upgrades, many are choosing to postpone their improvements. That delay can turn a managed, phased transition into a last-minute scramble to remain compliant when skilled labour and supply chains are strained. The likely result is increased costs and greater operational disruption.

Compliance risks and regulatory penalties

Failing to decarbonise is no longer a low-risk option. Breaching Minimum Energy Efficiency Standards can result in enforcement action and fines of up to £150,000, as well as restrictions on leasing the non-compliant space. It can also be more difficult to sell or refinance a non-compliant building, reducing your options for raising capital to fund the decarbonisation measures or make a profitable exit. 

The details of non-compliance can also be disclosed publicly. That creates wider reputational risks. Even if you complete the necessary work, a record of non-compliance can still damage relationships with tenants, investors and the wider market. That can narrow the tenant pool and make it more difficult to let the space in the future.

Missed productivity and workforce benefits

Another hidden operational cost of carbon inaction, particularly for owner-occupiers, is missing out on the productivity and wellbeing benefits that comfortable, sustainable and energy-efficient workplaces can bring. 

A poor indoor environment, driven by issues like inadequate ventilation, overheating, lighting or cooling, can lead to hidden human and economic costs, including:

• Increased absenteeism

• Reduced employee productivity

• Greater challenges in attracting and retaining the right talent

By delaying upgrades such as smart heating systems, improved ventilation and better insulation, businesses will continue to absorb losses that, although difficult to quantify, can have a meaningful impact on performance and competitiveness over time. 

Lost competitive advantage

Falling behind in an increasingly carbon-conscious market is a key financial risk of delaying your decarbonisation strategy. High-quality corporate tenants typically operate under strict net-zero targets and require buildings that enable them to meet their commitments. 

Acting early on your decarbonisation strategy can position your property as a premium, ESG-aligned asset that attracts stronger tenant demand and longer, more stable leases. 

On the other hand, by delaying action, you risk losing ground to greener alternatives and being sidelined in a market where over 80% of UK organisations consider sustainability to be a key factor in decision-making.

Missing out on financial incentives

Government-backed grants and energy-efficiency incentives are available to help businesses meet the cost of investing in sustainability upgrades. For example:

• The Industrial Energy Transformation Fund (IETF) provides up to £30 million in matching funding for large sites to invest in energy-efficient and low-carbon technologies.

• Salix Finance, a government-funded scheme, provides grants and interest-free loans to help public sector organisations and UK businesses fund improvements. It also offers low-cost financing options to private companies that meet certain criteria.

• Green tax incentives include 100% first-year capital allowances on qualifying energy-saving machinery and reduced Climate Change Levy (CCL) rates for compliant businesses.

• There are also local and regional grant programmes that offer funding for energy efficiency upgrades, renewable installation and other decarbonisation measures. 

The specific programmes and their availability vary over time. By delaying your decarbonisation plans, you could miss out on financial support and lose the opportunity to increase the value and performance of your building through subsidised schemes. 

Rising operating costs and energy price exposure

Not all the financial risks of delaying your decarbonisation strategy are hidden. The most obvious risk is leaving yourself exposed to the volatility of fossil fuel prices and consuming more energy than an efficient building. The result is:

• Higher utility bills that erode your bottom line

• Increased vulnerability to price fluctuations in the energy markets

• Difficulty forecasting long-term operating costs due to unpredictable energy expenses
    

Switching to on-site renewables and investing in building efficiency can help mitigate these risks by lowering energy consumption, providing more predictable operating costs and protecting against price hikes in the broader energy market.

Reducing hidden decarbonisation costs in commercial buildings

Commercial landlords and owner-occupiers often delay decarbonisation measures due to the perceived costs, but energy efficiency doesn’t require a full-scale overhaul. Small, targeted improvements can deliver meaningful results.

Start by carrying out an energy audit to pinpoint where energy consumption is highest across heating, cooling, lighting and building systems. You can also use smart meters and monitoring tools to track consumption patterns and identify inefficiencies over time.

Once you identify areas of energy inefficiency, you can prioritise upgrades that deliver the greatest impact. That includes things like:

• Installing LED lighting and motion sensors to reduce electricity use

• Using smart controls and occupancy sensors to improve the efficiency of heating, cooling and ventilation systems 

• Improving insulation to minimise heat loss and prevent overheating

• Installing on-site renewables, such as solar panels, to generate clean energy and reduce reliance on the grid

• Train staff or tenants to adopt energy-saving habits

• Explore grants and tax incentives that can help fund the cost of energy-efficient upgrades

Make decarbonisation an informed decision

The financial risks of delaying your decarbonisation strategy extend far beyond your energy bills. At Eddisons, we provide a full range of practical solutions to help you futureproof your property.

Find out more about our full range of decarbonisation services, including energy audits, and get in touch to discuss your goals with our team.