‘Blacklisted’ tenants: are ESG investment principles their own worst enemy?

As we all know, institutional investors are sitting on the side-lines of the commercial real estate market with a mountain of money looking for a home – in some cases quite literally. Whilst they might be waiting for the investment market to stabilise, some recent market chatter has got us thinking: are real estate investors elevating socio-political concerns above their primary responsibility of generating returns? More perversely, could such concerns be hampering a more sustainable future?

What’s prompted us to ask this question? The Cargo building in Canary Wharf. Bought by Blackstone in 2014 – who then carried out a £100 million refurbishment – the now state-of-the-art, highly sustainable building (kudos to Blackstone) was let principally to oil giant BP, creating an institutional-grade investment holding. Nearly ten years on, Blackstone is reportedly struggling to shift the asset. Why? Could it be because its principal income stream comes from an oil company?

Now, before we cause too much alarm, this won’t unilaterally be the reason it hasn’t traded. It’s common knowledge that Canary Wharf has suffered recently as it has more secondary space than other markets and two high profile tenants have moved out (HSBC move in 2026/27 and Credit Suisse has collapsed). The estate has also been overexposed to investment banks which have gone through a global (not London-centric), secular downsize. This softness in the leasing market has meant that investors are less warm to Canary Wharf than other London markets.

However, it does highlight that some investors’ ESG agendas are playing a role in beating solid investment logic and there is an argument to be had that this socially conscious lens has gone a step too far and runs the risk of perturbing investors from developing assets fit for a more sustainable future. This is particularly worrying given the market – upon which huge swathes of ordinary peoples’ pensions can depend – is shaking at the knees.

Cargo is a prime, Grade A asset with new and improved accessibility via the Elizabeth Line, modern office floors, 20,000 sq. ft of terraces, and energy efficiencies a whopping 35% higher than the average UK office. Oh, and it’s also fully let with a 12-year weighted average unexpired lease term (the longer the guaranteed income stream, the more attractive it should be to investors), which flies high in the face of recent negative headlines about Canary Wharf, and further demonstrates the value of this highly sustainable, repurposed office.

Balancing financial gains with ethical responsibility is a tightrope we don’t envy anyone walking, but surely, investors need to reconsider their approach if a commitment to a sustainable future is itself (even if just in part) discouraging investors from acquiring a highly sustainable asset. And sure, while BP is still an oil and gas company, they’re also a key player in the energy transition, investing billions in renewables.

Buildings with top notch sustainability credentials (like Cargo) often attract the best tenants, premium rents, and the highest valuations. So, what we have here is an asset which on paper resoundingly ticks nearly all boxes, but which some investors are turning their nose up in part because of who one of the tenants is.

In our opinion, this runs the risk of setting a dangerous precedent. Where does this stop? Do tenants like BP become homeless? Will Oxford Properties and Temasek find themselves unable to shift the Blue Fin Building occupied by BAE Systems (who provides weapons systems to the Israeli Air Force)? What about GPE’s 18 Hanover Square, partly occupied by Glencore?

Yes, the above might be extreme examples and we’re not for one second questioning the need to deliver a sustainable future. But in the interest of driving the debate…the problem is that in doing so there can be unintended consequences. In reality, buildings like Cargo will be fine and, in 12-18 months when yields and the market story around Canary Wharf improve, they’ll find a new home.  Will it be an Asian or Middle Eastern private or pension fund which is more relaxed about BP’s core business, or will others step up to the plate? Watch this space.