Technical Due Diligence – how to achieve best practice

In the era of carbon risk and regulatory scrutiny of both building performance and asset owner ESG approaches, Technical Due Diligence (TDD) has also evolved to become a more comprehensive, flexible and forward-looking speciality.

Conventional approaches are often reactive – responding to the current minimum regulatory requirements in relation to occupant health and safety, fire protection, structural soundness and so forth. They might address sustainability as an additional aspect, but by and large each aspect of the investigation was undertaken by a separate expert, and the whole program of evidence-gathering developed by the asset manager or portfolio manager. Simple calculations would form the basis of a business case, such as the return on investment from upgrading lighting, or the short-term operational cost benefits of a capital investment in improved energy efficiency of mechanical plant.

This approach is not truly fit for purpose in the current market, nor does it deliver the best value in terms of an evidence base for addressing risk and ensuring a property remains relevant, viable and valuable as the wider economy progresses towards net zero.

Best practice TDD aligns itself with global standards and global market trends, recognising that finance and policy are both becoming increasingly borderless. It is led by investment managers, who appoint an integrated team to plan and implement TDD, report the findings and then map out pathways for actioning required works.

Conventional TDD will tell an investor what they have – best practice TDD demonstrates to an investor how the state of their Real Assets can be aligned with their ESG goals through a practical pathway to net zero and optimised building quality.

A comprehensive and holistic TDD can also encompass more than the mechanics of the building and the condition of its fabric – it can also investigate the human factors that play such an important role in the stability of tenants and therefore the revenue they provide for asset owners.

The first step – evidence-gathering

For the building, the first step is to undertake a detailed audit of energy use, water use, waste and carbon emissions. This ideally goes to the individual building system level such as ventilation system, cooling system, hot water & chilled water, vertical transportation and both base building and tenancy lighting and electrical services.

Engaging with tenants to obtain this data also supports understanding the human elements of the asset. These include surveys or interviews to discover which spaces are uncomfortable or underutilised? How is the building affecting people’s mental/emotional and physical health? Does the building support the sense of belonging and pride in place? What types of wellbeing/nurturing features would they like to see?

The facilities manager and other building staff such as cleaners and security are also valuable sources of intelligence – they will likely know, for example, if there are systems or building features that require constant maintenance. They may have clear and practical insights on improvements that would reduce costs or create efficiencies.

The second step – developing the sustainability roadmap

After fact-finding comes developing a plan of action that is robust, evidence-based and underpinned by financial analysis of spend required and returns on investment.

As part of developing the plan, the project team can undertake education and engagement for facility management staff; service providers; and external stakeholder groups to ensure there is buy-in and that everyone is committed to the process.

The sustainability roadmap will scope sustainability actions in order of priority factoring in equipment life; energy savings gained from upgrade; and opportunities to increase natural light and naturally-ventilated spaces.

The value of natural light and natural ventilation should be understood as two-fold. On the one hand, it can save on energy consumption for electric light and mechanical ventilation, while on the other it also enhances occupant wellbeing and the level of amenity, which delivers reliable and sometimes higher rental returns.

A waste management strategy should also be developed to reduce one-use products and waste-to-landfill. This not only lowers costs for waste disposal, but it is also positive for asset owner and occupant ESG reporting.

The third step – the program of works

The staging and scope of works for delivering the sustainability roadmap is tailored to the asset and aligned with the risk management approach evolved as part of the initial TDD. There are a range of options to consider – and that is going to be the topic of the next blog in this series.