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The benefits of making buildings more sustainable

10-07-2014 | Opinion helena-vines-fiestas.jpgHelena Viñes Fiestas, Head of Sustainable Research (SRI/ESG) at BNP Paribas Investment Partners, explains how the drive to make buildings more sustainable can benefit real estate owners and investors.

Is the sustainability of buildings, from carbon footprints to energy efficiency, rising up the sustainability agenda?
For investors it is an issue that is emerging rather than being fully integrated. It is increasingly being addressed and has particularly benefited from climate change going up the international agenda to act on energy efficiency. The building sector has becoming the No. 1 priority for this. In Europe, 50% of our energy bills come from buildings, and the need to reduce it is going to help meet efficiency targets for 2020. But more importantly, it’s also the most cost-effective way of reducing energy consumption, and politically it is much more agreeable than policies in related areas.

As a major investor ourselves, we have analyzed all the major European real estate players and we benchmark them against their environmental performance, notably around energy consumption, C02 emissions and so on. In the first year, only around 15% were actually dealing with their energy consumption and only 3.7% actually had targets in place. This year, 70% are looking at their energy consumption in a more serious way and 10% are measuring it against targets. So there has clearly been an increase in awareness in the industry. When it comes to emissions the results are lower, but still encouraging.

How can investors most benefit from improvements in building sustainability?
For real estate owners, better sustainability can lead to shorter vacancy periods and lower the risk of building obsolescence. It also lowers energy costs, which are increasingly important for companies – currently it’s just a small part of the total bill, but in the medium to long term, it’s definitely a clear driver. European companies must now acquire energy efficiency certificates and the UK has gone further by saying from 2018, any apartment building with a rating of ‘E’ or lower (on a scale of ‘A’ being the best to ‘G’) cannot be let or sold until the rating improves.

So that’s a tangible means of measuring improvement and we think this will be applied across Europe. If you’re not taking action now, you won’t be able to transact any properties after 2018. And in 10 years’ time, as standards improve, ‘E’ might be on the blacklist as well. If you are the tenant, and you planned to rent a building for 10 years, you might think twice if the rating on that building is currently ‘E’ or ‘F’. The biggest demand for sustainable buildings has actually been the corporates - they want to be perceived as occupying highly sustainable offices

How integrated is ESG in investment decisions for property?
It varies enormously between investors. Some investors like us will benchmark the company against sustainability measures and eliminate the worst performers from portfolios. They will also engage with both the companies and with policymakers at EU level and below to improve energy efficiency in the property sector. There are maybe 15 top investors in Europe that are actively working in this area in terms of engagement. We see increasingly more investors in real estate who are taking these issues into consideration. But at the same time, a lot of investors are not even looking at this issue, which is quite worrying.

There are two ways of investing in real estate – indirectly through equities, or directly by buying the property itself. Those investing directly are moving faster on integration of ESG in their investment process, whereas others look at it in a more holistic way: they may look at it as part of general ESG integration but not specifically at this sector. Direct investors tend to realize how material it is for the medium and long term.

Real estate owners have been seen as wasteful in the past on resource management. Is this improving?
Around 35% of all companies are looking at energy efficiency, but when you look at it more closely, very few of them are actually investing in reducing emissions. We have seen companies that say they have cut emissions by 20%, but when you look at what that 20% related to, it is mainly due to the acquisition of new buildings, which is a no-brainer as new buildings are quite sustainable. So it is low-hanging fruit. We haven’t seen any capital expenditure on existing buildings, which is the real strategy and investment needed to meet energy efficiency targets.

France has a target of a 38% reduction in emissions for the building sector, but there are currently no sanctions for anyone who doesn’t meet that target. So companies are just doing easy things, like changing the light bulbs and not the boilers.

What needs to change to improve building sustainability – more regulation?
It’s not about having a lot more regulation, but closing the loopholes, and linking targets with sanctions and some sort of penalty. It’s all very well having a 38% emission reduction target in France, but it’s not binding, so where’s the incentive? The energy performance certificates issued in the UK set a clear threshold where if you don’t get a grade of “E’ or above then after 2018 you will not be allowed to do any transactions. That’s what we need: tighter regulations with clear targets linked to sanctions.

Secondly, we need to standardize regulations, evaluations and metrics across Europe. Thirdly, when it comes to new regulation, we need to disentangle the ‘Principal Agent Dilemma’ of who pays for what, because currently there is no incentive for tenants to reduce costs or emissions. As long as energy prices are such a small part of their total tenancy bill, most have no incentive. The one who is making the investment is not the one who is going to be benefitting from it, and one of the biggest dilemmas in the sector is how we share responsibility among the different players – the landlord, tenant, investor, company and property manager.

Given that half of all European buildings are over 30 years old (and many are historic), can much more be done?
There are binding targets - 3% of all public assets in each EU country need to be retrofitted each year and the EU has put aside EUR 23 billion to help fund this. Of course there will always be exceptions, as we can’t do much about monuments – I doubt whether St Paul’s Cathedral is going to be retrofitted. But 80-90% of public buildings can be retrofitted to reduce their energy consumption significantly. The majority of public buildings are hospitals, government offices, etc., and the bulk of their energy bills go on heating and cooling, so much more can be done here: things like insulation and double glazing can easily be installed. The problem is we don’t have all the public financing; at least when it cannot be decided who is going to pay for what.

Should investors start excluding energy-inefficient companies, or improve engagement with them?
It is difficult for us sometimes to assess performance, as transparency is an issue. A lot of companies might disclose something like their carbon footprint in only part of their portfolio. So for the time being, the No.1 priority is engagement on transparency. This goes hand in hand with policymakers making regulation much more tangible. Rather than using exclusion, it can be much more positive to simply pick out the best companies, or illuminate them by telling the market that this issue is important for us. It’s a bit of a carrot and stick approach. It is always good to send the message that we will prioritize those companies that are more efficient, but combine it with engagement and dialogue so that companies know what you are looking for.

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