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 Carbon Management in the Retail Real Estate Investment Trusts

Carbon Management in the Retail Real Estate Investment Trusts

19-08-2015 | Insight | Daniëlle Essink Climate change may lead to significant investment challenges. Therefore, carbon management at companies is a recurring theme that we give attention to in our engagement program. The real estate sector represents a large share of annual global emissions of CO2 and other greenhouse gases. The sector as a whole accounted for nearly 40% of the world’s energy consumption and 33% of the related global greenhouse gas (GHG) emissions. In addition, the industry accounts for 30% of raw material use, 25% of solid waste, 25% of water use and 12% of land use. Therefore we have, over the last 18 months, been focusing on carbon management at retail real estate investment trusts (REITS).

 


The Cost of Carbon
Managing their carbon emissions provides real estate companies with the ability to lower their energy costs through energy efficiency measures. At the same time it reduces their environmental footprint as a result of reduced carbon emissions from energy production. This is particularly important because the business case for environmentally friendly buildings is strongly based on the possibility for higher rents because of lower energy costs. Besides this, it is also easier to market energy-efficient buildings due to their traditionally higher occupancy rate. Finally, there is less risk incurred by the implementation of stricter environmental requirements by the government.
Thus, as investors in the real estate sector, we are not only looking for real estate companies that seek to reduce energy costs, but also for companies that integrate sustainability into their business models to ensure long-term security of tenants. With this in mind we are engaging with 12 REIT’s from across the world on five engagement objectives: climate change management and legislation, license to operate, environmental Management System, occupiers engagement and energy and carbon reductions.

 


Climate change management and legislation
Buildings are responsible for one-third of the world’s greenhouse gas emissions, making the real estate sector a key component in achieving an overall global reduction of emitted greenhouse gases. Thus, setting targets to increase investments in green buildings and conducting green renovations will be essential in this regard, as well as ensuring compliance with future and likely more stringent climate regulation. We regard Unibail-Rodamco’s commitment for all new developments to meet the highest BREEAM certifications for both the development and operation of their assets as well as extending retro-certification to the majority of their assets, as a case of best practice. W encouraged the company to continue their drive forward on this front.

 


License to operate
Robeco believes that it is important for companies to link sustainability indicators, such as reductions in energy consumption, sustainable building certifications and other initiatives, with financial indicators. The best way to achieve this is through increasing the quality and extent of appropriate quantitative data in their reporting. Of all the companies under engagement in this sector, we see the strongest performance on license to operate at Link REIT. A combination of their recent switch to an integrated report, their strong GRESB participation and overall transparency on key indicators are all highly regarded by Robeco, however, what sets them apart is the strong connection outlined between sustainability indicators and financial indicators in their 2013/2014 annual report, showing the strong integration of sustainability into the corporate strategy.

 


Environmental Management Systems
In order to create accountability for investors we deem it essential that companies have in place a comprehensive environmental management system (EMS) to efficiently manage the overall environmental impact of their operations and to focus on continuous improvements when it comes to reducing these impacts. We view CapitaLand as being the sector leader with regards to environmental management systems. We especially value their comprehensive approach to its roll out and certification, shown by their commitment to achieve both ISO 14001 (for environmental management) and OHSAS 18001 (for health&safety) certifications in all key markets, which are externally audited on a yearly basis. In addition all appointed main contractors must be ISO14001 and OHSAS18001 certified or equivalent.

 


Occupier’s engagement
This engagement objective focuses on attaining buy in from the tenants. We see that for REIT’s pushing sustainability, the concept of ‘green leases’ represents the ‘holy grail’. We see Unibail-Rodamco and CapitaLand as displaying best practices for the sector with regards to occupier’s engagement. Firstly, Unibail-Rodamco’s commitment to roll out green leases as standard to all tenants, as well as the continued promotion of sustainability related themes to their tenants is a valuable way of embedding sustainability across their value chain. Secondly, with regards to overall stakeholder engagement, including tenants, we believe that CapitaLand has attempted to take into account all relevant stakeholders and aligning their needs with those of the company through its Global Stakeholder Engagement Initiative.

 


Energy and carbon reductions
Whilst most of the ‘low hanging fruit’ appears to have already been picked by most companies with regards to energy consumption and carbon emissions reduction, it is important for companies to intensify their efforts and make use of new, innovative technologies to continue to reduce these metrics. In this area, we again see Unibail-Rodamco as a sector leader, through achieving substantial and sustained reductions in their energy and carbon footprints in recent years, as well as setting ambitious targets for coming years. Whilst the rate at which these metrics have been cut has levelled off over the past years, the company has developed ambitious plans to achieve further savings in a cost-efficient way. To continue reducing carbon emissions and energy consumption the company is pursuing an action plan at 20 of their sites, representing the biggest energy consumers, aiming to cut emissions and consumption even further by acting on site with suppliers and tenants.

 


Looking to the Future
The two engagement objectives where we see most positive progress over the course of our engagement so far have been “Climate change management and legislation” and “License to operate”, whereas most companies struggle to come up with meaningful “Occupier’s engagement” strategies. Over the coming 18 months we will be actively encouraging the companies mentioned in this article who are already sector leaders to redouble their efforts and continue to innovate for the future. However, and even more importantly, we will encourage those currently lagging amongst our peer group to intensify their efforts to become more sustainable companies and better position themselves for the future.

Daniëlle Essink

Senior engagement specialist
"Companies are responsible for the selection of business partners both in their direct operations and their supply chain. By working with these business partners on sustainability related aspects, companies are able to limit operational and reputational risk and create opportunities"
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Daniëlle Essink
Senior engagement specialist


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