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Simon Property Group (‘Simon’) is a US real estate company that develops and operates shopping centers. The company has remarkably improved its sustainability performance since we started to engage with them in 2013.
Besides environmental advantages, having a solid climate change strategy has various economic benefits for real estate companies. First, energy efficiency measures allow them to lower their direct energy costs. Second, they can charge higher rents for environmentally friendly buildings because of tenants’ lower energy costs. Third, it is also easier to market environmentally friendly buildings as their occupancy rates are higher on average. Fourth, a climate change strategy reduces the risk related to the potential implementation of stricter environmental legislation by governments.
As investors we are looking for companies that integrate climate change and sustainability considerations into their business models to ensure long-term value creation. Our engagement with Simon was part of our engagement theme ‘Carbon management in the retail real estate industry’. Our engagement objectives with Simon were:
Robeco uses data of research initiative GRESB. This investor initiative compiles a benchmark to analyze the sustainability performance of real estate companies across the globe annually. Based on this research, we started to engage Simon in the fall of 2013 and had several conference calls with senior Simon representatives from its Sustainability and Investor Relations departments. These calls were followed up by e-mail correspondence during which Simon provided supporting documentation. We reviewed the 2013, 2014 and 2015 GRESB submissions of Simon and discussed the results in detail with the company, encouraging improvements year on year. We also provided feedback on Simon’s two sustainability reports and highlighted concrete areas for improvements.
Over the course of the engagement, Simon’s overall GRESB score showed a remarkable rise. This reflects the significant improvement in Simon’s overall sustainability approach, which evolved from being compliance driven to driving the business. The company showed particular improvement in the following four areas:
Climate change management and legislation
The company has aligned its sustainability objectives with its overall business strategy. Based on a comprehensive materiality assessment, the 2015 Sustainability report includes an extensive set of sustainability goals, such as improving portfolio-wide energy efficiency by 5%-10% by 2020 (base year 2013). In addition, Simon hired its first Director of Sustainability, who directly reports to senior management. This reflects the integration of sustainability and climate change considerations into the overall corporate strategy.
License to operate
Simon published its first publically available sustainability report at the end of 2014, followed by the second report at the end of 2015. The 2015 report is based on the Global Reporting Initiative (GRI) guidelines and in accordance with GRI G4 core reporting requirements. The regular publication of a sustainability report and the alignment with GRI is a big step forward. Combined with the improved web disclosure we see this as a major improvement in the company’s transparency on sustainability and climate change.
Simon has made significant progress in a short period of time with regard to sustainability tenant interactions, with an official sustainability goal being to ‘Engage with top 10 tenants on sustainability issues relevant to our shoppers to improve the overall sustainability performance of properties by 2018’. During our conversations we consistently stressed the relevance of this subject and are happy to see that the concept of occupiers engagement is being embraced and embedded into the regular business approach.
Energy consumption and carbon reductions
Simon set its first long-term reduction targets for energy consumption and carbon emissions in the fall of 2015, thus providing investors with extra accountability. Over the last three years, Simon substantially reduced like-for-like energy consumption and carbon emissions in both absolute terms and against the peer group. We also think the 32% reduction in electricity consumption since 2003 is proof of the company’s substantial efforts in this area.
Given Simon’s substantial progress on almost all relevant aspects, we have successfully closed the engagement with Simon Property Group. We will use the example of Simon to motivate the other companies under engagement to follow suit.