Every year GRESB (Global Real Estate Sustainability Benchmark) conducts a survey that serves as input for its sustainability benchmark. Robeco uses this benchmark to engage with companies in which we invest in order to improve the real estate sector’s sustainability. Robeco Property Equities scores well above the average.
Focusing on ESG in real estate is a useful exercise, as was recently shown in ground-breaking research published in the Journal of Portfolio Management. Dr. Nils Kok of Maastricht University in the Netherlands and Dr. Avis Devine of the University of Guelph in Canada analyzed 10 years of financial performance data across a Bentall Kennedy-managed office portfolio totaling 58 million square feet.
The results provide compelling evidence that buildings with sustainable certification outperform similar non-green buildings in terms of rental rates, occupancy levels, tenant satisfaction scores, and the probability of lease renewals. Net effective rents, for example, were on average 3.7% higher in US certified properties than in similar non-certified buildings during the research period. Occupancy rates were 18.7% higher in Canadian certified buildings, and 9.5% higher in US certified buildings than in buildings without certifications.
In early September GRESB published the 2015 survey results. A total of 707 property companies and funds participated in the GRESB Survey versus 637 last year. Of these 707 entities 170 companies are from the listed real estate sector. GRESB now covers 61,000 assets with an aggregate value of over USD 2.3 trillion (+10% versus 2014).
Using the new GRESB scores we have analyzed the ESG profile of Robeco Property Equities. Compared with last year, the fund’s holdings included in the GRESB database increased from 19 to 29. Although the fund currently has a total of 65 holdings these 29 names cover more than 50% (40% in 2014) of the fund’s assets under management. As more and more companies are participating in the GRESB survey we expect this percentage to increase. The GRESB database represents 170 names from the listed companies versus 154 in 2014. The fund’s holdings that do not participate in the survey are analyzed in terms of their ESG profile as well, the main data source used being RobecoSAM scores.
Based on this analysis the Robeco Property fund has an average score of 66 versus 60 for the benchmark average (170 listed companies) and 55 for the GRESB average (707 entities).
GRESB’s scores and broader ESG considerations are important determinants for the Property fund’s allocation decisions. In general we prefer companies with prudent management teams and strong business models, companies with strong financial profiles that focus on high quality assets. Often we find that companies with these characteristics also score well on ESG factors. It’s worth mentioning that the score itself is not the sole criterion; the efforts the company is making to improve its ESG profile are very relevant as well. One particular aspect in that regard is an improvement in greenhouse gas (GHG) emissions.
The real estate sector represents a large share of annual global emissions of CO2 and other greenhouse gases. The sector as a whole accounts for nearly 40% of the world’s energy consumption and 33% of 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. Over the last two years our active ownership team has therefore been engaging with retail Real Estate Investment Trusts (REITS) on carbon management.
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 carbon emissions from energy production decline. This is important because the business case for environmentally friendly buildings is based on the possibility to charge higher rents due to lower energy costs. Besides this, it is also easier to market energy-efficient buildings as their occupancy rate tends to be higher. Finally, the potential implementation of stricter environmental requirements by the government poses less risk for companies that already manage their carbon emissions.
With this in mind we are engaging with 11 REITs from across the world on five engagement objectives: climate change management and legislation, license to operate, environmental management systems, occupier engagement and energy and carbon reductions. The peer group has made considerable progress over the past two years of our engagement. During the last year of our engagement we will encourage the lagging companies to intensify their efforts to become more sustainable and thus unlock their full value.