Robeco closes successful real estate engagement program

The team successfully closed 9 out of 11 engagement cases after being pleased to see significant advances in the sustainability approaches applied by the companies. The results were published in a special Robeco report entitled ‘Carbon Management in Retail Real Estate Investment Trusts’. The document is not available in the public domain, but it can be shared with interested stakeholders upon request.

The engagement program was started because the real estate sector is responsible for about 33% of global greenhouse gas (GHG) emissions and almost 40% of the world’s energy consumption. Buildings account for the use of 30% of raw materials, 25% of water and 12% of land, while simultaneously generating 25% of the world’s solid waste.

“Climate change leads to significant investment challenges: therefore, climate change strategies and carbon emissions are a recurring theme that we give attention to in our engagement programs,” says Matthias Narr, Environmental Engagement Specialist with the GAO team.

“In the past, we have selected companies in particularly carbon-intensive sectors such as materials, automotive and cement industries. At the moment we are engaging with companies in the electric utilities, oil and gas and real estate industry, particularly as buildings represent a major opportunity for environmental improvements.”

“The real estate sector represents a large share of annual global emissions of CO2 and other greenhouse gasses, so over the last three years we have subsequently been focusing on trying to trigger improvements at real estate investment trusts (REITs).”

A REIT is a company that owns, and typically operates, income-producing real estate or building-related assets. These companies can often focus more on monetizing the assets rather than trying to minimize their impact on the environment, which is where engagement comes in, Narr says.

To this end, five engagement objectives were pursued:

• Climate Change Management: Companies were asked to state their positions and actions taken with regards to climate change management and legislation.
• License to Operate: This aimed to cover aspects such as communication, reporting and participation in initiatives such as the Carbon Disclosure Project.
• Environmental Management Systems: These are needed to cover energy consumption and carbon reduction metrics, ideally certified to an international standard.
• Occupiers Engagement: Such a framework may consist of regular meetings with tenants to raise sustainability awareness, with mandatory sustainability training.
• Energy and Carbon Reductions: This analyzes the development of year-on-year averages and the longer-term trends of these metrics, while encouraging ambitious target setting.

The engagement process began in 2013 with seven companies: CapitaLand, Corio, Hammerson, Link Real Estate Investment, Macerich, Simon Property Group and Unibail-Rodamco. Another five were added in 2014: Eurocommercial, Federal Realty Investment, Frontier Real Estate Investment, Scentre Group and Sun Hung Kai Properties. In 2015, Corio dropped out due its acquisition by Klépierre.

Robeco does not publically disclose the full results, but as a broad summary, two companies met all five engagement objectives; four companies met four of them; three companies met three of them; one company met two, and one company reached one of the objectives.

“While these results could be seen to be mixed, it does mean all 11 companies under engagement met at least one of the engagement objectives, while two companies met all of them,” says Narr. “So while there is always room for improvement, the majority of the companies made substantial progress and we are pleased with how this engagement program turned out.”

The research underpinning this engagement program came from the Global Real Estate Sustainability Benchmark (GRESB), an industry-driven organization committed to assessing the sustainability performance of real assets globally such as real estate.

Robeco encouraged all companies under engagement to participate in the GRESB survey as a means of measuring sustainability performance and increasing transparency. At the start of the engagement, only about half of the companies participated in GRESB. This rose to a 60% increase in participation, and 10 of the 11 companies under engagement have since joined the initiative.

Narr says he now hopes that these companies will reap the rewards of the engagement process, proving that adopting sustainability is financially material to bottom lines, as well as helping the environment.

“Besides the environmental advantages, having a solid climate change strategy has various economic benefits for real estate companies,” Narr says. “As investors in the real estate sector, we are therefore not only looking for real estate companies that seek to reduce costs, but those that integrate sustainability into their business models to ensure long-term value creation of the properties in their portfolios.”

Regarding the portfolio impact, portfolio weightings of the companies were adjusted, reflecting their levels of success in meeting the engagement objectives, says Folmer Pietersma, portfolio manager of Robeco’s Property Equities fund.

“It is Robeco’s philosophy to closely align its engagement activities with its investment activities and focus on financially material engagement themes,” he says. “Robeco’s Property Equities fund has significant overweight positions in the companies that scored highest in this engagement. We also reduced exposure to the two companies that showed a lack of improvement following our engagement.”