hongkongen
Covid shows decarbonization strategies essential for property companies

Covid shows decarbonization strategies essential for property companies

03-01-2022 | Insight
The property sector has been hit hard by the Covid-19 pandemic. As populations saw their mobility restricted, offices remained empty, hotels longed for tourists, and physical shops struggled to accommodate. A potential silver lining – that Covid could have put the sector on a decarbonizing, Paris-aligned pathway – failed to materialize, meaning colossal efforts remain necessary to put the sector on the right track.
  • Folmer Pietersma
    Folmer
    Pietersma
    Portfolio Manager
  • Frank Onstwedder
    Frank
    Onstwedder
    Global Equity director

Speed read

  • Carbon emissions of the companies we’ve tracked only fell by 6% in 2020
  • This is barely in line with the necessary reduction to meet net zero targets 
  • Covid-related distortions complicate decarbonization progress tracking

The Covid-19 pandemic has meant major upheaval for the property sector. As economies gradually reopen, most segments are still struggling to recover from the initial shock, while others continue to benefit from a stop-and-go recovery. Over a year after the great lockdown of early 2020, many offices, hotels and traditional retail venues still have a long way to go to get back to normal. Meanwhile, logistics and datacenters remain on a tear.

While carbon emissions of many property companies fell significantly in 2020, this drop was merely a foretaste of things to come

Given the amplitude of the shock they suffered, Covid-19 could have, at least, given property companies a head start in their race towards the decarbonization targets set in the 2015 Paris agreement on climate change. Yet that does not seem to be the case. Robeco analysis shows that while carbon emissions of many property companies fell significantly in 2020, this drop was merely a foretaste of things to come, and shows how hard it will be for the sector to decarbonize.

A major contributor to global GHG emissions

The property sector is a major contributor to global greenhouse gas (GHG) emissions, including CO2. According to the International Energy Agency (IEA), the built environment represents over 38% of total energy-related CO2 emissions annually. Building operations including heating, cooling, and lighting are responsible for 28% of global emissions, while building materials and construction, typically referred to as embodied carbon, are responsible for an additional 11%.

In order to achieve the targets set in the Paris agreement, the property sector will need to reduce carbon emissions at a 6% annual rate (85% by 2050). This challenge will require large investments in retrofitting programs; potentially more than USD 20 trillion.1 These programs represent the only alternative to incurring even higher costs in the form of potential carbon-related taxes, or the risk of stranded assets.

But while an estimate of the potential costs involved may be a useful way to assess the efforts needed to put the sector on the right track, it does not necessarily give an idea of the actual disruption involved. From this perspective, analyzing the impact of the Covid-19 shock on the sector’s carbon emissions in 2020 and comparing it to required decarbonization pathway provides a much better idea of the colossal efforts needed to achieve these goals.

To assess the impact of the pandemic on the carbon emissions of the property sector last year, we looked at the reported absolute levels of scope 1 & 2 carbon emissions2  of 200 of the largest listed real estate companies, and found that only 134 of the 200 companies have so far reported scope 1 & 2 carbon emissions for both 2019 and 2020. These 134 companies represent 65% of the market capitalization of the S&P Developed Property Index.

We also found that, for these 134 companies, total scope 1 & 2 carbon emissions declined by 6% on average, in 2020. While a 6% decline in absolute carbon emissions is in line with the projected decarbonization pathway the listed real estate should follow to achieve the targets set by the Paris Agreement, one would have expected a much steeper decline in a year in which the economy almost came to a standstill for several months. This illustrates the formidable task ahead.

Stay informed on Sustainable Investing with monthly mail updates
Stay informed on Sustainable Investing with monthly mail updates
Subscribe

Large differences across segments

One reason for the relatively small overall reduction in emissions is that Covid-19 hit some subsectors disproportionately, while other segments experienced a strong rise in activity. Figure 1 illustrates this. On the x-axis, the chart shows how carbon intensive for each segment is. The y-axis shows how much each segment’s absolute carbon emissions changed from 2019 to 2020. The size of each bubble reflects the absolute amount of carbon emissions.

One reason for the relatively small overall reduction in emissions is that Covid-19 hit some subsectors disproportionately, while other segments experienced a strong rise in activity

Not unexpectedly, the worst hit subsector was Hotel & Resort REITs. As the pandemic broke, business and leisure travel activity virtually froze, and many hotels were closed for a large part of the year. Also among the hardest hit by the measures taken to contain the spread of the virus were Retail REITs, as physical shops and malls either remained closed or saw the number of customers visiting them fall sharply.

Figure 1: Absolute carbon emissions (scope 1& 2) per segment – 2019 versus 2020

Source: Robeco, November 2021.

Other segments severely affected by Covid-19 were the Office REITs, as people were forced to work from home, and the Diversified Real Estate subsectors, which also have a high representation of office and retail real estate. Finally, Healthcare REITs also suffered significantly. Many of the companies is this segment own senior housing facilities, which also had to close for an extended period of time at the height of the pandemic.

At the other end of the spectrum, the switch from physical to remote business meetings and from bricks & mortar shopping to ecommerce led to outsized growth for the Specialized REITs and the Industrial REITs segments. Datacenter companies represent a large part of the Specialized REITs category, and experienced a strong growth both in terms of occupancy rates and the number of datacenters in operation.

Also, among the big winners of the broad shift from physical to digital were Industrial REITs. The bulk of assets owned by companies within this category is made of warehouses and other logistics-related assets. These companies benefited from the stellar growth seen in ecommerce activity in the heat of the pandemic, which did not reverse once economies gradually reopened during the second half of the year.

Durable impact on decarbonatization progress tracking

Looking ahead, it is also important to note that the impact of the pandemic will distort any analysis of the progress made by the property sector in terms of decarbonization for at least another reporting year, and perhaps even longer. This means that not before late 2023, at the earliest, will investors be able to judge whether the sector really is on a Paris-aligned pathway to net-zero emissions. 

Not before late 2023, at the earliest, will investors be able to judge whether the sector really is on a Paris-aligned pathway to net-zero emissions

We will then have to compare the carbon disclosures with those of 2019, the last year of the pre-pandemic era. Hopefully by then we will also have much better disclosure on scope 3 carbon emissions, which represent by far the largest part of the overall carbon footprint of the real estate sector.

In the meantime, these considerations also serve as a reminder of the important implications of broad commitments towards net-zero emissions by a growing number of countries. As we argued in a recent white paper on the decarbonization of the real estate sector, it is high time investors in listed property companies start incorporating decarbonization strategies into their valuation framework and investment decisions.

1Source: Morgan Stanley BluePaper (2019): Decarbonization: The Race to Net Zero, Global Alliance for Buildings and Construction, International Energy Agency and the United Nations Environment Programme (2019): 2019 global status report for buildings and construction: Towards a zero-emission, efficient and resilient buildings and construction sector, Robeco.
2GHG emissions are measured in three ways, according to how they were created. Scope 1 emissions are those that are directly generated by the company, such as an airline emitting exhaust fumes. Scope 2 emissions are those that are created by the generation of the electricity or heat needed by the company to sell its main products or provide its main services. Scope 3 emissions are those resulting from the entire value chain, including the end-user of the product over its life cycle, and are much more difficult to measure. For property companies, scope 3 emissions, which typically represent the vast majority of emissions, include items such as emissions from construction materials used by a developer for a new building, or emissions from the energy use of tenants, for example.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree