Robeco’s Active Ownership team has just concluded an engagement program that began in 2017 with four companies in the office real estate sector that are holdings in the Robeco Sustainable Property Equities fund. Its main focus was on decarbonizing buildings and focusing more on the well-being of tenants, particularly after Covid-19 hit.
Decarbonization is a vital issue in real estate as the sector accounts for nearly 40% of the world’s energy consumption and 33% of global greenhouse gas emissions. Reducing these levels is not only good for the climate, it is also financially material for these companies, says Engagement Specialist Sylvia van Waveren.
“Having green and healthy office buildings can bring about various economic benefits for real estate companies,” she says. “The proactive management of a building with regards to its environmental performance and its carbon emissions can lead to lower energy costs.”
“Additionally, it enables office owners to charge premium rents for environmentally friendly, healthy buildings, because tenants will benefit from having happier and healthier employees. As investors, we value those companies that integrate sustainability into their business models to ensure the long-term value creation of the properties in their portfolios.”
Several improvements were achieved during the engagement period. One company undertook efforts to instill a net-zero carbon policy for its design construction modules. “This means that new projects will decrease emissions by reducing the use of virgin materials and fossil fuels,” says Van Waveren. “For existing projects, this means making buildings repurposable, and replacing energy derived from fossil fuels with renewables.”
“Furthermore, we saw that companies became more transparent about their sustainability activities, thereby earning and strengthening their license to operate. This encompasses issues such as proactive communication, the level and depth of sustainability reporting, and participation in green building certifications.”
Most companies increased their certifications under the industry’s two main professional bodies for standards – the Building Research Establishment Environmental Assessment Method (BREEAM) and Leadership in Energy and Environmental Design (LEED) – while some even started using energy efficiency benchmarking for energy ratings in their buildings.
“We encouraged companies to strengthen the efficient measurement and reduction of their overall environmental impact, mostly by using an environmental management system (EMS),” says Van Waveren. “The EMS should cover energy consumption and carbon reduction metrics, and ideally be externally certified according to international standards.”
“Most of our companies showed a fair increase in the floor area covered by energy consumption monitoring, something that we had strongly pushed for within the EMS objective. We also called on companies to further reduce their energy consumption and carbon emissions. Under this objective, we focused on year-on year absolute and relative emissions reductions across the last three years.”
“All of our engaged companies are now committing themselves to companywide greenhouse gas reduction goals and are well on track to reach them. We are very much encouraged by these commitments.”
One thorny issue is the salaries and bonuses given to senior executives at real estate investment companies. “They are known to use a significant amount of discretion to determine executive pay, often leading to inappropriately large payouts,” says Van Waveren.
“We are of the opinion that companies that adopt compensation policies supported by investors and societal stakeholders are reaffirming their ‘license to operate’. Although we remain concerned around the compensation practices of some companies, we have seen a positive trend overall.”
“This trend is reflected by our proxy voting, as several companies have improved their compensation plans enough for us to approve them during shareholder meetings.”
Another issue that affected all companies was reacting to the Covid-19 crisis, in which many offices were forced to close to meet lockdown regulations. “We found that the pandemic’s impact on this sector depended on the industry to which their tenants belonged,” Van Waveren says.
“For example, one of our companies is a US-based owner and developer of life science laboratory space. This will remain in high demand, especially given the current pandemic threats and other diseases faced by our modern and ageing society.”
“Another company has a portfolio consisting mostly of offices, whose tenants are mostly based in the technology sector, which was one of the less-impacted sectors during the current economic downturn.”
“However, another company holds a portfolio with 28% in retail exposure, with smaller retail units as tenants. This could well be the sector that is damaged most in the current economic downturn. The company is now in process of agreeing to three-month rent delays with some of its tenants.”
Another development was the willingness of companies to embrace the UN’s Sustainable Development Goals (SDGs). The two goals that are particularly relevant are SDG 11: Sustainable cities and communities, and SDG 13: Climate action.
“All our peer companies are working on integrating these SDGs into their strategies,” says Van Waveren. One of them committed to achieving carbon neutral operations by the end of 2030 by reducing the energy consumption of its current properties and its entire development pipeline.”
“The company will continue to take advantage of all onsite solar and battery installation opportunities. Finally, it will make the remainder of its energy consumption 100% renewably powered through an offsite energy power purchase agreement.”
Robeco has long used engagement to achieve environmental, social and governance (ESG) improvements at investee companies. “Integrating ESG factors into our investment process is an important part of our sustainability strategy,” says Folmer Pietersma, portfolio manager of the Robeco Sustainable Property Equities fund.
“The engaged companies have shown improvement on their management of climate change-related issues. Certain companies have clearly formulated strategies to become carbon neutral by 2030 – something which we highly appreciate.”
“Although the companies engaged have been sector leaders, they remained open to dialogue and taken further steps to reduce greenhouse gas emissions. We hope the results of our engagement can inspire other corporates to follow on their decarbonization efforts.”