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Carbon management in Real Estate Investment Trusts

Carbon management in Real Estate Investment Trusts

14-12-2016 | Insight

Buildings represent a major opportunity for environmental improvements as the sector as a whole accounted for nearly 40% of the world’s energy consumption, 30% of raw material use, 25% of solid waste, 25% of water use, 12% of land use, and 33% of the related global greenhouse gas emissions. Because the real estate sector represents such a large share of annual global emissions of CO2 and other greenhouse gasses, we have, over the last 3 years, focused on Real Estate Investment Trusts (REITS).

  • Sylvia van Waveren
    van Waveren
    Engagement Specialist

Besides environmental advantages, having a solid climate change strategy has various economic benefits for real estate companies. First, proactively managing their carbon emissions provides real estate companies, with the ability to lower their energy costs through energy efficiency measures. 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.

The research underpinning this engagement program comes from the research group Global Real Estate Sustainability Benchmark (GRESB). GRESB is an industry-driven organization committed to assessing the sustainability performance of real assets globally such as real estate. Based on GRESB research, we began our engagement program in 2013 with seven companies (CapitaLand Ltd., Corio NV, Hammerson Plc., Link Real Estate Investment, Macerich Co., Simon Property Group and Unibail-Rodamco) before adding another five in 2014 (Eurocommercial NV, Federal Realty Investment, Frontier Real Estate Investment Corp., Scentre Group and Sun Hung Kai Properties). In 2015, Corio NV dropped out due its acquisition by Klépierre.

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Substantial progress

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. Based on a success threshold of reaching at least 3 out of 5 objectives, we successfully closed our dialogue with 9 out of 11 companies. 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.

Below we briefly outline some of the progress made in the five engagement objectives defined to guide and structure our engagement program.

Climate change management and legislation

We believe companies should strive to embed climate change and sustainability considerations in their overall corporate strategy. One measure that reflects such strategic climate change thinking is the push for renewable energy use across portfolios. We see strong links between renewable energy use, long term cost savings and the ascertaining of LEED and BREEAM certifications. BREEAM and LEED are the two most widely recognised environmental assessment methodologies used globally in the construction industry today. Any sustainability strategy must also have significant commitment from the top, including buy in from the very highest levels of the organization, and be linked back to the overall corporate strategy of the company.

Spotlight: Hammerson has been a big improver in this engagement objective. The company’s commitment for all new developments to meet the highest BREEAM certifications is reflected in excellent or very good ratings for all new developments. It is clear that the company systematically started to take climate change into account in all their strategic decisions. Strong buy in at the senior management level is mirrored in significant awareness at the site level, with sustainability considerations reflected in the day to day operation of their assets.

License to operate

In order to strengthen the business case for sustainability, we believe it is important for companies to link sustainability initiatives such as efforts to reduce energy consumption, implement environmental management systems, gain sustainable building certifications with associated cost savings. We think the best way to achieve this is through increasing the quality and quantity of meaningful quantitative data in corporate reporting. This may be best possible in a fully integrated report, but sometimes a traditional annual report complemented with a dedicated section with sufficient material information on the company’s website may be adequate as well.

Spotlight: During our engagement, Simon Property Group has shown constant improvements, first by publishing its initial stand-alone sustainability report, then by aligning it with the Global Reporting Initiative (GRI) guidelines GRI G4 core reporting requirements and finally by greatly expanding the sustainability information available on the company’s website. We see this as a major positive development for the company.

Environmental Management Systems

Efficient environmental management should result in improved operational efficiency and subsequently in lower costs. Thus, directly affecting financial metrics such as operating margins.

Therefore, we deem it essential for companies to have a comprehensive environmental management system (EMS) in place. This allows them to efficiently manage the overall environmental impact of their operations, and to focus on continuous improvement when it comes to reducing these impacts. Overall, we see positive trends both in companies moving towards certifying their EMS’s against the ISO 14’001 standard, and moving from asset level certifications to group wide certifications.

Spotlight: We view CapitaLand Ltd. as being one of the sector leaders with regards to environmental management systems. We value their comprehensive approach to certification, reflected in their commitment to achieve both ISO 14001 and OHSAS 18001 certifications in all key markets and at group level. CapitaLand Ltd.’s EMS is externally audited by a third-party accredited certification body on a yearly basis. In addition, all appointed main contractors must be ISO 14001 and OHSAS 18001 certified or equivalent. They also demonstrate a clear understanding of the importance of climate change for the real estate industry. Echoed for example in the target to operate only Green Buildings (certified by a green rating system administered by a national government agency or a World Green Building Council (WGBC) recognized Green Building Council) by 2030, in addition to all existing properties owned by the company in Singapore targeting the Green Mark certification, a Singapore specific certification run by the government, by 2020.

Occupiers engagement

We see effective tenant engagement as the ‘holy grail’ for retail real estate companies aiming to incorporate sustainability considerations in their operations, as they typically only have direct operational responsibility for the communal areas, which typically cause only a relatively small part of the environmental impact, 20% to 40% depending on the design of the asset. By getting tenants to also ‘green’ their own operations, the magnitude of improvements which can be achieved is substantially increased.

One meaningful tool to engage tenants are concept known as ‘Green leases’. Encouragingly, over the course of the engagement, we have seen an increase in the amount of companies that incorporate some form of green criteria into their standard lease agreements (i.e. a Green lease). It is all very well for large property companies to green their own operations, but without attaining buy in from their tenants and subsequently bringing them on board, an unnecessary ceiling is placed on the level of improvements which can be achieved.

Spotlight: We see Unibail-Rodamco as displaying best practices for the sector with regards to occupier’s engagement. Unibail-Rodamco’s commitment to roll out green leases as standard lease agreements with all their tenants, as well as the continued promotion of sustainability topics coupled with comprehensive training options for their tenants is a valuable way of embedding sustainability across the value chain.

Energy and carbon reductions

Whilst initial investments by companies in energy-efficiency and associated environmental strategies have substantially driven down overall GHG emissions and energy consumption, we have observed an overall slowing down of reductions for these two metrics during the final phase of the engagement program. However, we believe that leading companies are now willing to make longer term investments, with longer pay back periods, to achieve further reductions. We view this as a very encouraging development.

Spotlight: In this area, we see Macerich Co. as one of the sector leaders. Its USD 120 million investment in energy-efficiency projects since 2008 is paying off. In fact, their actual energy consumption and carbon emissions reductions often outperform their targets. In addition, their reporting on respective targets is clear, especially in the 2015 sustainability report, which provided for the first provided comprehensive breakdowns in relation to carbon footprint, energy efficiency projects and additional key environmental metrics.


In general, we are positively surprised by the substantial progress the real estate sector has made in a relatively short period of time. In particular, 2 out of 3 US REITs made substantial progress. After 3 years of engagement, we successfully closed our dialogue with 9 out of 11 REITS.

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