The United Nations Secretary General asked countries to come forward with net-zero targets and theRace to Zero campaign also calls on regions, cities, businesses, investors and civil society to submit plans to reach net-zero emissions by 2050. This suggests that all companies that own and manage real estate around the world should have a clear policy on how they are seeking to reduce their Carbon Emissions and this policy can and should be more aggressive than in other business sectors.
However, at Resolution Capital, the specialist global real estate investment manager of the Nedgroup Investments Global Property Fund, we say it should be possible for most listed real estate businesses, or REITs, to hit the net zero target (scope 1 & 2) by 2030.
There are several companies within the Global REIT universe already achieving more advanced targets and a great example is US office REIT Kilroy, which achieved carbon neutral operations by the end of 2020 (scope 1 and scope 2). They met this goal by reducing energy usage across their portfolio of buildings by 18.5% since 2010, installing on-site solar photovoltaics on 15 properties, entering an agreement to generate electricity from a large offsite solar array and purchasing carbon offset verified emission reduction credits.
Given the advanced climate agenda in Australia with the listed property companies, many of the Australian REITs have already set targets to be net zero emissions by 2030. This includes Mirvac, the diversified property company with residential, office, industrial and retail assets, which made a commitment in 2014 to be net positive carbon emissions by 2030 and in 2019 released their plan on how to achieve this target. The plan includes a continued effort to maximise energy efficiency, electrify buildings, and use 100 per cent renewable electricity.
Both Nedgroup Investments and Resolution Capital consider Responsible Investment and analysis of Environmental, Social and Governance (ESG) factors as an integral part of the investment philosophy. They believe that not only do any such initiatives benefit the broader community, but a strong ESG culture in companies is likely to be additive to their performance and investors will ultimately be rewarded through superior investment outcomes.
At Resolution Capital, we consider the sustainability policies of the entities considered for the fund, especially with regard to the ESG standards followed, the existence of ‘green’ buildings in the entities’ portfolio and the adoption of sustainability principles in the operation and development of buildings , among others.
Through its analysis, Resolution Capital has observed that environmentally friendly assets make better business sense, as they have:
1.Greater tenant demand.
2.Environmental policies that lead to greater energy, water and waste efficiencies, reducing operating expenses, making buildings more profitable and efficient to run.
3.Attractive buildings for tenants and consumers that are increasingly setting minimum standards for sustainability. Buildings that meet such requirements have higher occupancy rates
4.Buildings with high environmental standards may receive better pricing upon sale, due to a wider pool of potential buyers.
Climate risk has become a key focus for the Resolution Capital team in recent years.
We have set a goal for the portfolio to align with the objectives of the Paris Agreement and ensure that activities of the portfolio make an overall positive contribution to the global transition to low-emissions and climate-resilient pathways. The progress made includes the measurement of Greenhouse Gas (GHG) emissions and the carbon footprint of the Portfolio. We have defined specific targets for both the business and the portfolio and we have implemented a number of initiatives via energy reduction, renewables and investee company engagement.
The current carbon dioxide intensity of the Resolution Capital Global Portfolio is estimated to be $46kg/m2 versus $83kg/m2 for the FTSE EPRA/NAREIT Developed global REIT index. This is based on data sourced the Global Real Estate Sustainability Benchmark (GRESB) and Bloomberg, which covers 84% of the current portfolio.
Resolution have developed a proprietary database which presents the climate related data in numerous ways, including at a portfolio, sector, or company specific level. This is important for understanding whether ESG metrics for the Portfolio are being influenced by individual stock selection or sector bets. For example, data centres are significantly more carbon intensive compared to, say, the self-storage sector.
We stress that it is important to be able to differentiate whether the carbon footprint of the Portfolio is being influenced by an overweight to this sector, or rather, they are picking companies that underperform their relevant peers.
There are 58 ESG metrics captured in the proprietary database, but active judgement is also necessary as data providers and REITs themselves may be subject to complex problems with regard to:
•Inconsistent methodology; across regions and sectors
•Property age: retrofitting old often better
•Measuring energy intensity e.g. in large residential portfolios
Data centres have some of the worst carbon scores of any REIT sector. This does not make them un-investable from our point of view, because data centres owned by large data centres REITs have typically better energy efficiency compared to servers owned by non-specialist owners and spend significant resources to reduce this further. Additionally, data centres REITs are procuring most of their electricity needs through renewable energy, companies like Equinix fall into this category and make up a significant part of the portfolio.
Since 2015, Equinix has increased its renewable energy coverable from 33.5% to 92.0% globally even as their portfolio has doubled.
Climate-related data at the company level can be used to assess how companies stack up in relation to their relevant peer set. This can serve as a tool for further investigation, a prompt for company engagement, or else to help facilitate constructive dialog during ESG engagements with investee companies.
The team at Resolution Capital investment team routinely engages with top management, investor relations personnel, and sustainability division heads to monitor progress across various ESG issues. The team then tracks the outcome of such engagement/scrutiny by storing the information in their proprietary database, which is made available to the whole investment team.
Engagement initiatives are designed to optimise the ability to affect outcomes and enhance investment decision-making. More specifically, we meet the management of prospective investee companies before an initial investment is made and observe the importance management places on ESG factors during such interaction. Subsequent meetings then provide the forum to discuss, amongst other things, the ESG performance of the company, and allow us to advocate further improvement in their ESG performance and disclosure, where relevant.
In addition to meetings with management and Chairpersons, the Resolution Capital team conduct engagement meetings with ESG specialists within prospective and existing portfolio companies.
Having defined objectives is crucial. Specific objectives are defined for all of our engagement activities. We track the number of engagements in full and monitor the actions companies take during and following these interactions. Our engagement activities are also reported to stakeholders, through our quarterly reports and ad-hoc discussions.
Resolution Capital as a firm has ensured that their own business practices align with those targeted for investee companies. The firm has a target to be Carbon Neutral by the end of 2021 by already using renewable energy, carbon offsetting flights and other travel, minimising the use of plastics and waste reduction.
Resolution Capital’s Responsible Investment Policy, Engagement Policy and Proxy Voting Policies are all available publicly on their website. They have been a UNPRI member since 2010, a GRESB member since 2017 and also became a UN Global Compact participant in 2019.
Organisations that understand the necessity for positive culture and demonstrate it to this extent have a significant edge. Leadership and governance of this nature breed resilience and strong business results. However, equally important and extremely prevalent today is a focus on environmental issues such as carbon emissions, which is why a more aggressive stance on net zero targets should be encouraged for property companies.
We believe the positive adoption of truly sustainable investment practices in the industry must be driven by shareholders of all sizes. These stakeholders can make a significant difference and are best placed to encourage the adoption of 2030 timelines by listed real estate companies. By setting more aggressive emissions targets, we want to encourage active, result-orientated engagement in the global property space.
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.