Universal standards are key if investors are to make headway in greening their portfolios, says Steve Smith
Climate change is a global phenomenon with particularly challenging implications for the real estate sector. Following Kyoto and in due course Copenhagen, it is becoming increasingly clear we need consistent policies and above all a common methodology for evaluating and monitoring our approach to delivering carbon reduction targets.
At the moment we have a system dominated by domestic and local standards and the multiplicity of sustainable solutions offered to real estate investors has created a virtually impenetrable fog of confusion around the subject, which has been highly counterproductive.
Global targets for fighting climate change should imply global standards and methodology. In Europe, major institutional investors and managers have an urgent need for consistent environmental performance measurements and reporting and, increasingly, the majority of investors and advisors distinguish between managers who can and cannot meet appropriate standards in the request for proposal process.
So there is a need for a tool that can provide a consistent picture of the level of compliance across an investor's multi-jurisdictional portfolio, which would dispense with the need for multiple certifications through the likes of Building Research Establishment Environmental Assessment Method (BREEAM), High Environmental Quality (HQE) and Leadership in Environmental and Energy Design (LEED). Additionally the tool must be adaptable to existing assets, not just new construction.
AXA Real Estate Investment Managers (AXA REIM) decided in late 2007 to anticipate the environmental challenge and became part of a project aimed at developing a new tool that is truly adapted to the industry's needs. In fact, it was the experience of preparing Energy Performance Certificates (EPCs) with their origins in the European Energy Performance of Buildings Directive (EEPBD) that prompted us to take the initiative. While the EEPBD is essentially a sound directive, its main weakness is allowing significant discretion to individual member states to define their own implementation and measurement processes.
This latitude is less likely to be evident in future legislation but in the case of the EPC the freedom to manoeuvre allowed a variety of interpretations, the result being an implementation enshrining purely national conventions. In the circumstances the Directive has failed to produce an environment in which relative measurement of compliance to a consistent standard is possible between member countries.
So what are the main features of the tool that we believe should be developed and could become a market standard?
The tool must be able to provide reliable and relevant qualitative information as well as the key quantitative data. Measuring energy performance is a complicated process and it is vital that the information is verifiable by third parties.
The tool should be simple, not too costly and capable of adaptation as standards evolve. An initial audit for a 10,000m2 office building should cost somewhere between €3,000-5,000 depending on complexity.
This distinction is of particular importance given that most of the improvements/modifications derive from the specific needs of the actual occupier. A full appreciation of occupiers' needs is essential to facilitate a significant reduction of consumption and therefore emissions.
We believe that together with our partners and Bureau Veritas we have developed the basis of a tool that will evolve and assist in developing an internationally recognised set of standards. ‘Green Rating', addresses the need for qualitative and quantitative assessment and has the flexibility to deliver consistent analysis and reporting across national borders.
We hope to encourage investors and managers who share our determination to embrace sustainability to join the debate on standards and metrics and to support the Green Rating initiative. We hope the initiative will help to develop an international standard that will be fundamental in the context of the future real estate industry.
Green Rating will continue to evolve and by the end of 2009 more than 120 office properties throughout Europe will have been through the process. It will be expanded to include other asset classes and as a priority logistics and retail assets will form part of the next induction.
At AXA REIM, a regular appraisal of our assets measured against Green Rating standards will become a significant part of our business plan. We believe that in so doing we are future proofing our portfolios.
Further, we believe that anyone who ignores the growing trend towards ‘green' evaluation and the urgent need for remedial action to improve the quality of the built environment does so at their peril.
A responsible approach to sustainability can actually help to achieve better returns and this is core to our approach at AXA REIM. There is little doubt that obsolete buildings, judged by the standards of the coming generation, are likely to suffer accelerated rental value depletion. We believe that a growing appreciation of this dynamic strongly emphasises the need for a general standardisation of processes and practice throughout the global real estate market.