While Prupim's improver portfolio did not establish a link between sustainable investment and performance it did deliver powerful lessons, notably the importance of mainstreaming responsible property investment, as Paul McNamara reports
If property investment performance is enhanced through environmentally responsible fund management, it becomes a fiduciary duty to manage in this way. If the opposite is true, then the ability of a fund manager to act responsibly is significantly curtailed. However, if the truth lies somewhere in the middle, with the relationship between responsible management and investment performance unclear, then, over and above a moral logic, what is a property fund manager to do?
In 2007, we addressed this issue by asking what environmental improvements could be achieved within the everyday economics of property asset management and established what became know internally as the ‘improver portfolio'.
The aim of Prupim's improver portfolio initiative was to learn about responsible property asset management. To this end, it tagged £500m (€560m) of institutional-type property investments drawn from its two life funds and set out to see what could be achieved through ‘no', ‘low' and ‘economic' cost actions, to drive down their environmental impacts.
There was talk at the time about utilising a binary benchmark for the new portfolio whereby it continued to provide investors with competitive returns against IPD but would see its collective environmental impact decrease year on year. The original notion was that the experiment would run for five years, with any learning disseminated internally, as it emerged.
Since there was little to learn from already green assets and similarly little point in selecting obviously green-able assets given the desire to learn what to do with everyday properties rather than brag about spectacular wins, a portfolio of 25 typical assets, across all property sectors, was identified.
Albeit driven by a key individual, we decided against establishing a specialist team for the initiative. Rather, Prupim felt that the work (and learning) should be spread across its professional team.
Consultants (ECOFYS) carried out day-one environmental audits for each property in the portfolio to baseline figures for the future measurement of environmental factors such as energy and water consumption. The original intention was for these audits to be repeated annually to measure progress.
So, how did the improver portfolio fare and what were the main lessons?
Given the nature of the initiative, the obvious first task was identifying which environmental improvement options were low cost but of high environmental impact. Schedules of potential improvement options were ranked in this way. As we stand in 2011, it will surprise few that such actions tended to relate to how properties are managed rather than a deployment of specific technologies.
The boundaries of what an asset owner can achieve quickly became clear and led to creative thinking around all aspects of engagement with property investments. It was easy to take direct action with respect to the built structure of some assets but this was bounded by the rights we held and how these changed through time. We soon saw it was far easier to take action in multi-tenanted buildings with common areas and to act at the end of a lease.
Where scope for direct action was denied, there was scope to engage directly with tenants to persuade them to operate properties in a more environmentally friendly way. However, this also prompted our earliest explorations of ‘engaging' with the ‘legal structure' of investments, through ‘green lease' ideas.
We also learned quickly that, in 2007, staff knowledge and commitment to environmental issues was mixed and that, to get traction, senior- and middle-management commitment and education was essential. This said, the improver portfolio proved an excellent mechanism to inspire many professional staff to apply their talents to environmental issues, and seminars were held to enable them to tell colleagues what they had done and what results they had achieved.
Naturally, we did not halt any of our other community and environmental programmes just to focus on the improver portfolio. Other, more specialist, initiatives helped us cut CO2 emissions and water usage from our portfolios by 14.5% and 12.2% respectively between mid 2008 and 2010, and reach recycling rates at our shopping centres and office properties of 49% and 42% respectively. As such, learning developed concurrently across the business and over time the distinctiveness of the improver portfolio slowly dissolved into other bigger, more specialist, initiatives. As time passed, there seemed less need or point in maintaining it as a separate initiative since the techniques were becoming more mainstream.
The drive to audit the properties in the improver portfolio also faded as we came to understand that in, say, single-let high street shops, there was little we could do, other than persuasion, to influence matters until the end of the lease; the cost of unhelpful environmental audits was not to be sneezed at in 2008-09. So, after the first round, they became more selective and eventually came to a halt, for the improver portfolio at least; an immense amount of audit work goes on across our portfolios.
Doubtless, readers will be curious about how the improver portfolio performed financially. Having recently blasted IPD and journalists for attempting to assess the link between environmental and investment performance with a bigger set of data than the improver portfolio can offer, you will not be surprised to hear I make no great claims in this regard - at asset or portfolio level.
There is no doubt the improver portfolio had some notable environmental successes but even at asset level it is hard to prove economic success. Take, for example, our green refurbishment at Griffin Park industrial estate near Southampton where, through simple actions like ensuring greater natural light and using reflective white paint internally to obviate the need for daytime lighting and related costs, we believe we gained a quality (environmentally-conscious) tenant, on a longer than otherwise lease, at a higher than otherwise rent with a lower than otherwise capitalisation rate.
However, choosing a ‘green' course of action means we did not pursue a ‘normal' course of action or get the results. As such, we only have one outcome to reflect upon - beliefs about its superiority over more ‘normal' actions are purely hypothetical, rendering ‘proof' impossible.
Overall, the improver portfolio outperformed and had positive stock scores in three out of four years. However, in one year, it suffered a very bad ‘stock score' and, consequently, over its four-year period, it modestly underperformed the IPD Annual Index. Did this underperformance have anything to do with sustainability? No, it was because some weakly covenanted, secondary retail warehouses had been tagged for the improver portfolio, all of which were marked down and underperformed their sector benchmark in the dark days of 2008.
The data suggest we did achieve some real environmental wins in our improver portfolio without affecting investment performance. So, given its slow dissolution, was the improver portfolio worth it in the end; did it succeed or fail?
It was an initiative of its time that inspired and helped promote learning when the knowledge base in this area was a fraction of what it is now. It helped us gain experience and better think through what works and what does not work, and what it is and is not feasible to claim and do in the field of responsible property management. It helped us see the benefits of mainstreaming responsible investment and become a green fund manager rather than a manager of green funds.
Paul McNamara, director, head of research, Prupim