Research from the European Centre for Corporate Engagement at Maastricht University commissioned by APG, PGGM and USS found wide divergence in green performance in commercial real estate
From a societal perspective, attention to the environmental performance of real estate investments is important, because the commercial real estate sector is among the largest consumers of natural resources and one of the heaviest polluters in terms of greenhouse gas emissions and waste production. Thus, the property industry can play a major role in reducing global energy and resource consumption and in limiting greenhouse gas emissions.
From an investment perspective, an increased focus on energy efficiency and sustainability implies resolving a market inefficiency, since the investments needed to make buildings more energy efficient have, to a large extent, positive net present values, even at current energy prices. This positive net present value holds especially true for better building management: lighting, cooling, and heating technology; and better insulation.
Environmental Performance: A Global Perspective on Commercial Real Estate, provides the institutional property investment market with a unique dynamic environmental benchmark: based on the survey results, we have developed an Environmental Real Estate Index, which includes sub-scores on environmental management practices and on the actual implementation of these practices. By using information contained in the index, institutional investors can compare the environmental score of individual property investments with their environmental real estate targets. This benchmarking can serve as a catalyst for environmental engagement in real estate investments.
The environmental real estate survey
The survey focuses on two dimensions, the definition of an environmental management policy and the actual implementation and measurement of that policy. In the first part, public and private property investors were asked 20 detailed questions related to the presence of environmental management policies, the integration of environmental issues in property management, and the disclosure of environmental policies. In the second part, respondents were asked 28 questions, the purpose of which was to supply evidence on the actual implementation and measurement of their environmental policies. For instance, we asked investors to provide detailed information on energy and water consumption, waste collection and recycling, and CO2 emissions, and on employee environmental training programmes and remuneration policies.
The survey sample comprises 688 listed property companies and private property funds: 426 from Europe, 194 from the US, 50 from Asia, and 18 from Australia. We note that non-responding property funds are likely to lag behind in environmental management. Thus, extrapolating the results based on the sample of respondents may provide an overly optimistic view on the current environmental performance of the global universe of listed property companies and private property funds.
Among listed respondents, we identify high response rates for European and Australian property companies, especially when we weigh these response rates by the market capitalisation of the surveyed companies. The response rate of 20% for the US is relatively low. The zero response (out of 13) for Asian property companies is disappointing.
The environmental real estate index - listed
Table 2 provides an overview of the scores on the Environmental Real Estate Index for the top three of listed property companies in different regions. We provide scores on the sub-categories Management & policy and Implementation & measurement, which comprise the total score. Overall, but with the notable exceptions of Australia and the UK, property companies do not come close to achieving the maximum score on the global Environmental Real Estate Index. However, the environmental scores of the best performers show that the current environmental benchmark set by three leading pension funds in Europe is realistic. These top green real estate performers provide the clear examples that the industry needs if it intends to improve environmental performance.
Since it is likely that the response rate is higher among the relatively strong environmental performers, our results may even overestimate the current environmental performance of the global property sector. This finding suggests that most property investors are not yet aware of the potential for shareholder value creation associated with energy efficiency or environmental investments in their buildings, ie, there is untapped potential to increase shareholder value.
A statistical analysis in the main survey report shows that among listed companies, the larger investors are significantly more likely to have a strong environmental performance. Although we cannot establish a causal link, we find that environmental performance is also significantly and positively related with return on assets, and also with the percentage free float of property company shares. We find that companies that invest in residential or non-core property types score substantially lower on the Implementation & measurement index of environmental practices.
Private property funds
We analyse the survey results for private property funds separately. Table 3 provides the scores on the Environmental Real Estate Index for the top performers among the 126 private property funds that responded to the survey. Listed property companies show a much better environmental performance than their private counterparts. We also note that for some funds, there are substantial discrepancies between the score on Management & policy and the score on Implementation & measurement. The low scores may be partly due to the limited disclosure, as a result of which there is inadequate public scrutiny of property funds that operate in the private market. Moreover, the finite life of some private funds may lead to a more short-term focus and may hinder investments in energy efficiency.
The variation in the scores largely accords with the scores for listed property companies: scores for Management & policy are higher than are those for Implementation & measurement, and Australian funds outperform their European, Asian, and American peers. It is clear that property managers from all over the world can learn from the Australian best practices in environmental management.
Results show that in explaining the existence of an environmental policy and its thorough implementation, the location of a property fund is more important than is the country of origin of the fund manager. Residential property funds score low on Management & policy, and even lower on Implementation & measurement. This low score may be due to the small size of the investment units, or the lack of incentives for energy efficiency improvements following the use of a net rental contract between owner and tenant. The dedicated office funds have the highest scores, both on Management & policy and on Implementation & measurement. Most of the environmental metrics and energy efficiency technology that initially appeared on the market were aimed specifically at office buildings. One exception is the score for industrial funds, which lags significantly behind the environmental performance of other sectors.
To address the relation between environmental policies and environmental management practices, we map for every respondent how their score on Management & policy relates to their score on Implementation & measurement. Figure 1 shows the results. If all the good intentions of the respondents are reflected in actions, then the dots in the figure should either be lying on, or very close to, the 45-degree line drawn in the graph. If respondents were to outperform their intentions, then the dots should lie above the line. However, this is not the case. Our results provide incontrovertible evidence of ‘green talk', rather than ‘green walk': performance on environmental Management & policy is much better than performance on Implementation & measurement. Clearly, property companies do not necessarily practise what they preach when it comes to environmental management.
We then divide figure 1 into four quadrants, each of which depicts a special set of environmental performance characteristics. Property companies and funds that appear in the lower left-hand quadrant are the ‘green laggards'. These respondents are underperformers when it comes to environmental performance; they do not have either the environmental policies or the implementation, and thus do not take environmental metrics into account. We note that this quadrant is the most densely populated, with about 133 of the respondents (67%) in this area.
In the lower right-hand quadrant are the property companies and funds that ‘talk the talk', but do not ‘walk the walk'. Their performance on Management & policy is relatively high, but these respondents do not execute these policies equally well, which is reflected by a low score on Implementation & measurement. We call this quadrant ‘green talk'. This quadrant is the second most densely populated of the four quadrants, containing 41 (21%) of all respondents.
In the upper right-hand corner are the environmental top performers, called ‘green stars'. These companies and funds have set ambitious environmental targets, actively implement measures to improve the environmental performance of their properties, and regularly assess the effects of these measures. Only 20 respondents (10%) can be classified as ‘green stars', with relatively high scores on both Environmental management & policy and Implementation & measurement.
In the main survey report, we also present a selection of survey results with responses to the most important individual questions. A substantial part of the survey collects information on the actual environmental metrics that are measured by the respondents. We address energy and water consumption, waste treatment, and CO2 emissions. Table 4 summarises the results. Only 37 (19%) of the respondents were able to report the exact energy consumption for their total property portfolio in 2007 or 2008.
The last column of table 4, percentage of respondents with smart meters, provides evidence on the use of smart meters. The information collected by such meters is essential to establishing a baseline measurement of energy consumption across buildings, to setting targets for energy reduction, and to measuring the immediate effect of resource efficiency measures. Even though utility companies all over the world are installing smart meters, the results show that this basic infrastructure to obtain information on environmental metrics is in place in parts of the property portfolios of 76 respondents only.
The results of this survey show strong differences in the environmental performance of property investors. The environmental scores of the best performers show that the current environmental benchmark, as set by the three pension funds, is realistic. Some Australian, Swedish, and UK property companies achieve close to the maximum score on the global Environmental Real Estate Index and outperform the rest of the world. These findings suggest that the environmental performance of the global property investment industry can be substantially improved.
Many investors have taken some steps toward optimising environmental performance. End-investors also have a major responsibility, which could lead to many more and extended collaborative initiatives. And given the increasing speed at which the commercial property sector is embracing environmental investment policies, it is likely that this survey will be repeated regularly. We strongly urge those property companies and funds that did not participate in this survey to respond to future ones, and we ask the global property industry not only to talk, but to take steps towards optimal environmental performance.
The research was conducted by Nils Kok, assistant professor, department of finance, Maastricht University, together with Piet Eichholtz professor of real estate finance, Rob Bauer, professor of finance and Paulo Peneda, graduate student