Sustainability How much of a priority is sustainability to institutional investors? Rachel Fixsen speaks to six investors and managers

Tomas Svensson, AP1

It is the sheer scale of energy consumed through buildings that makes energy efficiency a top priority for investors in the sector, according to Tomas Svensson, portfolio manager
for real estate at First Swedish National Pension Fund (AP1).


“Sustainability is important for all kinds of investments,” he says. “I don’t generally think it’s more important for real estate than for any other business area but, given its scale – the sector is often said to stand for 40% of the global energy consumption – the impact of it is, of course, enormous.”

He adds: “Commercially I think that today there is just willingness among particular office tenants to pay a premium rent for green space but, given the scale of the residential sector, there’s an acute need to address people’s behaviour in terms of use of heating and water consumption.”

It is not enough for real estate fund managers merely to pay lip service to sustainability, he says. “Managers must be able to explain what their policies are and demonstrate what they actually do in terms of sustainability, and not just having a nice looking policy document in the data room.”

Incorporating high environmental standards in new-builds might be easier than revamping existing ones, but Svensson says it is essential that investors become involved in both activities.

“We can’t just knock every outdated building down and start from scratch. So if you, as an investor, only invest in new-built buildings and are not taking measures to improve the old stock, I would hardly categorise you as a responsible investor.

“Frankly, if you build something today you don’t have to go to great lengths to get a building that is sustainable according to today’s standard,” he says. “The challenge lies in transforming all the old, obsolete, often protected, buildings that make up the largest part of the stock today.”

Simon Cox, Prologis
For investors and for all stakeholders in real estate, sustainability is very important, says Simon Cox, UK sustainability officer at logistics developer and fund manager Prologis.
“We’re often asked whether the demand for sustainability has taken a backseat during the financial crisis, but the answer is no,” he says. “We think it’s probably higher up the agenda than it ever was.”

What Prologis is trying to do as an investment manager, he says, is to find out what is important to stakeholders, as well as spotting future trends to keep its investment management ahead of the curve. “With the structure of the Prologis funds, we tend to retain a substantial co-investment in the fund, of anywhere between ten and 50%,” he says, and adds that being a co-investor makes long-term thinking a necessity.

In the UK, sustainability has been an essential part of real estate development for the last eight to 10 years, says Cox, in terms of energy use, and obtaining planning permission and building regulations approval. “In the UK, we’re moving towards zero-carbon buildings, and planning is already predicated on this standard,” he says. “When a building lease comes up for renewal, it will be competing with new buildings, so future proofing is vital if we are to make sure it doesn’t become obsolete but remains current at that time.”

Carbon emission reductions achieved through energy efficiency vary from country to country within Europe. For example, emission reductions in France are generally lower because the country has a significant level of nuclear energy generation, whereas in central Europe, where coal is a major electricity generation fuel, greater emission reductions can be achieved, Cox observes.

As an investment manager, Prologis tends to be asked by investors about its approach to sustainability and what it is actually doing. Cox says: “We tell investors about future proofing and preserving the value of buildings; investors are looking for companies like Prologis to do something – but it’s not clear precisely what they want that to be.

“What we’re doing is avoiding energy use,” he says. “If you get those basics right, then other technology can be added at a later stage in the life of the building.”

Lisa Lafave, HOOPP
In Canada, the increased demand for sustainability in commercial real estate is driven by potential tenants, says Lisa Lafave, senior portfolio manager at the Healthcare of Ontario Pension Plan (HOOPP).

“It has become increasingly evident in Canada during the last three to five years that high profile tenants want sustainability,” she says. A PepsiCo or a Target, with their own ambitious sustainability goals, wants buildings with LEED energy and environment design certification, she says. “They want to show customers and employees they walk the talk. One of the easiest and most cost-effective ways is to occupy sustainable properties.”

But these high performance buildings have other advantages for the corporate tenants, Lafave says. Not only do they boost employee productivity and decrease sick days, they allow for more collaborative space. “Space is no longer a commodity, but rather a tool to increase corporate profitability.”

In large downtown office markets, such as Toronto and Calgary, LEED certification has become a requirement for corporate tenants. “With LEED, you are in the game to obtain these tenants. While the net rents may be the same as traditional buildings, without the designation you may have an empty property.” Put simply, this is the way to future proof office properties, she says.

Property managers now need to have much broader skills than before. “They need to be competent in resource conservation (energy and water) understand the behaviours that drive people to switch off and recycle, and be knowledgeable about products that have better environmental features,” she says. On top of this, they have to be able to understand green building rating systems, track and report on new metrics such as energy and carbon emissions, she says. They also have to have good collaborative skills and processes to rally the many stakeholders in a property to achieve common goals together.

Lafave is glad HOOPP started its sustainability strategy early, and has won recognition as a green real estate investor and developer. “I suspect that, if we started this strategy today, we would have to invest much more time and capital in developing the brand and assets,” she says. “Now, we can instead spend our time increasing our leadership further.”

Tim Coffin, USS
Making sure its investments in real estate meet sustainable standards is part of the overall policy of responsible investment for the Universities Superannuation Scheme (USS). The £34bn pension fund for staff at the UK’s universities and higher education institutions describes itself as a committed long term and responsible investor. 

Sustainability Manager Tim Coffin says: “A responsible approach to property investment will protect and increase the value, thereby enhancing long-term returns for USS members and beneficiaries.”

For this reason, the fund’s objective is to make sure that it produces not only the financial returns it needs to fulfil its commitments, but also to reduce any potentially adverse environmental and social impacts that might be generated by the fund’s investment and management activities, he says. 

“I was recruited to take on the newly-created role of sustainability manager for the property portfolio in 2010, with direct accountability for all responsible property investment matters,” Coffin explains. 

Within USS’s real estate investments, targets for waste, water and energy performance are set for the direct portfolio, he says.

In addition to this, the pension fund actively promotes its RPI policy and targets by engaging directly with the tenants of its properties as well as through the managing agents. “This enables us to reduce landlord-controlled consumption of energy and water, minimise the production of waste and increase recycling rates,” Coffin says.

The USS real estate team also actively engages with the managers of its holdings in property funds. When they are looking at possible new acquisitions or refurbishment or development projects, Coffin says the team makes sure that it considers the environmental and social impacts thoroughly.

“A current example of a sustainable development is the new town centre for Whiteley in South Hampshire,” he says. This project, which USS is undertaking in a joint venture with British Land, involves the construction of new retail, leisure and community facilities. “The scheme will achieve a BREEAM Excellent rating and incorporates wide-ranging sustainability measures, including significant renewable energy PV installations,” he says.

Matthias Leube, AXA Real Estate
Sustainability is key in real estate, according to Matthias Leube, AXA Real Estate’s head of Germany. “Sustainability is now clearly the way to future proof assets against obsolescence,” he says.

“Behind energy performance or indoor air quality matters, the key issues are quality of construction, quality of the maintenance and quality of usage for occupiers,” says Leube. “In other words, sustainability is integral to modern real estate asset management.”

Despite all the crises and the fact that both the industry and the economy at large have been in a trough recently, sustainability is still high on people’s agendas. “There are many reasons why it has become important and, while increasing pressure from regulators obviously plays a part, tenant demand for sustainable buildings is also driving the agenda,” he says.

“Demand from large investors for sustainable property is growing and investors have their own corporate responsibility requirements and will view their own real estate, or the real estate in their investment portfolios, as powerful levers to achieve this,” he says.

Although not all sectors are moving at the same pace, they are all accepting sustainability in one way or another, Leube says, even if the regulations do differ. “We see sustainability being discussed and implemented in all asset classes today – whether these are offices, logistics, retail or residential.”

Some local regulatory constraints are very challenging, he says, and this leads those countries to a very high level of implementation programme.

“As an example, the CRC tax in the UK, launched in 2010, has set the starting point for sustainable measurements and improvements,” he says.

And in some special markets like US office buildings, or Swiss individual houses, where hundreds of “green” certified buildings have been delivered, occupied, leased, and in some cases sold, Leube says a link can be seen between capital value and certification availability.

“Local statistical evidence shows that rents decrease if buildings are not green enough, and thus there are direct local links between sustainability and performance,” he says.

Tom Farley, Brookfield Office Properties
For Toronto-based Brookfield Asset Management, sustainability is part of a larger commitment it makes to corporate social responsibility. “In setting our strategy for the company, we look at corporate social responsibility in three direct ways,” explains Tom Farley, president and global chief operating officer at subsidiary Brookfield Office Properties.

“First, we own, develop and manage premier office properties that are sustainable, environmentally friendly and technologically advanced. Second, we encourage and support a culture of charity and volunteerism among our employees. Third, we contribute to our communities by enlivening the public spaces at our flagship properties with top-quality concerts, exhibitions, fairs and festivals, which are held year-round and free of charge.”

Tenants and other stakeholders in Europe and Australia adopted the concept of sustainability in real estate earlier than their counterparts in the US. “Over the last few years, these issues became more important in North America,” Farley says. “In Australia, for example, the government requires all companies to report greenhouse gas emissions.”

Brookfield’s international scale has made it easier to bring in best practice in sustainability, he says, across all its buildings. Even though new buildings give developers the chance to build-in the latest energy-efficiency technology, Brookfield sees big opportunities in retrofitting older buildings too.

Farley cites the 72-storey First Canadian Place in Toronto as an example. Brookfield has nearly finished renovating the office tower, which was built in 1975 and is the tallest in Canada. The renovation, which began in 2009, has reduced First Canadian Place’s energy consumption by 24% to date, with further improvement anticipated.

“The savings that come from increased environment efficiency can be shared between tenants and owners,” Farley says. It is useful to have standards for measuring sustainability, and tracking performance over time, he adds.

Brookfield has voluntarily disclosed its greenhouse gas emissions in its annual report every year since 2009 and through industry-recognised disclosure channels such as the Carbon Disclosure Project and GRESB.