Sustainable property investment has attracted considerable debate but what are fund managers doing on the ground? Andrew Szyman reports
It has been said that many a company CSR report is nothing more than an elaborate piece of creative writing. This may be a rather unfair way of describing the results of a great deal of genuine effort from committed sustainability practitioners aiming to advise their stakeholders and inform interested parties on an important, emerging topic. However, it does perhaps reflect the continuing undercurrent of scepticism that pervades some quarters of the real estate fund management industry.
The fact that AXA REIM, for example, has entitled its 2010-11 Sustainable Development Report as ‘walking the talk' is somewhat reflective of the need to confront this disparagement. So, what exactly is AXA REIM, and other property fund managers, doing to demonstrate real action and implementation on the environment, and are such activities representative of other geographies?
In essence, real, meaningful and sustained action will only manifest itself through proper commitment and engagement. That much is true for almost any activity - and responsible property investing is no different. The Property Working Group of the United Nations Environment Programme Finance Initiative (UNEP FI PWG) recognised this as a crucial building block by opening its recent ‘toolkit' series with a narrative focused precisely on how to engage and gain commitment within organisations.
The first visible sign of such commitment is usually the ‘environmental policy statement', which often incorporates a social element, and is increasingly branded an overall responsible strategy. Such policies are now ubiquitous, from leading managers in emerging economies such as India - exemplified by ILF&S who see a steady increase in interest with green building concepts - through to well-known firms in the US, UK and Europe, Japan and Australia.
Yet efforts to convince third-party stakeholders of a company's philosophy on responsibility can come at the expense of the workforce. When presented to them, it is not uncommon for property fund and asset managers not to recognise their own firm's responsible property investment policies and aspirations!
Nevertheless, what might first appear as a depressing state of affairs is balanced by the growing number of intelligent property fund managers across the globe embracing the well-documented environmental and social challenges posed by real estate, thereby setting inspiring examples of how adopting a responsible strategy can make a material difference.
Australia, a leader in responsible real estate, continues to set the pace. Property professionals are encouraged to learn and develop responses through the educational and resource facilities available, while the building assets continue to be subject to monitoring and measuring with market-wide adoption of Green Building Council ratings for new buildings, increasing Green Star ‘As Built' ratings, and more green refurbishments occurring. Australia is not immune wfrom having to make the business case, and while barriers to action such as landlord-tenant split incentives exist here too, the government is using its influence to improve sustainability.
However, Australian property managers and their industry associations continue to engage with, influence and collaborate with global legislators. Peer group leaders such as First Colonial State pursue property asset efficiency programmes, and look to improve performance in the key environmental impact areas by metering, monitoring analysis and reporting. Investa reports independently verified reductions in electricity, gas and water usage and carbon dioxide emissions since 2003 although the rate of reduction is slowing.
In Australia, Lend Lease concentrates on urban regeneration and green refurbishment, extending the latter to its Asian operations where there is additional focus on green office funds. Meanwhile, its key initiative of rolling out ISO 14,000 Environmental Management Systems applies across its investment management businesses in these territories and in the UK, too, where attention is also given to the impacts of EU legislation and retrofitting the existing stock.
In the US (apart from large progressive investors, such as CalPERS, that are embracing a wider environmental, social and governance approach to real estate investment generally by looking at, for example, responsible contracting and community involvement) the focus remains primarily on the more tractable environmental issues, with sustainable development and high-performance property operations continuing, increasing acceptance and implementation by institutional fund managers. Core performance indicators have developed beyond energy management to include water, waste, materials and carbon dioxide in response to growing client and user demands for sustainably built and operated buildings. This is supplemented by growing evidence for the ‘value proposition' for green, and a better understanding of risk from non-green obsolescence and regulatory exposure.
Consequently, institutional investment adviser Bentall Kennedy notes that demand for third-party certifications such as LEED, and for Energy Star benchmarking, has grown exponentially. So has attention to the impact of the built environment on climate change and greenhouse gas emissions, as evidenced through contribution to carbon disclosure mechanisms.
This said, there is a lack of consensus on what metrics should be used to define responsible property investment, while a variety of tools, rating systems and organisations are being applied. This is probably having a negative impact on the integration of responsible strategies in the real estate sector.
This lack of consistent metrics and rating systems also concerns Japanese real estate investors. Japan's rating system, Casbee, currently assesses around 110 aspects of a building. In response, Sumitomo Trust & Banking is promoting a short-form version that creates a much-pared-down proxy form of Casbee. This is primarily used for building marketing and promotion, which has been the most significant driver for obtaining ratings generally. A further distillation of Casbee is intended to identify around half a dozen common metrics covering key areas, which will then be linked to property appraisal.
In the meantime, property managers are preparing themselves for the effects of the Tokyo Metropolitan Government's emissions trading scheme, which aims to achieve a staged 6% saving from 2010-14 and a staged 17% reduction from 2015-19. Reductions exceeding the yearly obligation can be traded from the second year onwards and it will be interesting to see how fund manager strategies develop. What seems evident is that the scheme allows offsets to encourage use of renewable energies. It is also relatively simple in concept and, therefore, likely to have more immediate traction with investors, particularly in comparison to the complicated UK Carbon Reduction Commitment.
Yet unravelling that complicated matter called a building's electricity supplies and distribution was a clear winner for UK-based Climate Change Capital's property fund. With its specific focus on energy efficiencies in existing commercial lets, and its strategy for comprehensive pre-acquisition sustainability checks and gap analyses, the fund was able to demonstrate real material financial benefit to both the occupier and investors on one of its assets by identifying problems with meter calibration, sub-metering functionality, and most importantly addressing a control strategy that had operated contrary to building design criteria. By doing so, not only did it reduce electricity consumption, cost and associated carbon emissions, it realised significant savings in utility cost refunds, gained a delighted tenant, and future-proofed its asset.
The concept of pre-acquisition checks now goes beyond the traditional contamination and flood risk to consider opportunity. French property fund manager BNP Paribas Real Estate has developed a two-staged approach to evaluate the sustainability credentials of its stock; an initial review that considers regulatory compliance levels, ratings, and building usage as well as traditional areas of consideration, and importantly evaluates the availability of such information as a key criterion. This initial assessment then drives further asset analysis where a more detailed set of criteria are monitored for ongoing improvement. Moreover, for BNP Paribas, this is the practical implementation of its ‘three pronged' approach whereby strategic aspirations are filtered down to a business level where the internal processes identify and drive the operational requirements in a recursive and coherent manner.
Much responsible activity is centred on gathering good management data. Obtaining such material is a crucial activity and many fund management houses are developing strategies for installing remote metering and sub-metering so that they can monitor performance to underpin intervention strategies. However, while the resulting efficient use of energy and water is commendable, it is only one of the dimensions that determine property value, and asset and portfolio performance.
UK manager PRUPIM has developed a mechanism that enables responsible property investment considerations to be evaluated alongside the more traditional factors. Crucially, sustainability criteria can be appraised alongside other value judgements. Not only does the approach allow for flexibility in considering the economic impact of sustainability characteristic in any given circumstance, it uses a language (financial) that is more likely to engage rather than alienate fund managers. The integration of sustainability criteria alongside conventional investment principles is vital to the responsible property investment debate and is the subject of UNEPFI PWG's latest toolkit.
And so back to AXA REIM, whose CSR report identifies the need to engage, to measure and to explore. To achieve this, all functions within an organisation must be involved if it is to live up to its corporate promises here. In a property investment context, this must also distinguish the contribution of the tenant occupier. British Land recognised this critical aspect by operating environmental groups that not only allow for dialogue with tenants on environmental matters but also facilitate a wider understanding of their business objectives and operations, leading to a foundation of trust, relationship and partnership.
But perhaps the most pressing matter in engaging property fund managers is to present relevant information in a language they understand - the language of asset values, investment returns and implications for absolute and relative performance.
More UK fund managers probably raised their heads on hearing about their government's recent proposals to prohibit the trading of assets below a certain EPC grade than did so when hearing that their building emits 54.25 kgCO2/m2/quarter.
Andrew Szyman is head of sustainability at F&C REIT Asset Management and co-chair of the United Nations Environment Programme Finance Initiative, Property Working Group. On behalf of the United Nations Environment Programme Finance Initiative, (UNEPFI) Property Working Group