Climate change can pose significant investment challenges. Therefore, companies’ CO2 management is a recurring theme in RobecoSAM’s engagement program. As the real estate sector represents over 10 % of annual global emissions of CO2 and other greenhouse gases, engagement specialist Sylvia van Waveren has started a three-year engagement with companies in this sector.
CO2 reduction is relevant for investors
Real estate companies can benefit directly from managing their carbon emissions, which is also relevant for investors in these companies. There are various ways in which carbon management can have a positive effect on companies’ bottom line. First, energy efficiency measures targeted at lowering CO2 emissions also allow real estate companies to lower their operating costs. Second, carbon management can increase rental income: because energy efficient buildings reduce costs, they are in high demand and real estate companies can charge higher rents. Third, as such properties tend to have higher occupancy rates, they will often be easier to market. Finally, if companies proactively adopt forward-looking environmental policies, they lower their risk of being caught off-guard by tightening government-imposed environmental regulations. As investors in the real estate sector, we are therefore not merely looking for real estate companies that seek to reduce costs. We are interested in companies that consider the integration of sustainability into their business as an opportunity to secure long-term tenants and in turn, reduce turnover and enhance company value.
Top performers in Australia and New Zealand
In the fourth quarter of 2013, we commissioned a research report by Dutch research group GRESB (Global Real Estate Sustainability Benchmark), which has compiled a sustainable real estate benchmark. GRESB produces scores for approximately 350 real estate funds and classifies them into four quadrants, varying from start-ups in the field of sustainable policy to top performers that have integrated sustainability performance in their investment processes. The analysis shows that the top performers in terms of sustainability are primarily located in Australia and New Zealand, followed by Europe, then North American funds and finally, Asia.
Cooperation with the portfolio manager
In our engagement we will focus on retail REITS (real estate investment trusts) including shops and malls. Based on our portfolio holdings and our clients’ and portfolio managers’ preferences, we will engage with twelve companies in Europe, Asia and North America, such as Simon Property Group, Unibail Rodamco and Sun Hung Kai. We will do this in cooperation with Robeco’s real estate specialist Folmer Pietersma, fund manager at Robeco.
"Real estate companies can benefit directly from managing their carbon emissions, which is relevant for investors."
During the course of our three-year engagement, we will assess the companies’ average CO2 emissions and their progress towards reducing them. Companies will be expected to define and publish energy efficiency targets, CO2 reduction targets and comply with the relevant regulations. In addition, we will look at the companies’ transparency, such as how they communicate with their stakeholders, their sustainability reports, as well as their participation in initiatives such as the Carbon Disclosure Project. In our opinion, a company’s transparency towards stakeholders contributes to its license to operate.
We will also look at the landlord’s engagement policy with regard to his tenants (‘tenant engagement’). For example, is a landlord providing his tenants with tools to monitor their energy usage? We believe that addressing climate change is mutually beneficial to both landlords and tenants. Therefore, it makes sense for all stakeholders to join forces.
Important input for selecting investment candidates
Ultimately, we will want to know which risks and opportunities companies see with regard to climate change and how sustainability is integrated in their processes. This will enable us to more accurately assess which real estate companies represent attractive long-term investments.