Listed real estate companies lead the way on climate targets

By Hassan Sabir, EPRA Finance & Sustainability Director

Signed to much fanfare, the 2015 Paris Agreement committed its 195 nation signatories to limit temperature rises to less than 2°C above pre-industrial levels. Just three years later and we are already way off target.
Humankind’s current practices run counter to the Paris pledges and would lead to a global temperature increase of 3.3°C, noted climate science expert Professor Chris Rapley of UCL at the EPRA Sustainability Workshop in London towards the end of last year. Without the United States – which, under President Trump, has pulled out of the accord – that climbs to 3.6°C. On the world’s current business-as-usual trajectory, the rise is predicted to be 4.2°C.
“The indications show we would be in for a very rough ride if we end up with a 4°C rise,” Rapley said. Lethal high temperatures would make large areas of the world uninhabitable, resulting in mass migration and extreme weather as likely consequences.
As the latest Intergovernmental Panel on Climate Change (IPCC) report made clear, even the difference between the Paris Agreement’s aspiration of 1.5°C and its 2°C limit would be profound – equivalent to a 10 cm rise in sea levels.
As the prospects seem gloomy at best, Rapley warned that we are imperfectly adapted to the climate system we inherited but certainly not adapted to the system we are provoking: “We are close to running out of time to hit the 1.5°C target if we do not accelerate the scale and pace of change.”
While government-led responses are proving limited at best, and with individual “cognitive dissonance” engendering a sense of futility that meaningful action is possible, Rapley concluded that it will be up to corporates to take the lead in combating global warming.

Real industry efforts to mitigate climate change

The listed real estate industry is at the vanguard of these efforts, as attendees at the EPRA Sustainability Workshop demonstrated.
“The UK’s Landsec adopted its science-based targets following COP21 in Paris after questions from investors, customers and the community about its climate-related policies,” the company’s Sustainability Manager, Tom Byrne, said.
“Our decarbonisation pathway is in line with COP21 and seeks to decrease our carbon intensity by 40% by 2030 and 80% by 2050,” Byrne added. To date, Landsec has cut its carbon intensity by 28% from 2013 levels by adopting a three-pronged approach: using less energy, generating energy and procuring renewable energy.
Retail-focused European property developer and asset manager Hammerson’s efforts are similarly directed towards developing more sustainable buildings.
“We work together with contractors on how they build and with what,” said Louise Ellison, Hammerson’s Group Head of Sustainability and new Chair of the EPRA Sustainability Committee. “For example, do they have recycled content in their materials?”
Hammerson has reduced its carbon emissions by 40%, but the firm reset its targets in 2015 and now aims to be net carbon positive across its entire Scope 1, 2 and 3 emissions by 2030.
For leading European residential specialist Vonovia, curbing emissions poses a different challenge.
“In development, property lifecycle management is crucial, so Vonovia works with its suppliers to find innovative ways to build sustainably,” Sustainability Manager Amira Zauchner said.
“Influencing downstream residents is more difficult,” Zauchner noted. “Vonovia does, however, offer sustainable energy supply directly to tenants and is also expanding the use of smart metering systems, while communicating with residents to increase awareness of energy consumption.”

Logistics: Building a case for low-energy facilities

At the EPRA Sustainability Workshop, Simon Cox, First Vice President, Project Management UK & Sustainability Officer with Prologis, outlined three steps towards creating low-energy density distribution buildings:

  • Design: 90% of energy use is from lighting, so designs need to incorporate as much daylight as possible.

  • Energy use: The most efficient systems rely on LED lighting with movement and daylight sensor controls. Prologis also avoids air conditioning where possible.

  • Renewable energy: Prologis favours solar PV, which can even become income producing.

“As a landlord, we focus on the energy performance of the structural fabric,” Cox said. That means getting the design and structure of new buildings right and retrofitting old sheds to optimise efficiency. “The issue of embedded carbon also affects our thinking on the reuse of buildings.”
“Many standard elements within buildings can be reused in other projects to save carbon,” agreed Ben Brakes, Sustainability Manager, SEGRO. “43% of embodied carbon is in concrete,” he noted. Disassembly and recycling of buildings is therefore crucial.
Like Prologis, SEGRO’s sustainability strategy focuses on materials, resources and energy. Energy procurement when servicing buildings for customers is a key component. SEGRO also seeks to generate more onsite energy, especially by strengthening roofs to support solar PV.
“Depending on the building use, PV can make it carbon neutral,” Brakes said. “However, for more energy-intensive uses such as data centres, it is more difficult.”
When retrofitting, “the biggest win comes from installing LED lighting,” he added. Improving the fabric through insulation and smart lighting systems are other possibilities.
Building performance will only get us so far though, argued Cox. “We need a mitigation strategy.”

Building healthy spaces for people

It is well known that urban populations are likely to be more vulnerable to the adverse effects of climate change. For example, people in urban centres will be exposed to higher extremes of temperature because of the heat island effect, to air pollutants and to social stressors that may heavily impact their well-being.
In response, listed real estate companies have been putting strategies in place to improve the wellness and health of people through their buildings. As an example, Castellum’s Filip Elland explained that well-being represents one of the four pillars of the company’s sustainability strategy. Beth Ambrose from JLL drew attention to a recent study by the World Green Building Council, which shows that, especially in commercial buildings, investing in enhancing the well-being of the occupiers contributes to creating healthy workspaces as well as increasing productivity and comfort. “To assist property companies in designing healthy and comfortable spaces, there are standards such as WELL, Fitwel and Reset in the market, which provide a set of good practices to achieve this objective,” explained Oliver Pye from EVORA.

Boosting inclusive and diverse communities

Diversity & Inclusion is a key element to contribute to the creation of resilient communities. This has long been a relevant talking point in the sector as there is clear agreement that the industry can only engage with its stakeholders if the staff and management teams more widely reflect the population at large. This would enable the companies to promote innovation, knowledge and equal opportunities across the different groups represented in the communities where they operate. In this regard, Sam Monger of Grosvenor moderated a panel discussion on the importance of increasing diversity in real estate. Sandra Dowling from PwC, Una O’Reilly from Unibail-Rodamco-Westfield and Lucy Philips from FTI Consulting shared best practices on how companies can practically achieve their diversity objectives bringing into the discussion experiences from other industries.

Enhancing shareholder value and lowering financial risks associated with climate change

As highlighted by Matt Tippet from JLL, increasing shareholder buy-in around the benefits sustainability programmes can bring and the risks climate change and a lack of company action can produce is surely another key area for listed property firms. Sustainability ratings and benchmarks are reinforcing this effort, helping investors understand the impact of climate change on their portfolios, and thereby influencing investment decisions. Peter van den Tol from MN Holding stressed that, “despite the limitations of the many ESG ratings in the market, the latter remain the main tool for investors to screen and engage with listed property company.” For example, MSCI’s ESG rating identifies leaders and laggards in a given industry, which investors can use to reduce risk exposures, improve resiliency and increase returns, noted Jasmine Mehta from MSCI: “USD 280 billion is allocated to ESG through MSCI indices, which shows investor willingness to act in this regard.” To this end, GRESB, represented on the panel by Roxana Isaiu, widened its focus on risks mitigation in 2018 with the introduction of a resilience module that helps investors identify the shocks and stressors a property company might be subject to.
Action is needed as we have only a 60% probability that global warming will stay below 2°C, Rapley concluded. The hope is that a combination of market dynamics and legislation could drive us towards that target.