GREEN IS THE NEW BLACK

from MIPIM 2022 Preview Magazine

LOGISTICS

The only way

is ESG As broad industry pledges to do better are replaced by data-driven targets, the property world is getting to grips with its sustainable responsibilities.Isobel Lee reports

Allianz Real Estate’s Coeur Cologne provides sustainable office space in the heart of the German city

The COVID-19 crisis delivered a critical opportunity for organisations to engage with environmental, social and governance (ESG) issues, driving them to pay closer attention to external risks. For the real estate industry, it has proved transformational. “For most real asset investors, over 95% of their carbon footprint is within their buildings,” says Guy Grainger, global head of sustainability services & ESG at JLL. “If you combine that statistic with the fact that the built environment contributes 38% of the world’s greenhouse gas emissions, then it is all the evidence you need to see that we in the real estate industry are part of the problem — or, if we are prepared to change — part of the solution.” Yet solving this thorniest of issues — real estate’s carbon footprint — requires a clear and defined strategy, Grainger says. “That’s where things get complicated. There are no set benchmarks or targets, so many investors are comparing to their peers and waiting for market forces to justify the investment and CapEx needed. The longer you wait, the more there is to do.”

Despite these complexities, a number of real estate firms are emerging as ESG pioneers. Explains Christy Hill, PGIM Real Estate’s Americas head of asset management & global head of ESG: “PGIM Real Estate continues to focus on established and well-respected ESG reporting standards to disclose our ESG performance. We benchmark our ESG performance on a fund-level through the annual Global ESG Benchmark for Real Assets (GRESB) and communicate results to investors. “PGIM is a public supporter of the Task Force on Climate-Related Financial Disclosures and uses this framework to assess physical and transition risks to the portfolio as well as individual assets,” Hill adds. “We also committed to a net-zero target that aligns with the Paris Accord and recommendation to limit global temperature increase to 1.5 degrees Celsius. Finally, we have assessed our funds from the perspective of the Sustainable Finance Disclosure Regulation (SFDR) and are complying to it with few of the funds being Article 8.” As a premier partner of the recent UN Climate Change Conference, COP26, PGIM had the chance to see how in-step the firm is with current thinking. “Retrofitting existing building stock is an essential ingredient,” Hill says. Marrit Laning, newly appointed chief strategy & innovation officer at real estate investment manager Redevco, says that the firm has devised “a clear ambition for the portfolios we manage to be net-zero carbon by 2040”. She adds: “As we are traditionally invested in the high streets of inner cities, our focus is on making existing buildings better and contributing to making the cities more liveable and sustainable. Whenever we redevelop an existing building, we see an opportunity to improve the building’s sustainability performance, but also through our design and concept, the functionality of the location. We want to add value to the location and fulfil key functions that will support its neighbours’ and visitors’ (social) wellbeing.”

Allianz Real Estate describes the issue as a “highest priority”. Dr Raphael Mertens, the firm’s chief

Christy Hill, PGIM Real Estate’s global head of ESG

risk officer, says: “As one of the largest players in the real estate market, we have the responsibility to lead by example and reduce the carbon footprint of our portfolio. In practical terms, we strive to incorporate sustainability factors into our investment cycle and work towards reducing the greenhouse gas emissions of our portfolio to net-zero by 2050. The first milestone in this journey is to reduce the carbon footprint of Allianz Real Estate’s global portfolio by 25% in the next five years and we have developed a structured framework to reach this milestone.” Mertens notes that these ambitions are in line with high-profile initiatives such as The Science Based Targets initiative (SBTi) and the UN-convened Net-Zero Asset Owner Alliance. From growing its allocation to certified green buildings, to increasing the use of renewable energy, Mertens recommends that companies take a holistic approach. “We also look at social factors, for example through compliance processes or reputational risk assessments. Ultimately, all our investments must meet sustainability standards and there is an absence of any form of offsetting but inclusion of all tenant areas. The most impactful part will be the evolution of our directly held assets which currently equate to half of our portfolio,” he says. Principal Real Estate Investors has created a dedicated platform to tackle the issue. Indraneel Karlekar, Principal’s global head of research and strategy, says: “Through our research, we have identified five primary areas of ESG focus, which guide our decision making: environmental performance, occupant experience, community impact, climate resilience, and managerial excellence. As trends and best practices evolve, we continually refine the platform.”

The year 2021 saw many firms make tracks in the area of sustainable debt. “Green financing and green bonds have increasingly attracted the attention of investors engaged in the decarbonisation of their assets,” says Justin Travlos, global head of responsible investment at AXA IM Alts. “They allow us to actively contribute to the energy transition under way in the real assets industry, while providing opportunities for investors increasingly looking to make a positive impact through their allocations. “Last year, AXA IM Alts raised its first three green bonds — raising €1bn for its flagship CoRE Europe fund across two issuances — as well as raising €800m for its flagship European logistics fund. All three issuances were more than four times over-subscribed, indicative of the significant and sustained demand for green finance products on behalf of institutional investors.” He adds: “Linking the cost of debt to sustainability metrics is an obvious next step for the sector.” “Sustainability-indexed finance is both a good measure of what is now considered to be mainstream ESG, which can be interpreted as the minimum ESG requirements for any serious client, as well as a strong incentive for active asset managers to further innovate and refine their ESG approach to differentiate themselves,” adds Mathieu Maronet, head ESG securities, Swiss Life Asset Managers. The industry’s carbon footprint means that the ‘E’ issue continues to capture the headlines. But that’s not the whole story, Mertens underlines. “The fact that our primary focus is on the ‘E’ doesn’t mean ‘S’ and ‘G’ aren’t very important to us,” he says. “Having embedded our environmental framework throughout our global business we are now placing a more formal focus on the social impact of our

PGIM Real Estate’s sustainable Neptune Marina seeks to harmoniously complement the Marina Del Rey waterfront in California Guy Grainger, global head of sustainability services & ESG at JLL Marrit Laning, chief strategy & innovation officer, Redevco

buildings. We have developed a framework for social impact, which has included an audit of our investment portfolio, and will now roll this framework out across our portfolio.” However, he notes that it’s not always easy: “The social and governance areas are more qualitative than quantitative and therefore it is much harder to measure success. So, we will keep pushing to find ways to measure progress in this area. And we will keep evolving to enhance our approach.” The social part is also increasingly in the spotlight at PGIM Real Estate, says Hill. “We have invested $5.6bn (€4.9bn) in impact-oriented assets, including our UK Affordable Housing Fund which deployed £250m (€300m) at launch,” she says. The company also targets increasing Fitwel Health & Wellness certification coverage across its global portfolio, with “direct positive impacts for our tenants, employees, guests, and surrounding communities”. While responsible investors are seeing the “carrot” effect as they benefit from amassing attractive and liquid ESG-compliant assets, landlords that fall further behind will soon experience the “stick”, experts warn. “The capital, the lenders and the insurers are all migrating towards the investors who have an action plan — a clear pathway to net-zero carbon, with near term goals,” Grainger says. Following the enactment of the EU’s SFDR last year, directly impacting the investment world, the EU’s Corporate Sustainability Reporting Directive (CSRD) will go live in 2023, replacing the Non-Financial Reporting Directive (NFRD). It is expected to provide both greater clarity for landlords and new challenges in reporting against ESG metrics. And Grainger foresees “more regulation” ahead. “Regulation can come from central government or at city level, with New York currently being the most aggressive, introducing a carbon tax for buildings at $268 per metric tonne,” he says. Cheryl Gurnham, partner, real estate & construction, CMS UK, calls ESG something “the real estate sector can no longer ignore”. She adds: “In accordance with current proposals, by 2030, the Minimum Energy Efficiency Standards for non-domestic private rented sector will be ‘B’ (with an interim level of ‘C’ for 2027). “This means that much of our existing commercial real estate stock will be un-lettable in the near future. Buildings will need to be retrofitted and the question of who pays for that is something our clients are considering. Clients need to review their portfolios and identify which buildings will be sub-standard and create an action plan for them.” Concludes Travlos: “Ultimately, we are seeing a tsunami of regulation confronting the industry, not just for real estate but across the financing space, and the EU taxonomy introduced last year is helping to shape thinking around the environmental elements of ESG alignment. As new science comes to light, I expect these guidelines will continue to be updated, while decarbonisation pathways will become steeper and more challenging over time.”

A green roof open to the public tops off Allianz’s careful refurbishment of 23-29 rue de Châteaudun in Paris

CONFERENCES & EVENTS AT MIPIM 2022