HEEDING DEMANDS OF TENANTS AND ATTRACTING INVESTMENT DRIVE GROWTHPOINT’S ESG STRATEGY

Growthpoint’s environmental social and governance (ESG) strategy embraces nine of the 17 United Nations Sustainable Development Goals (SDGs):

1. No poverty: Support of educational initiatives and organisations addressing hunger alleviation. Support for social concerns, risk assessment and impact on a Just Transition

2. Zero hunger: Support of organisations addressing hunger alleviation. Support for social concerns, risk assessment and impact on a Just Transition

4. Quality education: Support of educational initiatives

7. Affordable and clean energy: Investment in solar, focused utility management, supporting innovation and focusing on green financing

8. Decent work and economic growth: Support of Property Point, the enterprise development initiative created by Growthpoint Properties, as well as local economic development policy implementation

9. Industry, innovation and infrastructure: Innovation through the Greenovate Programme. Focusing on green financing and green building certifications. Social empowerment and support of Property Point

11. Sustainable cities and communities: Local economic development policy and local community engagement. A focus on energy, water and waste management and climate change risk mitigation. Focusing on green financing, green building certifications, social empowerment and support of Property Point

BY JANICE ROBERTS

13. Climate action: Carbon-neutral objectives, innovation through Greenovate Programme, focusing on green financing/green building certifications. Support of Property Point, climate change risk analysis and mitigation

17. Partnerships for the goals: Active role in industry bodies ensuring adherence to government requirements. Collaboration with strategic partnerships

Growthpoint’s board sees ESG as a risk and its objective of addressing ESG-related matters is viewed as a way of mitigating risk. Through its ESG strategy, Growthpoint aims to:

• Achieve carbon neutrality by 2050 and with all buildings directly controlled by the company to operate at net zero carbon by 2030

• Create a positive work experience for employees and drive sustainable impact for the communities in which it operates, including a focus on education initiatives

• Provide all stakeholders with the confidence that the company is well-governed

Growthpoint confirms that it has identified particular projects to invest in so as to improve its ESG performance, indicating that it has an active, additionality orientated ESG strategy. The company’s expectations for financial returns on its ESG projects are in line with its cost of capital.

The goal of its strategy is to “provide space to thrive in environmentally sustainable buildings, while improving the social and material wellbeing of individuals and communities.”. In developing the goal, it consulted investors, peers and employees.

In addition, Growthpoint says tenants are becoming particularly fussy when it comes to the environmental footprint of the space they rent. "THE MSCI Global Green Building Index shows that green buildings have lower vacancies and offer better returns,” says Joanne Solomon, CEO of the SA REIT Association. “The Green Building Council South Africa (GBCSA), established 15 years ago, has been instrumental in bridging the gap between owners and tenants through their advocacy, education and certification. While many stakeholders play a role, tenants are fundamental to property owners' ability to deliver on their ESG strategies."

Apart from heeding the needs of tenants, attracting investors is also a primary reason for developing an ESG strategy. “From an investor perspective, ESG has become increasingly important,” says Solomon. “Due to the numerous existing rating tools and frameworks, reporting in a comparable and consistent manner is essential for South African REITs. The association has been putting in tremendous effort into developing the SA REIT ESG Framework to guide REITs to further develop their broader ESG strategy. The framework will produce a holistic picture of REITs’ sustainability performance, allowing investors to make informed decisions."

Solomon adds that the SA REIT ESG framework may be released as soon as the second quarter of this year. Referencing the JSE Sustainability and Climate Disclosure Guidance, the SA REIT ESG Framework focuses on areas requiring additional real estate guidance. “As an example, land rights and green building certifications are matters that come to mind. And as REITS like Growthpoint and Redefine have advanced ESG strategies and deliverables, we felt it important to incorporate guidance to equip the smaller REITS on their ESG journey.”

Environmental Strategy

Growthpoint is a founding member of the GBCSA which works with its membership community to create a sustainable built environment. The quality of the built environment has a significant impact on the planet and according to one estimate, is responsible for around 40% of greenhouse gas emissions.

“The commercial property sector forms part of the built environment and is therefore also a major contributor to natural resource and materials use, greenhouse gas emissions, landfill waste generation and unsustainable water use, while it can also affect tenants, building users and society in a myriad ways,” says Kevin James, CEO and founder of GCX, a company that offers sustainable business consulting and management services for corporate organisations. He says sustainability linked factors such as energy, waste and the environment can present serious business continuity risks, as evident in South Africa currently. Fortunately, the sector has made significant advances in recent years and “impressive sustainability leaders are emerging among real estate companies in Africa and beyond”.

For the last decade, Growthpoint has played an active, critical role in the greening of buildings. For FY22, the company focused on its carbon-neutral pathway, renewable energy as well as reducing energy intensity. It acknowledges that its aim of being carbon neutral by 2050, which is in line with SDG 13, is not straightforward. In setting its targets the previous year, it had yet to determine the cost implications of this objective. It has subsequently realised that its FY26 targets could have a substantial cost implication for the investment in energy efficiency initiatives and renewable energy.

The company supports the intention of the carbon tax to discourage the use of fossil fuels. The review of the Carbon Tax Act will now take place in 2025 as opposed to 2023 and as Growthpoint engages in activities that make the requirements for carbon tax applicable, it has been trying to register with the appropriate SARS department to ensure that it complies with the requirements. While such registration is proving to be difficult, the company says it will persevere. It will benefit from its investment in renewable energy as this will reduce the potential effect of the tax. In FY22, one tonne of carbon cost the company an average of R2,241 (FY21: R1,934).

With load shedding worsening, energy security has become a significant risk faced by many businesses. Growthpoint sees investing in a large energy plant as having limited opportunities and has therefore explored other options. It has carried out a feasibility study on wheeling and power purchase agreements at utility scale. While it has considered entering into power purchase agreements to supply a portion of its portfolio, it has found that there are limitations on which buildings it can procure energy for. Battery storage backup, however, is an option that the company continues to investigate.

Solar

The company’s challenge to investing in solar power is to find reliable, socially conscious service providers. What makes financial planning complex is that solar components are procured internationally and therefore are affected by exchange rate movements. The annual cost for maintenance of Growthpoint’s existing solar plants is around R1.42m. In the Sanlam ESG Barometer survey, Growthpoint lists one of its biggest challenges in the design and implementation of its ESG strategy as solar availability and pricing. (The other major risks are regulatory uncertainty and skills availability.)

With 13.9MW of solar projects in various phases of construction, Growthpoint is expected to achieve its target of 27.4MW of installed solar by its 30 June 2023 financial year end. “Our investment in solar power reduces our reliance on the national grid. There is a great need for this right now and ramping up our investment in solar makes perfect sense for our ESG goals,” says Growthpoint Properties SA CEO Estienne de Klerk. Of its 24 solar installations, half are at office and mixed-use properties, nine at shopping centres and three at industrial buildings. However, retail installations represent the highest capacity by far, accounting for a combined 9.4MW.

Growthpoint’s largest solar installation undertaken this year is the 2.5MW plant at Paarl Mall in the Western Cape, which is paired with a 4.5MWh battery system to form a hybrid renewable energy and storage system. This is the first battery system of its size to be used at a shopping centre in South Africa.

“Battery technology has come a long way in recent years. Batteries that were previously prohibitively expensive have become increasingly affordable, especially considering rapidly rising electricity prices and our imperative to help prevent costly business disruptions for our clients caused by load-shedding,” says Grahame Cruickshanks, Growthpoint head of sustainability and utilities.

While the retail sector is best suited to this type of grid-tied integrated solar and battery system, Growthpoint sees potential value in using it at suitable properties across all its assets. “We want to push the boundaries on the range of energy solutions available for our properties and our clients, expand our mix of energy sources and storage and boost the supply of renewables to our assets as part of our proactive energy management,” he adds.

As a direct result of Growthpoint’s national energy management programme, at least 1,053 shops, 833 office tenants and 38 industrial tenants are can continue doing business during load-shedding. In addition, all the nearly 1,000 tenants of the V&A Waterfront, which Growthpoint co-owns, have full access to backup power from the precinct’s 48 generators. “In this way, Growthpoint is helping much of SA Inc avoid business disruption during power outages and, in the process, safeguarding businesses, jobs and livelihoods,” De Klerk says. However, these obviously consume diesel.

Growthpoint provides generator backup power to just over 70% of its office portfolio by gross lettable area, offering standby power for a huge 1.2-million square metres of offices with 223 generators, where state-of-the-art technology has been implemented to monitor diesel levels. It also has a supply chain of in-house capabilities and external providers to keep them fuelled and operating.

In the remaining 30% of office space, most tenants have their own power solutions, or buildings are in areas that do not experience heavy load shedding, for instance, parts of Pretoria and Cape Town and near national key points. There are some office buildings without generators, and Growthpoint is reassessing these requirements. At industrial properties, tenants mostly use their own generators, however, Growthpoint provides backup power across three industrial parks in its portfolio, accommodating multiple tenants in 84,153m 2

Diesel Paradox

However, burning diesel at unprecedented rates weighs on Growthpoint’s strategy to be carbon neutral by 2050 and counteracts its environmental goals. Added to this is the significant capital outlay and a substantial monthly diesel bill.

Growthpoint spent just over R47m on diesel to power all its buildings in the six months from July to December 2022. The monthly bill topped R10m in both October and December and was just short of this figure in November. The V&A Waterfront independently spent R14.8m on diesel over the same period. “The costs are substantial, but the burden is mostly shared, with tenants paying for their own additional diesel consumption costs,” De Klerk says.

Hot on the heels of South Africa’s electricity crisis are water and waste emergencies. Water is scarce in some areas of the country while its landfill sites are filling up. Growthpoint is prioritising the monitoring of water usage of its buildings while also ensuring that all buildings with contracted waste service providers in FY22 will achieve zero organic waste to landfill by FY26. When asked in the Sanlam ESG Barometer Survey about the areas in which it can improve its ESG performance, both water and waste were on its list, as well as biodiversity.

Biodiversity is important to the company. Establishing how Growthpoint can make a positive impact on the natural environment is being considered, with its approach likely to be set out soon. It adheres to the South African National Building Standards relating to environmental issues and as its operations are mostly in urban areas, they are unlikely to affect any species on the International Union for Conservation of Nature Red List of Threatened Species.

While Growthpoint’s property development could affect biodiversity, it believes that this impact is relatively small. It has nevertheless stepped up its focus on making sure that all the company’s processes sustain biodiversity. In this regard an environmental and social review has been undertaken to mitigate risk.

As increased funding for green buildings is vital in South Africa, and because green funding remains limited in the country, Growthpoint welcomed the IFC’s announcement in December 2022 of its R1bn investment in a green bond issued under Growthpoint’s existing Domestic Medium-Term Note (DMTN) programme, which is registered at the Johannesburg Stock Exchange. "Green bonds are playing a very important role in driving ESG initiatives at the moment, as they provide companies with ring-fenced capital that can only be spent on sustainability projects,” GCX’s James says.

The green bond also gives ESG investors interested in additionality a way to directly finance Growthpoint’s efforts to improve its ESG performance. It is a good example of how a focused additionality strategy can be put into practice.

Social Strategy

When it comes to the S in ESG, South Africa has probably led the world on some fronts, and its situation is unique in relation to many Reits globally. “South Africa's workforce diversity continues to progress well, with the pace of adoption aided by the B-BBEE legislation and the imminent Employment Equity Amendment Bill,” says Solomon. “In anticipation of the President signing the Employment Equity Amendment Bill into law, we are determining our current benchmark, identifying potential obstacles and strategising avenues to accelerate meeting the transformation objectives. From a real estate perspective, responsible citizenship and community engagement have always been top of mind, especially considering the long-term nature of our assets and the location."

Growthpoint is tracking its progress against its transformation targets on a quarterly basis and has received a level 1 B-BBEE rating. These targets enable it to show diversity and integration within the workforce. A challenge for transformation is the current shortage of skills at all occupational levels as in the real estate sector, with many companies competing for the same skills.

One of the company’s corporate social responsibility (CSR) initiatives involves funding several successful early childhood development (ECD) training programmes for ECD practitioners. An ECD practitioner at Ntataise Lowveld Trust said that while she had worked in ECD on a voluntary basis, the level 4 training provided by Growthpoint had enabled her to assist children with special needs and she now receives a salary that will help her further her studies.

Through its enterprise development programme known as Property Point, Growthpoint targets local economic development. In FY22 the company’s investment in Property Point resulted in an additional 74 full-time jobs, while 848 jobs were sustained. “Property Point is even used by other property companies, indicating that there will be more collaboration between real estate companies in the future,” James says.

Property Point works closely with several REITs to unlock opportunities for SMEs operating in South Africa's property sector. “Providing support to SMEs is an investment in our communities and an investment in our collective future,” says Solomon. “Their programme is focused on SMEs to bring the required skills to the sector. Their track record of the opportunities created is truly excellent. It illustrates their diverse programmes' impact in contributing to long-term ESG outcomes. We're working on several initiatives with Property Point, one of which involves benchmarking our current employment equity landscape and exploring potential solutions to address inequality within the sector."

One of Property Point’s successes is Zamafuna Trading and Projects at Festival Mall in Kempton Park on the East Rand. Starting with developmental interventions to ensure compliance and growth of the business, Property Point then undertook basic financial management training, a compliance audit, and health and safety training for Zamafuna as part of its growth journey. The company is registered as a Growthpoint vendor and provides minor maintenance works to Festival Mall. Zecks Zamafuna of Zamafuna Trading and Projects proved to be a good ambassador for Growthpoint Properties in his local community of Thembisa during the July 2021 unrest when he mobilised community members to defend both the Festival and Lakeside malls.

The important part that REITs play in South Africa’s economy came to the fore during the Covid-19 pandemic. Total relief made up of rental discounts and deferrals of R3.5bn was provided by local REITs, including Growthpoint, to support tenants. Unrecoverable discounts to curb business failures made up 80% of the relief while deferrals on rental payments made up 20%.

Corporate Governance Strategy

Growthpoint’s board is guided by the board charter, which sets out its responsibilities as:

• Governing, directing and monitoring the performance of the business as a going concern and presiding over material business decisions

• Approving the company’s strategic plans and objectives

• Managing risks through the risk management and audit committees

• Providing direction to and evaluating the performance of management

The board either itself or through the Governance and Nomination Committee periodically reviews its composition relative to the knowledge and experience needed to provide strategic direction as well as equitable representation in terms of gender and race and in terms of its composition. Non-executive directors are independent of management.

Growthpoint was one of the first organisations to take part in the Gordon Institute of Business Science’s Ethics Barometer, a national initiative in 2019 in partnership with Business Leadership South Africa. The company has a whistleblowing policy that enables concerns to be raised about corruption, theft or racism and all whistle blowers remain anonymous.