A Fund managed by Swiss Life Asset Managers UK Limited
A Fund managed by Swiss Life Asset Managers UK Limited
3 December 2021
This article was first published in Wealth Magazine on 3rd December 2021. View their web based version here.
With building and construction activities accounting for approximately 39% of global carbon emissions and 40% of the UK’s total carbon footprint, decarbonising the real estate sector is paramount to curbing global warming and mitigating the worst impacts of climate change. Real estate is particularly exposed to climate-related risk, due to the long-term nature of investments, as well as location-based factors. Recent research found that 35% of real estate investment trust properties globally are geographically exposed to climate hazards – including inland flooding, typhoons, hurricanes, coastal flooding and sea-level rise.
All eyes have been on COP26 recently, with citizens calling for decisive and ambitious action from our global leaders. There have been many notable commitments, with the UK Chancellor Rishi Sunak announcing that the UK will become the first country to require all financial institutions and listed companies to publish plans on how they will transition to net zero from 2023. In addition to this, the EU launched The EU Catalyst Programme, which is a billion-euro programme to finance breakthrough climate innovation and new technologies to be used on the ground in Europe.
Given the contribution of the real estate sector to climate change and the effect of global warming on the built environment, decarbonising portfolios must be the number one priority for real estate investors. Whilst this will require careful consideration of timing, resource use and cost benefit, it is the only option for investors hoping to ensure stable long-term returns and resilient portfolios.
Keeping pace with regulation
Increasingly stringent legislation and industry-led initiatives are transforming the real estate market. There has been immense industry focus on net zero carbon, brought about through increased public pressure for meaningful climate action as well as through the UK government’s commitment to net zero carbon by 2050. Consequently, building regulation is evolving to meet these commitments, with proposals for commercial buildings to produce an Energy Performance Certificate (EPC) with a minimum of a C rating by 2027, and increasing to a B rating by 2030.
The Task Force on Climate-related Financial Disclosures (TCFD) is another initiative that has gained considerable momentum, with the number of signatories growing by over a third this past year to over 2,600 organisations globally. TCFD has developed recommendations for more effective climate-related disclosures to promote informed investment decisions and enhance transparency on climate-related risk. In November 2020, the UK announced its intention to make climate risk disclosures mandatory across the economy by 2025, becoming one of the first major economies to do so.
Staying abreast of regulatory risks should be a key priority for all real estate investors. We conduct annual legislation reviews to ensure regulatory risks are monitored and the right measures are in place to mitigate these risks to our portfolios. In addition, we carry out annual risk materiality assessments against Global Reporting Initiative (GRI) standards and industry policies to ensure our ESG strategy is correctly aligned to rapidly evolving trends.
Pricing climate risk
Despite advances in reporting, accurately and comprehensively pricing climate risk into investment decisions is still not commonplace in the industry. In time, we expect the cost of mitigating climate-related risks will be routinely factored into asset appraisals and valuations. As tenants increasingly prioritise ESG factors in their occupational requirements, this will pose a risk to the current income and capital value of assets.
As with financial performance, we recognise the benefit of using historical environmental performance in conjunction with forecasted data to assess the resilience of our portfolios. We conduct climate resilience assessments using specialist ESG tools to identify emission reduction requirements and ‘transition’ risks in various decarbonisation scenarios. This forward-looking analysis is becoming increasingly important in asset pricing models, and we expect it to become the norm.
Future proofing portfolios
Building climate resilience and developing a clear pathway to net zero carbon is a primary focus for our parent company, Swiss Life Asset Managers and for Mayfair Capital. Swiss Life Asset Managers is currently undertaking a project to define its pathway to net zero carbon, with Mayfair Capital and its portfolio a key part of this project.
Ultimately, successful implementation of a net zero carbon strategy requires comprehensive data and effective tools and processes for engaging, monitoring and addressing issues at the asset level. One of the most pressing industry-wide challenges is ESG data acquisition. Energy data, which is fundamentally important to understanding carbon performance, is often difficult to acquire due to the nature of the lease. This means that in portfolios with many FRI leases, there is no obligation on the tenant to share this data with their landlord. As a result, strong tenant and occupier engagement is vital, ensuring environmental and social issues can be managed effectively.
We have deliberately structured our Property Income Trust for Charities (PITCH) fund as a leaner portfolio, which allows for more intimate engagement with occupiers. As a result of our engagements, we have gained visibility into the carbon performance of buildings across 36% of the portfolio – well in excess of our contractual access to 12% of building data. We are continually working to improve tenant data coverage and exploring technology that will support further automation of this data, to the benefit of both parties.
At Mayfair Capital, ESG considerations are integrated throughout the investment process. Our acquisition process includes consideration of transition risks and net zero carbon requirements, and all refurbishment projects follow our Sustainable Development & Refurbishment Guide to enhance efficiency.
80% of properties in the UK that will exist in 2050 have already been built and as a result significant focus is required to decarbonise existing investment portfolios. We routinely conduct technical assessments on standing investments to identify practical carbon reduction strategies. We also employ specialist tools, such as the Carbon Risk Real Estate Monitor (CRREM) and engage with ESG software to leverage in-depth asset management and technical engineering expertise. This allows us to determine sustainability and carbon reduction initiatives that can be implemented for each asset, factoring measures into business plans and monitoring implementation through the use of our ESG asset logbooks.
The real estate sector has a significant environmental impact, but as a result can also play a pivotal role in mitigating climate change. As investors, we must make meaningful changes to the way we assess, acquire and manage real estate assets if we want to safeguard the sector and the future of the planet.
Christi Vosloo, Head of ESG, UK