Governments across the globe have been wrestling with the negative impact of climate change for decades. In December 2015, 196 nations agreed to work together to tackle the issue, signing an accord in Paris to rubberstamp their collective ambition. The sole focus: measurably reduce greenhouse gas emissions.
“It emphasizes the direction of travel for governments when it comes to carbon and we very much welcome it because climate change is one of the mega-trends that is having a major influence on real estate, as well as other asset classes,” says Mathieu Elshout, senior director in the private real estate group at Dutch pension fund giant PGGM.
Earlier this year, US President Donald Trump sent shockwaves through political and business communities when he announced the US would back out of the agreement. But his call has done little to dent the resolve of the private real estate sector, despite his country having one of the biggest impacts on global carbon levels.
David DeVos, global sustainability officer, PGIM Real Estate, says that much is evident from the reactions of the US’s own state authorities. “Already 30 states, dozens of cities and scores of large companies have stated they will continue with their carbon reduction plans,” he says. “For many real estate industry stakeholders, the US leaving the Paris Climate Accord has little impact on sustainable real estate investing.”
Part of the reason is that many property investment managers already have long-term sustainability plans in place and are in no mood to replace them, particularly as significant pressure remains from their investors to improve the energy efficiency of their portfolios. “The whole topic of sustainability has such momentum now, and it’s such a key topic for institutional investors that any manager has to be doing this stuff and be seen to be doing it well,” says David Hirst, chairman of the Real Estate and Private Markets Sustainability Workgroup at UBS.
In fact, DeVos adds that since the US announced its intention to leave the Paris Agreement, some investors have enhanced their ESG-related due diligence questions and processes to ensure investments keep their sustainable targets. “For some stakeholders, the US leaving the accord has only aligned and catalyzed their efforts to preserve and advance sustainable real estate – keeping pressure on regulators and other stakeholders to continue with their climate plans,” he says.
In any case, a US exit from the Paris Agreement is a future event, and not entirely certain, despite the rhetoric from the US president. Under the terms of the Paris Agreement, no country can give notice of its departure until November 4, 2019 – three years after it entered force. Further, no one country is able to leave until November 4, 2020 – which is exactly one day after the next US presidential election.
The US State Department also says that, up until its departure time, the US will continue to participate in the Paris Agreement’s international climate change negotiations and meetings “to protect US interests and ensure all future policy options remain open to the administration.”
As such, for organizations such as PGGM and Danish contemporary PKA, it is business as usual on the sustainability front. Consequently, that means sustainability remains a high priority for their external investment managers. The pair jointly issued a white paper in 2015 stating PGGM would halve the CO2 footprint of its investment portfolios and further integrate climate change risks and opportunities in all its investment activities.
To meet this goal, Elshout says the group is constantly in discussions with the pension plan’s external investment managers on what is expected of them with regards to sustainability. In turn, Elshout says he has not seen a “major shift” in behavior among its managers.
From the manager viewpoint, persevering with a greener agenda continues to make good business – and not just in terms of appeasing the capital support, but the renters of the space they provide. “If you don’t [get sustainable building certification] then you won’t get on the list of some of the major occupiers. If you are competing in a central business district which is well established, then one of the criteria that tenants are looking at is sustainability,” says Hirst.
“It lowers the risk of obsolescence and depreciation, enhances tenant retention, reduces void periods and lowers operating costs,” adds Tatiana Bosteels, head of responsible property investment, Hermes Investment, the London-based investment manager.
Yet, not everyone is convinced that investor and occupier demands are the best mechanisms for improving sustainable property investing. While institutions anticipate a greater role for ESG, only six out of 10 predict it will become standard practice for their organization in the next five years, according to a June survey of more than 500 investors from over 31 countries conducted by French asset manager Natixis Global Asset Management.
For some of these managers, the argument persists that government intervention is the real driving force behind sustainable property investing. Andrew Szyman, head of property management & sustainability at BMO Real Estate Partners, another London-based manager, says the Paris Agreement will manifest itself in tighter regulation over the coming years, and that legislation tends to be the one factor with the biggest impact.
“I think there are clear leaders in this space, those who see other drivers beyond regulation, but I also think there is a long tail of legitimate property investors who don’t wish to be ranked against the likes of Hermes or Lendlease, for example. To those, sustainability is more about compliance rather than any moral or other imperative,” says Szyman.
The East’s mixed position
As such, the Paris Agreement remains an important initiative for the real estate sector as it is leading to specific regulatory and legislation changes. “The Paris Agreement is translating into a lot of legislation, both at the European level and at the country level, so I think we can see the policy drivers are fairly strong in those markets and getting stronger,” says Nina Reid, responsible investment manager at M&G.
“In Asia, it is more mixed, but the policy drivers are starting to become stronger. Singapore for example now requires you to get green building certification if you are undertaking a certain level of refurbishment work. Even in the US, the national government may not be as engaged on climate change, but, at a city and state level, there are strong drivers around disclosure and certification.”
Bosteels suggests that investor support and government involvement work hand-in-hand. “While investors are keen to play their part, the accord recognizes there are limitations to what investors can do to scale-up finance to the levels required to close the emissions gap without a supportive public policy environment,” she says.
“The pace of investing in low-carbon alternatives, without lower returns, is likely to be driven by government policy. Companies and investors alone, especially where climate risks have a significant impact on their value chain, cannot succeed in decarbonizing business models without supportive public policy that allows them to achieve a reasonable return on capital. Aside from pushing down emissions through win-win strategies such as energy efficiency, we will require effective public-private co-operation to achieve significant step-changes.”
Whether the sector gets to benefit from such co-operation from Washington, DC will be known come 2020. Until then, other governments and the investor and occupier communities are giving the sector all the impetus it needs to continue pursuing a more sustainable outcome for its assets.