This article is sponsored by Ivanhoé Cambridge
Global real estate investors are uniquely vulnerable to the effects of a changing world. However, they are also in an unrivalled position to work for positive change, both to the environment and to wider society, while at the same time future-proofing their investments, as Stéphane Villemain, vice-president, corporate social responsibility at Ivanhoé Cambridge, the real estate arm of Canadian institutional investor Caisse de dépôt et placement du Québec, explains to PERE.
Why is real estate so vulnerable to climate change yet at the same time a potential force for positive change?
Real estate assets are by nature immovable in a world that’s changing rapidly around them, and therefore very much exposed to those changes in terms of climate patterns, social patterns, policy, regulatory trends and tenant expectations.
If we want to make better investment decisions, as a long-term investor, we clearly have to systematically factor those ESG forward-looking criteria into our investment process. The goal here is to futureproof the portfolio, making sure it remains relevant to our clients and occupiers, 10, 20, 30 years from now. So, that’s the exposure that real estate has to the outside world, so to speak, which makes it essential to consider ESG in our mandate and how we manage our investments.
The second dimension is our ambition to be intentional about making positive social impacts. It’s really in our interest to do so because we, as a long-term institutional investor, must lead the way on this. We sit at the top of the investment chain and we strongly believe it is our corporate responsibility.
So, we want to make positive impacts and we have incorporated that intention in the firm’s purpose and mission. And that brings us to this double impact mandate we have. First, as a fiduciary, we look for risk-adjusted optimized returns. There’s a strong social element to that, because our depositors are made up of about six million Quebecers, and our goal is to ensure their financial security over the long term.
In addition to that fiduciary mandate, we look for the measurable social, environmental positive outcomes, which all must be delivered through the investments we make. We believe there is strong alignment between sustainability and profitability.
How do you envisage this model of sustainable investment being profitable over the long term?
In the minds of many people, this idea that there could be a trade-off between ESG and financial returns still holds true at a lot of organizations, even institutional investors.
However, we believe they are aligned. Recent research in Knight Frank’s ‘The Sustainability Series,’ published in September 2021, highlighted a 12 percent rental premium for buildings that have the highest level of green certifications versus the ones that don’t have any green certification.
Where buildings have a worse environmental performance, you’re at risk of having stranded assets within the portfolio. This comes back to this notion of futureproofing and managing obsolescence risk.
There are clear signals from the market that ESG must be considered now. We don’t need to wait for climate catastrophes to happen. The impact of climate change on values will be much earlier. Similarly, when a tenant comes into town and looks for a space to rent, it’s likely to favor one with the highest ESG rating, because that fits with the tenant’s ESG goals and what its staff want.
All these factors will lead to a divergence in values between the most sustainable spaces and the least.
What kind of environmental sustainability measures are Ivanhoé Cambridge taking?
We’ve committed to aligning our portfolio with the Paris Agreement goals and aim for a net-zero carbon portfolio by 2040.
Obviously, 2040 is fairly far away, so we’ve set shorter-term targets. By 2025, we aim to reduce carbon intensity for the portfolio by 35 percent, for example, to increase our low carbon investments by C$6 billion ($4.8 billion; €4.1 billion), and for all our new property developments to be net-zero carbon from an operational standpoint.
We also look to use cleaner forms of energy, including building electrification, and then onsite or offsite renewable power generation or procurement. Rooftop solar is used on some of our logistics buildings and we have assets that are net energy positive due to the onsite generation of excess geothermal or solar energy.
There are sectors – cold storage and data centers, for example – which are naturally energy intensive and so we focus on strategies to increase the amount of renewable energy being used and adopt industry best practices to reduce energy intensity.
The approach is to continue making progress in the portfolio. Indeed, one of the potential pitfalls of ESG commitments or net-zero commitments would be to try to acquire only very green assets. There are merits in buying less green assets in order to repurpose or retrofit them, and having ESG performance improvement as part of the value creation thesis.
Innovation is also key to attaining sustainability goals, so we’ve invested $85 million across four proptech funds managed by venture capital firm Fifth Wall. We’re not just an investor in these funds, but also a potential user of these technologies in the future. This is an area that is changing very fast as real estate goes through its own industrial revolution.
Do you invest to deliver a wider social impact, beyond your immediate responsibility to your pension holders in Quebec?
Ivanhoé Cambridge does have an important social responsibility in terms of promoting the health and wellness of occupiers in our properties.
This is an area where good progress is being made in terms of ensuring proper access to daylight, thermal comfort, acoustic comfort, access to services, to public transport, and many other components which make a building healthier and, in the case of an office building, for example, make staff more productive.
We’re increasingly adopting wellness certifications, such as the WELL building certification, in addition to green certifications. Another element is diversity, equity, and inclusion, both internally and through the relationships we have with our partners. Housing affordability is another ‘S’ factor that is important for us. More than half of our residential rental units are considered affordable according to local market criteria.
At the asset level, each property has its own strategy for community investments and activities and volunteering, all of which are tailored to their local community.
We’re also working to better assess and measure the social impacts of our buildings and initiatives. For example, we’re piloting some studies to evaluate the social return on investments for some of our assets. It’s early days and there are no off-the-shelf methodologies, but it is an area in which we’re seeking to make progress.
How do you ensure that ESG consciousness is hardwired into the organization?
Our priorities are integrating ESG into the various business processes, and in particular the investment process; really making sure ESG criteria are factored into the investment decisions we make, be it acquisitions or asset management decisions. Tied to that is a commitment to be transparent to stakeholders in terms of how we’re performing and progressing on sustainability. So, we’ve participated in GRESB for seven years, allowing us to benchmark the ESG performance of our portfolio with relevant peers over time.
Real estate capital is composed not only of equity investments, but also financing, so equity is only half of real estate. And so we’ve worked on the sustainable finance theme quite extensively too and have made good progress here, issuing green loans and also a green bond in 2019. In 2020, we had around C$2 billion of sustainable finance in place but this year we also converted C$8.5 billion of our corporate credit facilities to sustainability-linked loans, where the interest rate is linked to certain ESG targets, including the GRESB score and the carbon intensity of the portfolio. Hitting these targets leads to a reduction of the interest rate and failing means a higher rate, so performance is incentivized. Across a portfolio it adds up and reinforces our commitment.
ESG is not just the responsibility of the ESG team; it’s for all teams across the business to deliver on these commitments and integrate them in their day-to-day job. For example, all employees have a part of their incentive pay tied to various strategic ESG-related objectives, including the carbon intensity of the portfolio.
However, it’s not just about our efforts internally. The incentive question is also important outside of Ivanhoé Cambridge, in the wider investment chain, with asset managers, tenants and property managers. There is also an opportunity to structure incentives tied to the achievement of certain energy or ESG targets. And we need to remember that while we’re committed to the ‘Race to Zero,’ we do not just want one winner. We all want to win the race, so collaboration and sharing of best practice among investors, managers and tenants is essential.