LaSalle on forging ahead with the evolving pace of ESG

The impact of sustainability on private real estate ramps up with every passing year. Eric Duchon of LaSalle Investment Management explains how the firm is responding

When PERE spoke with LaSalle Investment Management for last year’s sustainable investing report, the firm had just published its white paper Environmental Factors and Real Estate Demand, which set out how the firm would grow its focus in the area. A year on, Eric Duchon, global head of sustainability, tells us how the firm’s approach continues to expand in line with investor expectations.

PERE: Where has your focus been in the last 12 month to ensure LaSalle continues to expand its sustainability practices?

Eric Duchon: Sustainability standards in global real estate continue to evolve at a rapid pace due to both market and regulatory forces recognizing real estate’s impact on climate change. We remain focused on being a leader in the evolving area of ESG issues through continued integration of best practices across our public securities and private equity business. The aim is to help investors think about efficient ways to better analyze, price and integrate environmental factors into the risk-return evaluation of each asset.

Within our global framework, each region has its own approach to environmental management. Accordingly, whenever an asset is acquired, we work to understand the sustainability qualifications, identify areas for improvement and ensure that environmental performance has the potential to lead to enhanced investment performance. That means constantly educating employees about environmental factors and having established task forces to accomplish this, so they feel empowered to use their role to truly realize the opportunities of a sustainably managed portfolio.

Asset management is our biggest focus, as within our existing portfolio there is tremendous opportunity to reduce our environmental impact and carbon footprint. Asset managers are key stakeholders. Therefore, we train them to think about ESG at every decision point from development of guidelines for green leasing to implementation of energy, water and waste reduction projects. It is critical to be very cognizant of how these programs impact the bottom line and to be sure that we are passing on those savings to investors.

From an industry perspective, LaSalle remains an active signatory of the Principles for Responsible Investment (PRI) and have recently signed on to the United Nations Environment Programme – Finance Initiative’s (UNEP FI) Task Force on Climate-related Financial Disclosures (TCFD) Real Estate Investor Pilot. In this initiative, we are working with peers and competitors to identify and minimize our impact on climate change.

PERE: Are investor expectations and demands growing and expanding?

ED: Investor expectations are definitely growing and expanding. As a fiduciary to our investors, long-term value creation and protection is fundamental to our business and we believe that ESG best practices can enhance returns. We are seeing more push from investors all over the world, especially in Europe and coastal US. They are asking new and deeper questions demonstrating their increasing knowledge of this subject and their growing involvement in industry ESG initiatives. Investors are asking us to expand our horizons in this area and take a greater leadership role, so we continue to define our impact on climate change, identify opportunities for building-level resilience initiatives and explore the newest trending area of social impact investing.

To continually demonstrate upward movement, we also report annually to industry assessments, and LaSalle now has a three-year track record of an A+ in our PRI Strategy and Governance assessment and enjoyed our strongest
year of GRESB performance since we began submitting in 2012.

PERE: How important are new technology and data management strategies as part of the sustainable investing equation?

ED: They are definitely important, but it is even more critical to ensure that we use the right technologies and strategies for our buildings. No single technology is going to fit a diversified portfolio like ours. When I’m being sold on these new technologies and hear “you can reduce energy or water consumption across all of your buildings,” I immediately pause because there is no silver bullet.

We have a system in place to ensure that we evaluate each new solution via a pilot program that deploys the new product at one or a few assets where we believe it could work at a very low cost so there is no financial impact to us. If the pilot is successful, we roll out to the applicable assets in our portfolio. Many of these pilot programs will have a direct benefit to our tenants as they impact energy operations, so we work closely with their teams to ensure the programs are mutually beneficial.

PERE: Is tenant engagement important?

ED: Extremely. In the US, we saw this recently through feedback in our annual tenant survey. Similar to investors, tenants are placing more importance on sustainability than ever. We have to engage tenants according to property type, so we leverage our onsite management teams to engage them as appropriate under our direction.

At office and multifamily properties, this has been standard for some time but at retail and industrial assets, LaSalle is pushing the envelope to work together on ESG initiatives, for instance financing lighting retrofits in tenant-controlled industrial buildings. We are actively working to increase awareness of sustainability factors as an important consideration for tenants across all property sectors.

PERE: Talk us through an example of where sustainability improvements have led to better investment performance

ED: In 2015, we acquired 222 Exhibition Street, a multi-tenant office building built in 1989 in Melbourne. Our asset management team identified the opportunity to improve both the sustainability performance and investment performance through a long-term, asset lifecycle approach, with the stance that exceptional outcomes could be realized without millions of dollars of capital expenditure. Our goal was to achieve a high NABERS rating in order to attract the right tenants.

While common for a new office building to target high NABERS performance, existing commercial properties face challenges from legacy systems and complexities of making changes without inconveniencing existing occupants. We started with an extensive analysis of the building’s systems and performance. Once completed, we established an improvement plan that optimized existing services and upgraded the end-of-life plant with new technology, with a particular eye on reducing energy consumption. Highlights include optimizing mechanical systems controls and cooling towers, improving air-conditioning and ventilation strategies, implementing a proactive maintenance approach, upgrading wellness amenities and instituting a best-in-class waste management program with the tenants. In essence, we took an outdated building from the 80s and made it a sustainability success story that is attracting new tenants and investors alike.

PERE: In your view, how does an investment manager go above and beyond to improve ESG performance?

ED: ESG practices cannot be conducted in a vacuum; we believe that fully integrating our ESG mandate into all investment functions is critical. However, these initiatives must be tailored according to factors such as geography and property type, among others, to be successful. For example, we undertook a global initiative for each region to establish ESG processes during our due diligence of new acquisitions. These regionally customized processes establish a baseline for each asset team to improve ESG performance.

While the core responsibility for ESG initiatives remains with our sustainability officers, our energy and sustainability task forces are the true reason we can go above and beyond. Professionals across business functions are critical to providing the insights and perspective that enable us to take action and implement ESG initiatives at every point in our investment process, from acquisition to asset management, to ensure we successfully reduce our environmental impact.

This article was sponsored by LaSalle Investment Management. It appeared in the Sustainable Investing special supplement that accompanied the October 2018 issue of PERE magazine.