Sustainability goals: What to target, and why, is key

Setting goals is vital to any business, and sustainability is no exception. Real estate managers say clearly defined targets are vital to ensuring investments are sustainable.
Exactly what those goals are will depend on the type of company or fund. Indeed, the goals for an investment manager may be different from those of the funds it manages.

Sustainability professionals recommend targets be focused on issues that are strategically important to the company and on areas where the company can make a material difference.

Richard Hamilton-Grey, head of sustainability, Europe, at manager Nuveen Real Estate, says: “Goal setting must be laser-focused on what we see as material today, but that has the nimbleness to adapt over time as issues rise up or fall down the agenda. With real estate typically a long-term investment, this is particularly important for our business.”
He recommends that companies inform goals by undertaking a materiality assessment, which involves engaging with the company’s most important stakeholders, as well as analyzing industry, market and regulatory trends.

Managers also say it is important to have clear goals at the house level, as they set the tone across the organization, though goals must also make sense at the fund level. Simone Pozzato, fund manager for Houston-headquartered Hines’ European core fund, says: “It is super important to have clear goals in sustainability, from which you build a timeline with internal and external stakeholders. For example, we have a target to be net zero in Scope 3 emissions by 2040, which drives a series of sub-targets for the assets and the business.”

Cristina Garcia-Peri, head of corporate development and strategy at Madrid-based Azora, adds that goals need to be set within the context of investment risks, returns and the demands of investors. “We have a deep focus on identifying investment risks, including those related to sustainability, and chiefly physical climate change and transition risk,” Garcia-Peri says.

“Our goals and objectives are set up in the context of the returns that we are trying to achieve in each strategy, and we work closely with our investors to align to their sustainability goals and strategies too. We believe that without returns it is not possible to advance in the improvement of the sustainability of our economies.”

Walk the path

The UN’s SDG framework can be used to inform a real estate investor’s or manager’s goals. There are 17 SDGs, which were agreed by all UN member states in 2015, including: climate action, affordable and clean energy, sustainable cities and communities, good health and wellbeing, and quality education.

There is no ‘correct’ number of SDGs with which a real estate organization should be aligned, as it will depend on which are material to stakeholders. The number is likely to change as a company’s sustainability strategy evolves. Nonetheless, the UN warns against cherry-picking easy goals.

“Without returns, it is not possible to advance in the improvement of the sustainability of our economies”

Cristina Garcia-Peri
Azora

Some organizations use the SDGs as a framework by aligning their own individual goals with them, whereas those with an existing reporting framework might integrate the goals into this structure. Real estate investors can determine ESG goals for each relevant SDG and prepare targets that can be practically assessed to determine progress. These goals should be reviewed periodically to ensure they are relevant.

Sustainability ambitions such as aligning with the Paris Agreement, which targets reaching net-zero carbon by 2050, are ambitious and sustainability professionals recommend setting stretch goals, even though the plan to achieve them cannot be clearly defined today. Ole Lund Hansen, local networks chief at the UN Global Compact, a voluntary initiative that encourages businesses to adopt the SDGs, says stretch goals will “stimulate innovation, investments, positive engagement and, ultimately, performance.”

Decarbonization has become the key theme for real estate investors and managers due to the significant contribution of the built environment to global greenhouse gas emissions from the construction and operation of buildings. As a consequence, more companies are setting themselves a net-zero carbon target.

Hamilton-Grey says: “A net-zero carbon pathway helps the business or a fund to understand the key interventions that are required to transition a portfolio towards operational net-zero carbon, through energy efficiency improvements, the utilization of renewable energy, reductions in embodied carbon and carbon offsetting if necessary. Understanding the investment required and optimal timing of interventions can help inform strategic business planning.”

Not all net-zero targets are the same; to truly combat climate change, real estate companies need to target Scope 3 emissions, produced by tenants. Some ambitious companies are targeting absolute net zero for both operational and embodied carbon emissions.

Many companies are also committing to the Science-Based Targets initiative, which provides companies with a clearly defined path to reduce emissions in line with the Paris Agreement goals. One advantage of the Science-Based Targets initiative is that it produces independently validated targets.

In order for goal setting to work, goals need to be integrated into the company and throughout its business units, and with buy-in from all stakeholders, particularly staff – and for investment managers, their investors.

For real estate investors and managers, another key challenge is aligning asset acquisition and management strategies with sustainability goals. In order to do this, progress needs to be monitored and measured.

Hines’ Pozzato says: “The next big thing is how all this works at the asset level, because we need to improve those assets in an efficient way. We have a net-zero CRREM pathway at acquisition; it is part of the due diligence process. You need a strategy for bringing each building as close as possible towards net zero.”

Sustainability targets, especially those related to decarbonization, can seem both difficult to achieve and far off in time. However, the first step to getting somewhere is to define and set meaningful goals.

Hamilton-Grey says: “Without clear goals, a willingness to be flexible, an ability to stay nimble and empower investment teams with knowledge and toolkits, you run the risk of having an obsolete or impractical strategy very quickly.”