Pensions World

Pension schemes can drive change by how they manage the environmental impact of their property portfolio suggests Paul McNamara, PRUPIM

It is becoming increasingly clear that commercial property is part of the problem and part of the solution to carbon dioxide emissions. According to the United Nations(1), buildings account for 40% of both global energy use and carbon dioxide emissions, 30% of raw materials usage and 20% of water usage, with commercial property representing around half these totals. However, the Intergovernmental Panel on Climate Change (2) (IPCC) among others (3) has identified buildings as having the greatest potential at lowest cost for carbon mitigation out of all the major economic sectors.
Growing concerns over climate change are encouraging governments to develop ever more demanding legislation and regulation for both the owners and occupiers of buildings; rising energy prices are increasing building occupation costs; and the physical impacts of climate change pose substantial risks to future asset values. It is, therefore, not surprising to find that under such conditions occupier and investor preferences as to what buildings they rent and own are also beginning to change.

Carbon emissions

The expectation is growing among investors that, over time, “greener” buildings will experience higher net income growth (through slower asset depreciation and lower operational costs), be viewed as less risky and, until these factors are fully priced in, deliver higher returns. Clearly, the more these issues matter to tenants and investors, the greater that differential medium term performance could be. Add to this the possibility that governments could enforce unexpected step-changes in the environmental standards of the existing built stock, the potential impact on asset values and performance between “green” and “brown” buildings could prove even more marked.

Once we see how these environmental issues could affect future investment asset performance, it is a logical step to recognise that the prevailing environmental performance of property assets in a pension scheme portfolio is as much a fiduciary as a social responsibility for pension scheme trustees and their property fund managers. As such, pension schemes need to understand how well placed or “future proofed” their property portfolios are to produce competitive returns in the face of this emerging property market dynamic and the degree to which carbon emissions and other environmental impacts from their property portfolio are being managed on their behalf.

Sadly, the collection of relevant environmental data is made unnecessarily difficult by the current proliferation of “green building” measurement and labelling schemes in existence and the lack of an accepted standard approach even among those property fund managers who are enlightened on the issue. This is compounded by the value of some of the metrics themselves being regularly put under question.

Climate change

To assist its scheme members ask the right questions about the environmental strategies being employed by their property fund managers and to identify the essential data they need to have in order to assess their managers’ environmental performance, the Institutional Investors Group on Climate Change (IIGCC) has recently published a 24 page guide entitled Climate Impact Reporting For Property Investment Portfolios: A Guide for Pension Funds and their Trustees and Fund Managers(4).

The guide suggests that to adequately assess the climate change related risks (and opportunities) in their portfolios, schemes need to have access to two main types of information on a regular basis. First, they need their managers to supply them with an overview of the environmental strategies they are deploying on their behalf to cut greenhouse gas emissions from the portfolio and reduce other environmental impacts. Second, they need data on the current environmental performance of the portfolio, how this is improving over time and how this performance compares with that of other similar portfolios.

In such disclosure reports, the IIGCC suggests that property fund managers outline to their client the financial and strategic implications of climate change issues for the property market in general and for their client’s fund in particular. This should include a review of relevant current and planned national, regional and international policies and a statement of the environmentally responsible actions being carried out by the manager.

While not exhaustive, the Table outlines the main types of data the IIGCC is recommending schemes ask their property fund manager to provide. It also outlines why the data is relevant to the prospective performance of the fund.

With respect to the types of portfolio-wide actions property fund managers might pursue to reduce the CO2 emissions of properties in the portfolios they manage, these may include:

• their introduction of energy, water and waste management plans
• their introduction of new, cleaner, technologies (eg photovoltaic panels, wind power, biomass systems)
• their use of new forms of leasing structure (eg green leases, memoranda of understanding, etc)
• the partnerships they form with property and facility managers, tenants and suppliers to deliver their aims and
• their involvement in industry initiatives and collaborations to develop a wider understanding of these issues.

Environmental impact

Property is a disproportionately important asset class for pension schemes wishing to exhibit their environmental credentials.

It may be a minority asset class in investment terms, but it has a material environment impact. The IIGCC firmly believes that, as owners of sizeable property portfolios assets, schemes can and should play an important role in driving the commercial property sector and those who operate in it to make their proper contribution to reducing the environmental impacts of existing and new buildings.

One way they can do this is to put pressure on their property fund managers for information about the environmental impacts of their property portfolios and impressing upon their fund managers the need for them to use all forms of no-, low- and economic-cost measures to drive those impacts down. In doing so, pension schemes should focus on the environmental performance of existing property assets and not be sidetracked into thinking responsible property investment is all to do with shiny new “green” developments which are a sideshow, albeit an important one.

In its guide, the IIGCC has used the recent work of the UK Green Property Alliance to identify a range of straightforward and common sense environmental metrics. It believes that by asking for such information and demanding that it be delivered in standard form, a new field of environmental performance measurement and attribution could be developed for property to sit alongside the established field of investment performance analytics. In time, environmental performance measurement could be used by pension schemes and their advisers to assess the absolute and relative environmental performance of the funds under management and the different fund managers who manage them.

Paul McNamara is director and head of research at PRUPIM. He currently chairs the IIGCC Property Workstream and is co-chair of the UNEP FI Property Working Group; paul.mcnamara@prupim.com

1 UNEP SBCI (2006), Sustainable Buildings and Construction Initiative, UNEP SBCI Secretariat, Paris
2 Intergovernmental Panel on Climate Change (IPCC), (2007), IPCC Fourth Assessment Report: Climate Change 2007. IPCC, Geneva
3 McKinsey & Company (2010), Impact of the Financial Crisis on Carbon Economics, Version 2.1 of the Global Greenhouse Gas Abatement Curve, www.mckinsey.com/clientservice/sustainability/pdf/Impact_Financial_Crisi...
4 The Institutional Investors Group on Climate Change (IIGCC, 2010), Climate Impact Reporting For Property Investment Portfolios: A Guide for Pension Funds and their Trustees and Fund Managers, www.iigcc.org/__data/assets/pdf_file/0013/1291/IIGCC-2010-Property-Repor...