While the decarbonisation efforts of Real Estate Investment Trusts (REITs) have advanced reasonably well in the last five years, it’s what happens next that could be most meaningful for investors.
The investment opportunity for real estate is quite real and tangible when it comes to environmental considerations. We think this is only going to get more important as REITs align with higher standards expected of them by the communities and regulators.
The global property sector’s continuing alignment on Taskforce on Climate Related Financial Disclosures (TCFD)1 is an example of the kind of higher standard property companies are being held to.
Then there’s the standards investors like us are creating as we wait for official standards and benchmarks – including the World Business Council Green House Gas Emission Protocols – to catch up.
Operational carbon (scope 1 and 2) is now mostly measured across the listed REIT sector2. It’s the so called embodied carbon emissions (scope 3)3 that may end up surprising investors that haven’t assessed the impact of emissions in the full life-cycle of an asset when more stringent regulations are put in place.
We believe there is a direct link between Environmental, Social and Governance (ESG) alignment and long-term value for investors in listed property. And while we have been pleased with the developments made by the property sector to date, the work ahead on the environmental side is likely to be more meaningful for investors than ever.
Where the rubber hits the road
Think about modernisation programmes, for example. As renovations and upgrades continue, upgrades in technology and materials can lead to major improvements in a portfolio's energy and carbon efficiencies.
Modernisation can equate to lower ongoing tenant costs of occupation when viewed through the investor lens. Energy savings through modernisation programs typically get shared between landlords and tenants.
Improvements in energy efficiency through modernisation can also increase the “rentability” of buildings, leading to more secure cash flows.
Tracking and measuring the effectiveness of modernisation programmes and how these programmes translate into better cash flows and greater tenant demand can directly relate to investor outcomes.
Beyond modernisation, another emerging area of materiality for property investors are carbon offset programmes.
We expect carbon offsets to be a significant risk mitigating factor in coming years as carbon regulation gets rolled out.
Landlords with established high-quality offset programmes will be at less risk of increasing financial liabilities associated with the rising cost of carbon credits.
ESG has progressed, but there’s more to come
Overall, we consider ESG adoption to be a positive development in the property sector. Social disclosures have been improving, whilst corporate governance evaluations have been a mainstay for investors already now for many years.
We have had ESG considerations embedded in the investment process for a decade now and it’s clear to us there is a high correlation between these considerations and shareholder returns.
We believe there are no losers, broader society and the environment benefit, corporate culture strengthens, and so do employee and executive and shareholder outcomes.
We expect to see higher returns in the property sector attributable to the progress REITs are making on their energy and carbon efficiencies, as carbon emissions reduction programmes become more and more prevalent.
2 Operational carbon is the carbon released from the ongoing operation of the building, including from sources such as power, heating, cooling, lighting, ventilation etcetera.
Curious about what lies ahead?
Find out more about how we are shaping the future.
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
- Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited.
- Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and this publication or advertisement has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) is a business division of First Sentier Investors (Singapore).
- Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
© First Sentier Investors Group