Important Note Click to maximise

This is a financial promotion for The First Sentier Global Property Securities Strategy. This information is for professional clients only in the UK and Switzerland and elsewhere where lawful. Investing involves certain risks including:

  • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
  • Currency risk: Changes in exchange rates will affect the value of assets which are denominated in other currencies.
  • Single sector risk: Investing in a single sector may be riskier than investing in a number of different sectors. Investing in a larger number of sectors helps spread risk.
  • Single country / specific region risk: Investing in a single country or specific region may be riskier than investing in a number of different countries or regions. Investing in a larger number of countries or regions helps spread risk.
  • Charges to capital risk: The fees and expenses may be charged against the capital property. Deducting expenses from capital reduces the potential for capital growth.
  • Property securities risk: Investments are made in the shares of companies that are involved in property (like real estate investment trusts) rather than property itself. The value of these investments may fluctuate more than actual property.
  • Emerging market risk: Emerging markets may not provide the same level of investor protection as a developed market; they may involve a higher risk than investing in developed markets.

 

For details of the FCA authorised firms issuing this information and any funds referred to, please see Terms and Conditions and Important Information below

For a full description of the terms of investment and the risks please see the Prospectus and Key Investor Information Document for each Fund.

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Global Property Securities - Property sector yet to face its emissions reckoning

The full scope of the real estate securities sector’s contribution to global carbon emissions has not been fully quantified, which could potentially impact the valuation of listed companies not moving towards emissions measurement and disclosure from modernisation programmes.

The mismeasurement and potential mispricing of companies is in part due to the World Business Council for Sustainable Development Greenhouse Gas (GHG) Protocol Definitions not translating well enough.

It’s the so called embodied carbon emissions (emissions associated with everything but the operating asset) – rather than the more apparent operational carbon emissions – that could end up surprising investors as more awareness comes to market or regulatory bodies bring in more rigid guidelines.

To get the full picture of the risks and opportunities, investors need to look at how companies are identifying, measuring, addressing, reducing, renewing and supplementing their carbon reduction and renewable energy ambitions, not just how they operate their assets.

We have developed a carbon assessment methodology that allows us to position the fund appropriately given the structural ESG tailwinds by integrating comprehensive carbon emissions assessment into our investment process so that we can value companies more accurately and mitigate any risks and associated costs of carbon.

This is the first in a series of articles that will draw insights and findings from a methodology we developed in-house to better measure the sector’s emissions profile. 

It’s the so called embodied carbon emissions… that could end up surprising investors as more awareness comes to the market or legislative bodies bring in more rigid guidelines

State of the sector

The real estate sector is one of the largest emitters of carbon comparatively, accounting for approximately a third of the world’s emissions, according to the Wold Green Building Council (GBC). Unfortunately, the sector does not have a standardised methodology to account for the full scope of carbon emissions produced from embodied carbon associated with modernisation programmes.

Although some listed property companies are currently demonstrating advanced carbon reporting standards through their annual sustainability reports, a lack of critical carbon disclosures broadly highlights the need for a more collective push as the sector moves towards net zero by 2050.

Embodied carbon disclosures, for example, will be crucial in showcasing the emitting activities of the sector which have previously been too hard to report. Currently, the building sector sends 13% of materials delivered to a construction site straight to landfills without ever being used, the World GBC highlights. Demanding more advanced reporting standards will help rid the industry of such inefficiencies as we continue to build for the future.

Looking at the operational emissions of an asset, a large proportion of an assets operational emissions are derived from heating and cooling systems that in many countries generate power from fossil fuels. To counteract operational emissions, many companies are investing in more efficient plant and equipment and, where the energy is controlled, are looking to procure the required mega-wattage from renewable sources.  

At present, progress towards net zero for listed property companies in our investment universe is advancing at a fast rate, with market leaders demonstrating robust reporting standards and a general consensus that doing nothing is no longer an option. 

Some progress is being made

The EU’s Energy Efficiency Directive and the Energy Performance of Buildings Directive provide a solid framework to achieve these targets; yet for this to happen strong implementation is required.

However, the EU still missed its 2020 operational energy efficiency targets because the European building stock is not being renovated at the rate and depth needed to achieve their targets.

In order to bring their energy emissions back in line with the advancing global net zero ambitions, the European Commission will need to encourage Member States to develop and implement ‘nearly zero’ energy strategies that go beyond the World GBC directive so all new buildings are net zero carbon by 2030. 

The International Energy Agency estimates that direct building CO2 emissions would need to decrease by 50% and indirect building sector emissions decline through a reduction of 60% in power generation emissions by 2030 to meet 2050 targets. These efforts would need to see building sector emissions fall by around 6% per year from 2020 to 2030. For comparison, the global energy sector CO2 emissions decreased by 7% during the pandemic1.

While much attention is focused on new, state-of-the-art buildings that achieve the highest sustainability certifications, 70% of buildings stock today will still be here in 2050, according to property services company Jones Lang LaSalle2. This projected glut of building stock highlights the need to repurpose spaces, retrofit older buildings and refurbish in line with World GBC guidelines. Combined with this, the embodied carbon from building modernisation needs to be measured, target reductions put in place and all resulting emissions fully offset.

Investment opportunity

We believe that ESG alignment, particularly in net zero efforts, will actually improve long-term shareholder returns

We believe that ESG alignment, particularly in net zero efforts, will actually improve long-term shareholder returns, giving our clients access to the most attractive risk-adjusted returns within our investment universe.

Our proprietary carbon analysis methodology enables accurate assessment of carbon emissions from the following areas: portfolio modernisation (inclusive of development, re-development and capital recycling programmes of companies), renewable energy procurement (purchasing of energy), carbon offset programmes, embodied carbon and on-site renewable energy generation. We will continue to break down aspects of this methodology in future articles in this series.

Already we are starting to see greener assets attract greater levels of tenant demand, which we believe is only the start of a strong structural theme that will last for decades.

The World GBC’s recent Beyond the Business Case report found that leasing activity for new, grade-A office buildings in central London with a BREEAM rating of “very good” or higher, achieved on average 10% higher rents than those without a rating. So-called leasing “velocity” also improved, with lower vacancy rates of 7% - compared to 20% - for those rated “very good” 24 months after completion3.

It is becoming increasingly clear that with the rapid expansion of sustainability in real estate investment, the value of your asset – no matter where it is or what type – will be impacted by increased obsolescence or stranding of properties that do not meet occupational, investor and legislative sustainability standards.

We believe that buildings with better efficiency ratings will continue to attract higher rents, will typically have lower running costs and will be more appealing to tenants which we believe will continue to drive performance over the long term.

1. 2020 Global Status Report for Buildings and Construction

2. The 10 Green Building Principles aiming to get real estate to Net Zero – JLL

3. World GBC - Bryong the business case

Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered. It does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First Sentier Investors.

In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. In the EEA, issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland number 629188. Outside the UK and the EEA, issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First Sentier Investors ICVC, an open ended investment company registered in England and Wales (“OEIC”) or of First Sentier Investors Global Umbrella Fund plc, an umbrella investment company registered in Ireland (“VCC”). Following the UK departure from the European Union, the OEIC has ceased to qualify as a UCITS scheme and is instead an Alternative Investment Fund (“AIF”) for European Union purposes under the terms of the Alternative Investment Fund Managers Directive (2011/61/EU). Accordingly, no marketing activities relating to the OEIC are being carried-out by First Sentier Investors in the European Union (or the additional EEA states) and the OEIC is not available for distribution in those jurisdictions. This document does not constitute an offer or invitation or investment recommendation to distribute or purchase shares in the OEIC in the European Union (or the additional EEA states). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC and VCC which are available free of charge by writing to: for the OEIC First Sentier Investors, PO Box 404, Darlington, DL1 9UZ or by telephoning 0800 587 4141 between 9am and 5pm (UK time) Monday to Friday and for the VCC to First Sentier Investors, 1 Grand Canal Square, Grand Canal Harbour, Dublin 2, Ireland or by telephoning +353 1 635 6798 between 9am and 5pm (Dublin time) Monday to Friday or by visiting www.firstsentierinvestors.com. Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First Sentier Investors may be restricted in certain jurisdictions.

In the EU: This document is a marketing communication. The fund(s) mentioned here may or may not be registered for marketing to investors in your location. If registered, marketing may cease or be terminated in accordance with the terms of the EU Cross Border Distribution Framework.

Copies of the prospectus (in English and German) and key investor information documents in English, German, French, Danish, Spanish, Swedish, Italian, Dutch, Norwegian and Swedish, along with a summary of investor’s rights are available free of charge at firstsentierinvestors.com

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity 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.

Copyright © (2021) First Sentier Investors

All rights reserved.