Approach to responsible investment

Climate change can impact the value of investments; the nature of property assets is inherently long term, making climate change a material issue for long term property asset valuation. 

Physical Risks

Property is naturally exposed to physical risks. We are conscious of investing in assets that are exposed to increased prevalence of wild weather events brought on by climate change. At present we do not have any serious concerns for the portfolio, however we do expect that assets located in areas that are susceptible to rising sea levels, flooding and wild weather events will continue to be impacted as global temperature averages rise.

Market and Business transition

Already we are seeing a flight to quality, particularly in the office sub-sector, which encompasses an asset’s overall environmental rating. Companies that are not accommodating for this structural demand change will be left with assets that are less desired than their peers. We believe that this will influence returns for our stakeholders in the long term and invest with a carbon overlay and incorporate an environmental score into the valuation stage of the investment process to mitigate this risk. We also believe that this provides an opportunity on the upside as ‘greener’ assets rank more attractively for the strategy, in line with our long term views for the property sector.

Reputation and social licence to operate

As environmental disclosure demands across the property sector increase, we expect that the discrepancy between the top of the universe and the bottom of the universe will become more transparent.

Our strategy currently screens out companies that do not meet Operational Net Zero by 2050 targets and conducts extensive environmental due diligence on all of our holdings. We believe our environmental stock due diligence is market leading and that our strategy is well-positioned to produce a high Environmental, Social and Governance (ESG) focused total return to our investors over the long term.

Legal and regulatory

Regulations in the property sector will become more stringent as governing bodies tighten development requirements and operational quotas. We perceive stringent legal and regulatory changes as opportunities rather than risks as they will enforce a better standard and benchmark for our property sectors in order to achieve one common goal, i.e. fight the risk of climate change. We will continue to work with regulatory bodies and leading companies within our sector to work through various challenges facing our sector; universal and uniformed disclosure and green-washing are some of our sector’s current challenges, to name a few.

Our key metrics:

• Total Operational Carbon (tonnes)
• Total Embodied Carbon (tonnes)
• Portfolio Operational Net Zero Date
• Operational Carbon Intensity (kilograms of carbon dioxide emissions per square metre)
• Portfolio Solar energy generation (megawatts)
• Portfolio Solar generation to Total Energy Consumption (%)
• Renewable energy as a % of total energy consumption (%)
• % energy sourced from renewables (%)
• Total Development Embodied Carbon (tonnes)
• Total Development Embodied Carbon Offset (tonnes)

The strategy’s risk assessment process is derived from all stock level fundamental analysis which incorporates full stock carbon analysis as well as continual re-evaluation of a top-down negative screen for all holdings.

Our carbon assessment methodologies have been developed in-house, to cater for identified Scope 3 emissions on all owned assets. This includes assessment of forecast embodied carbon associated with development and redevelopment.

We believe that implementing ESG considerations into our investment process leads to better risk return outcomes, which will ultimately improve long-term returns for clients.

Accordingly, the investment process directly incorporates ESG factors, ensuring an ESG bias in the portfolio. ESG factors are incorporated in three components of the investment process.  

Firstly, ESG factors are included in the initial screen which we use to define our investible universe. We have two ESG negative/exclusion screens: 1) the stock must achieve “controlled and “non-controlled” operational carbon net zero by 2050; 2) a low ESG score across a range of ESG factors within our qualitative assessment can lead to a stock being excluded from our investible universe.

Secondly, ESG factors and scores feed into the Capital Asset Pricing Model (CAPM) used in our Discounted Cash Flow (DCF) valuation methodology. This incorporates environmental factors as well as social and corporate governance factors.

A lower ESG rating will cause us to allocate a higher beta rating to the company’s shares. Other things being equal, the higher a company's beta is, the higher its cost of capital discount rate will be. A higher discount rate lowers the present value we place on a company's future cash flows, and reduces our total return expectations for that stock. 

Thirdly, within the “Negative Screen” at the final stage of the investment process we can bias the strategy on many ESG factors including carbon outcomes. For instance, seek to bring forward the portfolio’s “controlled” and “non-controlled” operational carbon net zero date.

ESG factors have always been fully integrated and embedded in our investment process from the initial negative screening stage to bottom up stock valuation stage and final negative screening stage. Furthermore, starting from 2022, we have made material enhancements to the carbon analysis undertaken on the portfolio and introduced a new exclusion/negative screen criteria: Any stock that does not achieve “controlled” and “non-controlled” operational carbon net zero by 2050 fails the exclusion test and will not make it through to the portfolio.

Continuous engagement with companies on ESG issues is a part of our investment process. We strive for improvement within our portfolio and our sector over time by setting short-term and long term targets. We aim to reach those targets through engagement. Where we see material issues are not being appropriately addressed within a reasonable time frame, generally 18-24 months; we will make the final decision to divest.

Our voting framework is aligned with the FSI voting policy. We take into account investee companies’ environmental, social and governance policies in our voting decisions.

We have set targets over the short to long term at individual company level with an objective to reduce emissions from our sector. At team level, our long term target is to have the portfolio achieving net zero emissions by 2050 or earlier.  100% of our assets under management is covered by our targets.

To track progress to a low carbon economy, we measure various science-based KPIs and commit to continuous reporting on those metrics. Some examples of our KPIs are carbon intensity, year on year carbon emission reduction (scope 1 & 2), embodied carbon emissions reduction, company net zero target and renewable energy as a % of total energy consumption.

Our long term vision is to achieve a portfolio with 100% exposure to green assets. It is an ambitious vision, however with planning over the long period, that vision is possible by green development and redevelopment, carbon credit programs and renewable energy sources.