1

Sustainable InvestmentLessons from the Field

Piet EichholtzMaastricht University

Investors in real estate can make a differenceThe economics of sustainable buildings

3

Learning

ProductivityProperty industry consumes resources and pollutes• 40% of global consumption raw materials (even 55% of wood)• 80% of electricity consumption• At least 30% of global CO2 emissions

Energy represents 7–9% of occupancy cost in commercial real estate

Many energy-efficiency investments in property have positive net present value

• Better insulation, technology, and building management all create shareholder value at current energy prices (McKinsey, 2009, 2013)

Solid academic research shows that green property investments create financial value, especially in office and residential

• Higher rents, higher values, less risk

4

ESG instruments used by Dutch pension fundsExclusion, reporting, engagement and voting are most common

Percentage of 171 funds reporting responsible investment instruments

5

Size matters in ESGDutch pension fund size and ESG instrument use

Let’s put this into perspectiveWhy is this happening and is it a problem?

6

Learning

ProductivityDo the large funds do the right thing?

Small funds face less public and media pressure

Small funds don’t have the resources

Small funds are more likely to opt for passive investments

Small funds make less of a difference, so why bother?

What to do about it?

7

(International) examples and solutions1. Exclusion’s unintended consequences: Bpf Landbouw (and many others)

• Bpf Landbouw excludes arms producers from its investment universe

• This excludes direct arms producers but also related “platform” firms • Rolls Royce maintains UK nuclear

weapons facilities• Airbus produces / maintains French navy

nuclear weapon• Bombardier

• Result is 90% reduction in exposure to aircraft/space industry• Reduces portfolio diversification

US$ 555 bn US$ 57 bn

Boeing Airbus United Technology

Lockheed Martin Honeywell General Dynamics

BAE systems Nothrup Grumman Raytheon

Safran Rolls Royce Bombardier

Thales Finmeccanica Textron

Spirit AerpSystems Rheinmetall Zodiac

MTU Dassault Smiths

Gamesa Triumph Orbital

8

International examples and solutions2. Combining passive investment and ESG: Fjärde AP Fonden

• Fjärde AP Fonden has created a tailor-made low CO2 index-tracking portfolio

• Goal is to minimize tracking error with MSCI Europe, and to reduce carbon footprint by 50%

• Exclusion approach• Top CO2 producers per sector• Retain sector weights of MSCI Europe index

as much as possible

• Result is passive portfolio with performance comparable to MSCI Europe• AP expects superior future performance

MSCI Europe Index

MSCI Europe

Low Carbon Leaders index

Annual return since 2012 7.8% 8.7%Sharpe ratio 0.57 0.63Tracking Error 0% 0.7%Securities excluded 93Market cap excluded 21.4%Reduction in carbon emissions intensity 52%

9

International examples and solutions3. Cooperation: The Nordic Engagement Cooperation

Corporation UN Global compact breach PeriodAES corp. Local population chased /

dam2009 -

Alstom Local population chased / dam

2009 -

Barrick gold corp. Waste spills, human rights violations

2009 -

BP plc Deepwater Horizon 2010 - 2015

Deutsche Post Forbid union membership 2015 -Glencore Mining in Western Sahara - 2015 Nestlé Child labor cocoa

plantation2013 -

Royal Dutch Shell Oli spills Niger delta 2013 -Total Oil drilling Western Sahara - 2015Transocean Deepwater Horizon 2011 -

2015Vinci Labor rights violations

Qatar2015 -

Volkswagen Emission fraude 2015 -

• Pension funds Ilmarinen (€36 bn), Folksam (€35 bn) and Kommunal Landspensjonskasse (€61 bn) founded the Nordic Engagement Cooperation (NEC) in 2009• NEC is complementary to fund-level

engagement: only outside the Nordics

• Criteria for engagement• Likelihood of real influence• NEC’s potential to get deep

knowledge of subject• Subject matter should be material• All three participants hold stake in

target firm

10

Translate this to real estate (and GRESB)GRESB can provide instruments and/or platform for action

• Saving the planet through real estate• Small pension funds should make choices, and GRESB data allows them to implement these

• Exclusion’s unintended consequences in real estate• Exclusion policy on GRESB score would overweigh office and underweigh industrial, Asia• It would likely exclude storage, healthcare, hotel real estate

• Passive investment and sustainability goals• Northern Trust index fund uses GRESB universe and selects 80% best in class overall• Use other GRESB performance data for more specific ESG-performance indices

• Cooperation• GRESB is designed for engagement • GRESB data can provide deeper understanding and criteria for success • Members can join forces to do this effectively

People: next step in real estate ESG researchThe economics of (un)healthy buildings

11

• Outdoor air pollution leads to premature deaths, school absences, productivity loses…

• But …• Average individual spends 90% time indoors • Indoor concentrations up to five times higher than outdoors

• Not much known about health/productivity effects in “normal” buildings

12

Individuals living in bad housing conditions report

3.6% more often bad or poor health status4.6% worse score on mental health scale12.5% higher number of doctor visitscomparable sick leave

Older respondents (above 64)28% more doctor visits than average individual

Health in homesEstimation results include individual fixed effects, socio economic controls and movers

13

Summer 2016Opening of new city office70% of 1500 civil servants moved

We employ surveys and personnel dataSurvey before (n=630) and after (n=670) moving

Perception indoor climate Job satisfactionHealth

Individual administrative dataSick leaveProductivity measures

Moving to productivityQuasi-natural experiment in Venlo

14

Moving to productivitySick building syndrome

Percentage of individuals reporting symptoms related to sick building syndrome

About GRESB Real Estate

MISSION

Enhance and protect shareholder value by assessing and empowering sustainability practices in the real asset sector

2009

Assesses the ESG performance of property companies, funds and developers

2015

Assesses ESG performance of real estate lenders

2016

Assesses the ESG performance of infrastructure assets and portfolios

Institutional Investor MembersIntegrate ESG data | utilize GRESB analytic tools

TRANSPARENCY

RISKOPPORTUNITY

Institutional InvestorsAssessing companies and private equity funds

Efficient Capital Markets

Sustainability Performance

LeadershipRegulation

Market BehaviorDistribution of activity | all economic sectors

Sustainability Performance

LeadershipRegulation

Real Estate MarketEconomic signaling

Buildings

ESG Performance Leaders

Engagement

GRESB Real Estate AssessmentPrivate equity funds | separate accounts | private + public REITs | JVs & club deals

Portfolios

ESG Engagement DriversTop down, bottom up

CapitalMarket

Company

Portfolio

Building

Institutional InvestorsCAPITAL REITs

Private Equity

Portfolio Manager/Asset Manager

Property Manager/Facility Manager

COMM

ITMENT

Strong Industry SupportAll major industry associations globally

CompetenciesUnderstanding and improving ESG performance

Systematic assessment companies | funds | separate accounts | JVs

Objective scoring ESG performance – environmental | social | governance

Peer benchmarking differentiate market participants

0 - 100

The Assessment

PORTFOLIO OWNERS

REAL ESTATE DEVELOPERS

INSTITUTIONALINVESTORSSTRUCTURED

COMMUNICATION

PLAN

DO

CHECK

ACT

INDICATOR

ISO-approachSystematic

Policy & Disclosure

Building Certification

Monitoring & EMS

Management

Performance Indicators

Risks & Opportunities

Stakeholder Engagement

Assessment AspectsNumber of indicators

8.8%

9.5%

12.4%

8.8%

10.9%

25.2%

24.5%

Assessment AspectsNumber of indicators

Policy & Disclosure

Building Certification

Monitoring & EMS

Management

Performance Indicators

Risks & Opportunities

Stakeholder Engagement

GRESB SCORE

8.8%

9.5%

12.4%

8.8%

10.9%

25.2%

24.5%

GRESB SCORE

Policy & Disclosure

Building Certification

Monitoring & EMS

Management

Performance Indicators

Risks & Opportunities

Stakeholder Engagement

Scoring of PerformanceTwo dimensions

The GRESB ScorecardAggregated business intelligence into market advances

Participant Information ToolsAggregated business intelligence into market advances

ScorecardFree to all participants

Comparative Intelligence

Benchmark ReportGRESB Member benefit [available ala carte]

Management Introspection

Portfolio AnalysisGRESB Members only

Advanced Analytics

2016 Results

2016 GRESB Participants≈200 listed property companies | ≈ 560 private property companies

Participation Learning CurveLeadership through consistency

Global Scope2016 industry coverage

759 Entities | 63 Countries | 66,000 Assets

Geographic Distribution2016 Global response rate

Investment CapitalAssets under management [$B]

2016 Global ResultsScoring and benchmarking ESG performance

Performance IndicatorsLike-for-like consumption 2014-2015

73,988 Homes

Energy

90,197 passenger

cars

Carbon

1,200 Olympic pools

Water

14,963 truck loads

Waste

ESG Performance Leaders

ESG Engagement | DisclosureManagement quality / investment risk profile

Portfolios

3.9xThe difference in

overall GRESB score between the Top 10%

and Bottom 10% entities in 2016

Questions?

© 2017 GRESB BVUnless explicitly stated otherwise, all rights including those in copyright in publication are owned by or controlled for these purposes by GRESB B.V. Except as otherwise expressly permitted under copyright law or GRESB B.V.’s terms and conditions, no part of this publication may be reproduced, copied, republished, downloaded, posted, broadcast or transmitted in any way without first obtaining GRESB B.V.’s written permission.

Sander Paul van Tongeren Managing Director

sp.vantongeren@gresb.com+31 62704 5730 – mobile +31 20 774 0220 – office