Insights ARCHIVE

Butterflies

Because nature is so good for us

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There aren’t many things that I don’t enjoy about running our businesses, but I do admit to finding the financial routines a little tedious. Thankfully, our super brilliant Business Manager, Timia, took the initiative to add a dose of enjoyment to the process by accompanying each of her monthly financial reports with a fun, nature-based fact. They’re too good to keep to ourselves, so here’s a selection of my favourites:

  • In an ‘aquatic traffic jam’ (if you can imagine such a thing), alligators will give manatees right of way.
  • Baby elephants suck their trunks for comfort, the same way that human babies suck their thumbs.
  • Female bats give birth hanging upside-down, catching the baby in their wings as it drops.
  • Galapagos tortoises sleep for 16 hours a day and can go a year without food or water.
  • Manatees control their buoyancy through an endless cycle of farting. Females also have one nipple beneath their flippers, meaning they nurse their young in their armpits.
  • Owing to its specific frequency, a wolf’s howl doesn’t echo even when the animal howls while standing right in the middle of a valley. It’s a natural adaptation, which plays a crucial role in their communication and hunting.
  • A species of amoeba called Pelomyxa Palustris can grow up to 5 millimetres! Sometimes many amoebas will join together in a big blob called a “slime mould”
  • Humpback dolphins are known to rip large toxic sea sponges off the ocean floor and bring them to the surface where they play with them to impress females. If the females are not impressed by tossing and catching skills, the male dolphins sometimes throws it at her. They even occasionally wear the sponges on their foreheads like hats, because that is universally fly.
  • To hypnotise a frog, turn it over onto its back and gently stroke its belly. This is known as ‘The Alligator Method’ as it is used on alligators. It also works on lizards and hammer head sharks!
  • Snake Island is bonkers. It’s an Island off the coast of Brazil “Ilha da Queimada Grande”. It used to have a human population, but they fled or died. Because there’s at least 1-5 snakes per square METRE. It’s the only place you can find the Golden Lancehead viper which is one of the worlds deadliest snakes – even if you get a dose of anti-venom immediately after a bite, you will probably still die.
  • Cows have strong social bonds and show physical signs of stress when separated from their best friends. They also produce (on average) up to 1.5 pints more milk when listening to slow music according to researchers at the University of Leicester school of psychology.

We all know that connections to nature are good for our wellbeing and productivity, so keep an eye on our Twitter account where we’ll be sharing Timia’s monthly fun-filled nature facts in future! And if you’ve got a great one too, do send it in to us – timia@hillbreak.com.

Greening the UK property sector

Implications of the UK Green Finance Strategy for real estate

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The UK Government has published its Green Finance Strategy, which seeks to tune capital markets to the ambitions of its Industrial and Green Growth Strategies and its commitment to the Paris Agreement on Climate Change. Significantly, the new Strategy looks beyond aligning and unblocking capital flows to green assets and solutions (“Financing Green”) by placing equal emphasis on the imperative to integrate climate and environmental factors into financial decision-making across all asset classes (“Greening Finance”). In addition, it seeks to cement the UK as a global centre for green financial products and services (“Capturing the Opportunity”).

The new Strategy gives a strong signal of intent, with some notable measures, but it is lacking in the detail and level of commitment that owners and managers of commercial and residential property ought now to expect.

Objectives

The two central objectives of the Green Finance Strategy are:

  • to align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by Government action; and
  • to strengthen the competitiveness of the UK financial sector.

There are many parallels to be drawn with the ongoing efforts of the European Union, through its Action Plan on Sustainable Finance, to:

  • reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth;
  • manage financial risks stemming from climate change, environmental degradation and social issues; and
  • foster transparency and long-termism in financial and economic activity.

The combined and accelerating weight of effort both domestically and at the European level to address capital market deficiencies in relation to the climate and ecological emergencies should, therefore, not be underestimated by investors or their fiduciaries. Indeed, the new Green Finance Strategy commits the Government to at least match the ambition of the three key objectives included in the EU Action Plan.

Climate and environmental integration

Considerable emphasis is placed on clarifying and enhancing the roles and responsibilities of an array of market regulators, such as the Financial Conduct Authority and Prudential Regulatory Authority, combined with a commitment to develop Sustainable Finance Standards. There is also a clear signal that Government policy will drive stranded asset risks, including through its push for complete divestment from unabated coal facilities.

Alongside the European Union’s own regulatory programmes for improved ESG disclosures, there are also specific proposals to mandate disclosure in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for listed companies and large asset owners by 2022. This is catalytic; within the real estate sector, whilst some REITs such as the BMO Commercial Property Trust and LandSec have begun to incorporate disclosures expressly aligned to TCFD, these are very much the exception to the market rule.

Financing green buildings

For real estate owners and managers, there are a number of notable declarations, some of which have admittedly been trailed previously.  Examples include the commitment to explore further the disclosure of operational energy use within buildings, including a strong nod to the Design for Performance work of the Better Buildings Partnership, as well as a commitment to consult formally on the future trajectory for Minimum Energy Efficiency Standards (and for which a programme of Government dialogue with the industry is already underway). For the domestic sector, funding support for private sector pilot projects to trial green mortgages and other innovations are notable, especially bearing in mind that all existing PRS leases will fall within the purview of Minimum Energy Efficiency Standards in nine months’ time. Potential financial measures to support the existing aspiration to upgrade homes to EPC band C by 2035 are also set out, including the possibility that lenders will be mandated to help homeowners finance energy improvements, alongside improvements to the much-maligned Green Deal framework.

Hillbreak verdict

In our view, the new Green Finance Strategy is significant for real estate asset owners and managers, particularly in relation to the measures proposed to green the finance system through, for instance, enhanced mandatory disclosures, improved sustainable finance standards and clearer oversight responsibilities. However, although there are several notable statements that relate specifically to the financing of climate and environmental solutions in property, these remain, for the most part, tentative and subject to further consultation and investigation. Given the pivotal role of the built environment in the context of the climate emergency and environmental breakdown, together with the extensive work and engagement that has already been undertaken on many of these proposed measures over the last decade, the time for provisional measures has arguably now passed. Whilst there are several welcome elements within the Strategy, as a package of measures it falls short of the market transformation that is needed.

 

ASI Real Estate ESG Strategy

Dialling up ESG Integration with Aberdeen Standard Investments

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Hillbreak has advised Aberdeen Standard Investments (ASI) on the development of an enhanced global Real Estate ESG Strategy. This builds on the respective strengths of the approaches to responsible property investment of the ASI heritage organisations, Aberdeen Asset Management and Standard Life Investments, and addresses evolving client expectations and long-term trends that are likely to shape how business is done in the future.Dialling up our integration of ESG into real estate

Our analysis identified several opportunities for ASI to fulfil its ambition of cementing its position as an industry leader on ESG across the full spectrum of its real estate investment management platforms, covering direct, indirect, listed and debt funding activities.

With the visible leadership and strong support of the ASI RE Investment Management Committee (RE IMC) a constant feature of our engagement, the resulting Strategy presents a cogent vision and long-term approach to ESG matters that is firmly embedded within the fund development and execution process.  Outcomes and features of particular note include:

  • An investment-specific approach to materiality, underpinned by a consistent house-wide framework of global drivers of change, with topics ranging from urban air quality to Modern Slavery to affordability.
  • A sophisticated but practical approach to embedding material ESG factors into each stage of the investment process, including underwriting decisions, supported by a unique tool, the ESG Impact Dial. The ESG Impact Dial supports strategy, decision-making and client engagement by fund and portfolio managers to tune the approach to ESG for each product and asset, whilst enabling the business as a whole to set future minimum standards targets for all assets under management.
  • Appointing the Head of Real Estate ESG to the direct real estate Investment and Investment Strategy Committees, with voting rights, ensuring enhanced expertise is deployed to fund strategy and underwriting decisions.
  • Establishing clear responsibilities for the effective implementation of the new ESG Strategy across the business, with specific and coordinated central support roles defined for Investment & Product Strategy, Real Estate Research, Fixed Income, Marketing & Communications, the Real Estate ESG team and the central ASI ESG team.
  • In addition to instigating independent verification of ESG data, bringing the application of the ESG Impact Dial into the scope of the investment governance and oversight.

Our work involved extensive collaboration and engagement with the RE IMC, the Real Estate ESG team, key stakeholders across the wider investment management business, as well as an extensive group of ASI’s investor clients from all major capital markets geographies. Although client strategies and expectations on ESG vary considerably, the rise in appetite for impact investing solutions, outlined in this recent ASI article, coupled with a demand for more effective ways of measuring risk, performance and outcomes beyond the limitations of global benchmarking systems, has become a feature of client feedback.

Remarking upon our role, David Paine, global co-head of Real Estate, said: “Our drive to be an industry leader on ESG factors is central to our investment philosophy. It’s an ambition that requires clarity of foresight, investment discipline and constant innovation. We are grateful to Hillbreak for the insight they brought to our understanding of both clients expectations and best practice enabling us to further enhance our approach and embarking on a new and exciting phase of responsible and impactful property investing at ASI”.

Pertti Vanhanen, global co-head of Real Estate, added: “We selected Hillbreak to work with us because of their reputation as the leader in their field for providing constructive, strategic and commercially-attuned advice on ESG. They more than lived up to our expectations, with their collaborative and engaging approach a stand-out feature of their way of working”.

Jon Lovell, who led Hillbreak’s input, commented: “It has been a real pleasure to support ASI in further developing and expanding its strategic approach to ESG across its real estate platforms globally and to help unify the distinctive elements of its heritage approaches. We were delighted to have the opportunity to work so closely with its highly regarded Real Estate ESG team, as well as the extended leadership group, to guide things on to the next level”.

A new video outlining the approach has been launched on the ASI website here.

Global Forces

ESG Factors

 

 

 

 

 

About Hillbreak

Hillbreak provides training and strategic advisory services for organisations seeking purpose and competitive advantage in a changing urban world. Its mission is to expedite the transition to a sustainable policy, business and investment environment by bringing intelligence, challenge and inspiration to its clients and stakeholders.

About Aberdeen Standard Investments

ASI is the investment arm of Standard Life Aberdeen plc and manages £557.1bn* of assets, making it the largest active manager in the UK and one of the largest in Europe. A global portfolio of £44.0bn of property assets under management**makes it the second largest real estate investment manager in Europe.

* at 30 June 2018

** at 31 March 2018

Streamlined Energy & Carbon Reporting (SECR) – a Hillbreak perspective

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The UK Climate Change Act 2008 was one of the earliest comprehensive framework laws on climate change globally, setting a goal of an 80% reduction in carbon emissions (from 1990 levels) by 2050. On the advice of the Committee of Climate Change (CCC), the UK government responded by putting in place successive, five-year carbon budgets that run to 2032.

Progress was initially strong, but the CCC’s most recent report (June 2018[i]) suggests the UK is on track to miss the fourth (2023-27) and fifth carbon (2028-32) budgets. The report notes that emissions have fallen 43% since 1990, but that “progress so far has been driven by the power and waste sectors, while emissions from transport, buildings and agriculture have plateaued”.[ii]

These sectors, therefore, present an ongoing risk to missing future carbon budgets unless progressive incentives and policy changes decisively commit them to emissions reduction programmes. Indeed, emissions from the buildings sector in real terms actually increased by 1% between 2016 and 2017.[1] [iii]

The CCC recommends the building sector increases the insulation of homes (insulation rates were 95% lower in 2018 vs 2012[iv]), upgrades as many homes as possible to at least a C-rated EPC by 2035, and phases out all high-carbon fossil fuel heating. It also flags the need to widen the use of operational data for benchmarking in the public and commercial sectors and references the introduction of Streamlined Energy and Carbon Reporting Scheme (SECR) for businesses.

SECR – a burden or a blessing?

SECR, which came into effect on 1st April 2019, is designed to simplify and align policies relating to energy efficiency. It replaces the Carbon Reduction Commitment (CRC)[2] Energy Efficiency Scheme, with a view to widening the incentive for more organisations to save energy through energy efficiency: around 2,000 companies participated in the CRC, while SECR mandates reporting for almost 12,000 companies.[v]

Acting alongside the Climate Change Levy, the SECR opens up reporting requirements to a wider group of energy consumers which, in theory, should increase transparency and shared intelligence to help drive energy efficiency across a range of sectors.

Organisations required to comply with SECR will include quoted companies, ‘large’[3] unquoted companies and ‘large’3 LLPs. The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, which came into force on 1 April 2019, require these organisations to include the new reporting requirements[4] either within their Directors’ Reports or, if a ‘large’ LLP, through a new Energy and Carbon Report.

Reporting requirements, which need to be addressed in the Annual Report & Accounts, include disclosure of:

  • energy use – electricity, natural gas, self-supplied energy and transport;
  • all carbon emissions;
  • an intensity metric (e.g. normalised against FTE, turnover, floor area etc.); and
  • all principal energy efficiency measures taken throughout the financial year.

Arguably, the implied ‘streamlining’ of energy and carbon reporting is a bit of a red herring. The requirements are actually rather extensive in scope.

Reporting efficiency measures marks a notable change for those previously participating in CRC or mandatory GHG reporting, particularly given that organisations must also declare publicly if no such measures have been implemented within the reporting year. The requirement to disclose whether or not action has been taken should amplify the pressure on continuous improvements being made at the source of consumption, ensuring that those benefiting from the decarbonisation of the grid, and other external factors, are also taking on the responsibility in-house to mitigate against rising carbon emissions. Given the groundswell of public attention being focused on corporate climate action, particularly by the Extinction Rebellion movement, the ultimate outcome should be progressive improvements across a range of sectors, including those yet to contribute positively to the UK’s carbon budgets. It is quite likely that financial services and related companies will be in the spotlight.

The fiscal escalator….

Another key change being brought into effect is the significant increase in the energy consumption tax – the Climate Change Levy (CCL) – which will offset the revenue lost to the Exchequer from the withdrawal of the CRC, and will sit alongside the introduction of SECR.

In contrast to previous increases of less than 3% annually, from 1st April 2018 to 1st April 2019 the Government raised the CCL by 45% for electricity and 67% for natural gas[vi] (see table below). Although there is no indication of plans to raise the rate further, there are strong indications that further increases will occur in future fiscal years.

This increase in the CCL is designed to continuously incentivise energy performance across a wide group of businesses and to encourage the continued substitution of gas energy for electricity, thereby reducing associated emissions. This change could prove to be a powerful driver towards improved energy efficiencies, especially for those organisations not previously captured by the CRC.

Table 1: Main rates for the CCL as of 1st April 2019[i]

This increase could add a sizeable amount to an organisation’s annual energy bill[i]. For example, a CRC non-participant who consumes 1,000,000 kWh of electricity and 1,000,000 kWh of natural gas each year, with an energy bill of roughly £140,000 annually, could expect an additional £4,000 of CCL charges through the current CCL changes.

Will it have the desired effect?

A landmark report[ii] authored by Jon Lovell and Miles Keeping in 2014 during their time at Deloitte, on behalf of the Green Property Alliance and the Green Construction Board, found that policy instruments which have a broad impact by amplifying the price of energy consumed, or which require processes to be undertaken (such as reporting) without imposing a clear obligation for positive action, are found to be relatively ineffective. This is due to the relative inelasticity of energy demand within the commercial property sector and the lack of a direct incentive for operational implementation.

However, one must now question whether the significant hike in CCL will provide a greater degree of stimulus, particularly given stronger emphasis on the net operating income performance of UK investment property than has been the case historically. Certainly, a clearly programmed and transparent price escalator over successive fiscal years would likely make a real difference, much in the same way as the Landfill Tax did for the waste sector. Equally, in the age of Greta Thunberg, #youthstrike4climate, and the Extinction Rebellion movement, the reputational implications of greater disclosure will undoubtedly be stronger than has been the case hitherto as well.

Collectively, SECR and CCL can therefore be expected to compel a wider pool of organisations more strongly than has been the case with preceding arrangements – including building owners and their occupier customers. Implementing the requirements should be more straightforward in the context of leased property that the CRC too, which may overcome some of the disapproving sentiment that was particular apparent within the UK real estate industry.

Official estimates suggest the introduction of SECR and the changes in the CCL rate will result in energy savings of £2,856m – as well as improvements in air quality, carbon savings and a reduction in noise pollution[i]. £262m of annual bill savings are also expected as an indirect result of reporting. The actual effect of the combined new arrangements remains to be seen, of course.

Climate change is unquestionably one of the most urgent and intractable issues currently facing the world, presenting an ongoing and increasing risk to communities, investments and businesses globally. With the scale of change required – particularly within the built environment and other sectors yet to contribute to the UK carbon budgets – SECR and CCL feel like progressive sticks to get the market moving in the right direction towards a low, perhaps even zero, carbon economy by 2050.

References:

[1] Accounting for adjustments relating to annual winter temperature increases.

[2] A levy on those companies with at least one settled half hourly electricity meter (sHHM) and used 6,000 megawatt hours or more of qualifying electricity supplied through settled half hourly meters.

[3] Large is defined as having two or more of the following: >£36m turnover; >18m balance sheet; >250 employees.

[4] All starting on their first financial year on or after 1 April 2019

[i] Committee on Climate Change (June 2018) Reducing UK emissions, 2018 Progress Report to Parliament. Accessed 30/04/19 https://www.theccc.org.uk/wp-content/uploads/2018/06/CCC-2018-Progress-Report-to-Parliament.pdf

[ii] Carbon Brief (28th June 2018) ‘Worrying trend’ in UK emission cuts beyond power and waste, says CCC. Accessed 30/04/19 https://www.carbonbrief.org/worrying-trend-uk-emission-cuts-beyond-power-waste-says-ccc

[iii] Committee on Climate Change (June 2018) Reducing UK emissions, 2018 Progress Report to Parliament. Accessed 30/04/19 https://www.theccc.org.uk/wp-content/uploads/2018/06/CCC-2018-Progress-Report-to-Parliament.pdf

[iv] Committee on Climate Change (June 2018) Reducing UK emissions, 2018 Progress Report to Parliament. Accessed 30/04/19 https://www.theccc.org.uk/wp-content/uploads/2018/06/CCC-2018-Progress-Report-to-Parliament.pdf

[v] Ecoact (6th February 2019) Ten things you should know about the new energy and carbon reporting regulations. Accessed 30/04/19 https://eco-act.com/2019/02/ten-things-you-should-know-about-the-new-energy-and-carbon-reporting-regulations/

[vi] Carbon Credentials (13th September 2018) Impact of Changing CCL rates. Accessed 30/04/19 https://carboncredentials.com/impact-of-changing-ccl-rates/

[i] Department for Business, Energy & Industrial Strategy (18th July 2018). Streamlined energy and carbon reporting framework. Accessed 30/04/19 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/725912/SECR_and_CRC_Final_IA__1_.pdf

[i] Carbon Credentials (13th September 2018) Impact of Changing CCL rates. Accessed 30/04/19 https://carboncredentials.com/impact-of-changing-ccl-rates/

[ii] Deloitte (March 2014) Carbon Penalties & Incentives. Accessed 11/05/19 https://www2.deloitte.com/uk/en/pages/real-estate/articles/carbon-penalties-and-incentives-report.html

Manchester University NHS Foundation Trust

The masterplan – a national exemplar of a sustainable healthcare strategy

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Hillbreak recently teamed up with our long-standing friends and collaborators, Creative Concern, to support and advise the University of Manchester NHS Foundation Trust (MFT) on the development of its new sustainability strategy, known as ‘The Masterplan’.

The strategy follows sector guidance developed by the Sustainable Development Unit (SDU) and NHS Improvement, and incorporates the following four core themes:

  •   Environment: realising environmental gain
  •   Health: enhancing health and wellbeing
  •   Future: Being future ready
  •   Community: delivering social value

MFT Core Themes

These in turn are woven through the ten categories under the Sustainable Development Assessment Tool, which is the UK healthcare sector tool for measuring and improving sustainability performance. These include: corporate approach; asset management and utilities; travel and logistics; adaptation; capital projects; greenspace and biodiversity; sustainable care models; people; sustainable use of resources and greenhouse gas emissions.

As the largest Acute Trust in the UK, ambitions for the new strategy are high. It has been endorsed by Andy Burnham, Mayor of Greater Manchester, in the context of his ambition to make Greater Manchester one of the leading green cities in Europe.

MFT Sustainable Care Model

It was crucial to consult with the Trust’s diverse staff base to understand what the Trust’s sustainability goals and objectives should be – and how the Trust could lead the field in a national context.

Informed by MFT staff views, and using our combined knowledge of megatrends,  strategic foresight, sustainability reporting and governance, we supported the MFT team to help develop ‘The Masterplan: Making Sense of Sustainable Healthcare, 2018-2023, including through a series of strategy workshops.

The Strategy, which was approved by the Trust Board and published in November, has already been deemed by NHS Improvement (NHSI) as a national exemplar.

The Masterplan is available to view here

Matrix

GRESB: Responsibility Reboot

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Like it or not, GRESB is the defacto index of choice for the majority of real estate investors looking for a convenient proxy measure for ESG across the funds and companies in which they invest. When Hillbreak engages with institutional investors around the world on behalf of its manager clients, it is the consistent point of reference that nearly all will point to, irrespective of their relative maturity on the responsible investment curve.

In many cases, especially in Asia but commonly in North America and parts of Europe too, investors have yet to develop their thinking on how they should effectively integrate ESG into their real estate allocations and investment strategies. Yet they will often acknowledge that ESG considerations are becoming material and, in the absence of a fully considered approach, are easily seduced by the simplicity (for them) of asking or instructing managers to submit to GRESB and to disclose their results.

At the more advanced end of the spectrum, typical of a number of institutional investors in Northern Europe, and especially from the Nordics and The Netherlands, a more informed view underpins the approach. But here paradox prevails: whilst critical of the inherent limitations of a single, relative global benchmark applied to a highly heterogenous asset class, they will at the same time be relying heavily on that benchmark to drive investment decisions and engagement strategies. For example, some will now insist that all of the funds in which they invest achieve a minimum ‘star rating’ on the GRESB 1-5* scale, or at least present a detailed route map to demonstrate how they will get there. The classic folly of trying to compare apples with oranges.

Admittedly, for those investors with the most sophisticated ESG strategies and policies, GRESB is treated as one of a few tools to support their approach. Yet for many, especially in the non-listed sector, it is very much a case of throwing all ESG eggs into the one GRESB basket.

This is a triumph of concept and marketing for the founders and now, the incumbent owners of GRESB, the Green Business Certification Inc. (GBCI). We have commended the driving forces behind GRESB in the past for the impact the service has had in driving ESG up the real estate capital markets agenda, and we continue to hold the view that the movement would be unlikely to have the profile that it does now were it not for the agency given to investors by the tool.

The irony, of course, is that the greater the traction GRESB receives in the market, the more important it becomes for its owners and operators to be accountable to its customers for its accuracy, transparency, reliability and fairness. And here is where things stumble heavily (it may be a little hyperbolic to claim that they fall flat on their face).

What are the issues?

The recently released response to the 2018 GRESB Survey Consultation from the Better Buildings Partnership (BBP) reveals the frustrations of many of those (major) real estate companies and fund managers that have a history of GRESB participation going back to its founding year, many as managers of multiple participant funds. Strip away the diplomatic veneer, and the BBP response is damning. Moving far beyond polite requests for improvements to the user experience (of which there are some), the BBP members call into fundamental question the trust that can be placed in GRESB. Of particular note are the observations relating to:

  • Inconsistent and arbitrary treatment of evidence, commentary and clarifications uploaded to GRESB (with the same evidence or clarifications being accepted in some cases and declined in others) resulting in different scoring outcomes for identical inputs.
  • Lack of transparency, openness and fairness in the scoring and validation process (the ‘black box’ factor), including:
    • No opportunity for participants’ results to be changed retrospectively in the GRESB portal where errors in scoring have been identified.
    • Participants subject to the full validation process receiving unfair advantage from the tailored guidance given to them by GRESB but which is not shared with others (this effectively amounts to selective coaching by GRESB of some participants).
  • Opaque guidance resulting in materially different approaches to data reporting amongst participants, in good faith.
  • Questionable peer group allocations and no accounting for the investment strategy of individual entities. In the real world, the relevance and materiality of ESG factors to the risk profile and impact of funds will vary greatly between, say, an opportunistic vehicle with a short holding cycle and a core fund of trophy assets managed over the long-term.
  • Methodological concerns that create incentives for perverse behaviours (the ‘tail wagging the dog’ factor), apply arbitrary conditions (e.g. on the timing at which certain measures may have been installed), require information that is often simply not available or internationally comparable and, more profoundly, risk allocation and divestment decisions being made that are based on a biased depiction of portfolio and asset quality. A key issue in this regard is the inadequate distinction between assets over which landlords have management control, and those that do not.

Where are the challengers?

One might be tempted to draw a parallel with contemporary politics in that, in the absence of a credible and effective opposition, the more complacent an incumbent power can be and the more maladministration it can get away with. How resonant does that feel in many parts of the world right now, by the way?! In the case of GRESB, a comment we often hear from investors is that it is the best of a bad bunch of indices available to them that have applicability to both listed and non-listed real estate vehicles. Faint praise indeed! To where should (or could) investors or participants turn for an alternative? None are particularly forthcoming.

That said, there are emerging examples of automated, AI-driven innovations which give an indication of what the future for asset- and portfolio-level benchmarking might hold, although these are currently subject to major constraints of their own, giving rise to similar efficacy and transparency concerns.

GRESB has always claimed to listen to its stakeholders, but in reality, this is subject to an important caveat: if those stakeholders stump up some cash, which, in the spirit of transparency, we should declare that Hillbreak does not – we have always taken the active decision to stand outside of the GRESB tent. Sure, the Survey is subject to annual iteration, typically to a rather modest extent, and there is an extensive governance structure which is inclusive of many users of the service – both investors and participants. But these iterations have not resulted in a resource that is fit for the purposes to which much of our industry is putting it, especially when it comes to the questionable efficacy of making positive or negative screening decisions based solely or predominantly on GRESB scores.

All change (please)?

The 10-year birthday of GRESB is approaching, and much promise has been made of improvements to come to mark its landmark anniversary. Some of those outlined are welcome, especially the distinction of the Assessment into separate Management and Performance Components and the development of an as-yet-undefined Data Quality Standard. However, these fall sort of the reboot that is needed and which, in our view, is already long overdue. Where so much is as stake, duty of care and fitness for purpose are paramount. We continue to wonder if the custodians of GRESB have truly grasped the burden of responsibility that they have placed upon themselves.

Educating investors on the limitations of GRESB as a proxy for risk, quality and performance (arguably, a role for GRESB itself) is rapidly moving up the list of priorities for fund managers, as the number of allocation decisions influenced by the Benchmark become greater. Of course, it is incumbent upon investors to ensure that they understand the systems they are deploying to inform their allocation decisions, especially if they have a fiduciary responsibility to others. Yet it is clear to us that this is commonly not the case and there remains much work for investors and managers to do together as a key tenet of the client-manager relationship.

The Diversity & Inclusion Experience: Equity > Equality

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Another article about diversity? Hasn’t it all been said already?!

We’ve shared our views on diversity in the real estate sector before, not so long ago. We highlighted the continued lack of diversity and some of the excellent initiatives that are catalysing progress – including Real Estate Balance, Freehold, and WomenTalkRE. And we committed to being more proactive in our efforts to support and enable inclusive behaviours.

So what else is there to say? Well, the good news is that the real estate sector is making progress – as are many other sectors. The recent Hampton-Alexander Reviewof FTSE Women Leader shows 30% of FTSE 100 and 24.9% of FTSE 250 board positions are currently occupied by women – up from 27.7% and 22.8% last year respectively – and real estate companies feature in the top ten performers in both lists.

Yet the anecdotal evidence (see, for example, page 20 of the Review) speaks of slower progress in terms of real experiences. Less than one in three FTSE 250 board vacancies went to women in 2018. The percentage of women in executive committee and direct report roles across all FTSE 350 real estate companies averages 28.4% overall, and 21.4% at board level.

And what’s happening in the pipeline of talent that feeds into those top positions – is it fit for purpose? What about other underrepresented groups in real estate workplaces?

We’ve grown our team over the past year, and we’ve really valued learning about each other’s perspectives on some of the key challenges currently facing the sector. We’ve spent time discussing diversity, including what it means to us on a personal level and some of the solutions for progressing inclusiveness in the real estate world and beyond. Here are some of our thoughts.

Born this way?

When it comes to attitudes around gender roles and diversity, we’re pretty much a product of our early years. Each experience and interaction shapes our patterns of behaviour, contributing to assumptions and preconceptions that feed into adult life. You could say we’re biased from birth.

History shows us that this programming can change over time, but it takes persistent, proactive effort. And that effort needs to be significant if hardwired social norms are to continue evolving in a more, not less, inclusive direction. Willingness to change has to come from every sector, and particularly from those already occupying positions of power: leading by example, enabling progress and calling out unacceptable behaviour.

So recognising diversity as a shared, societal issues is – we think – the most vital first step in moving away from divisive, blame-laden conversations and towards a more positive view of the benefits that fully inclusive workplaces can bring. In fact, it was a conversation kickstarted by Estates Gazette about blame that motivated us to share our thoughts.

And within this bigger picture, we obviously have to develop a clear understanding of just how diverse and inclusive the workplace is, so we know what we’re working with…

Looking behind the numbers

Numbers are important. They enable target setting, demonstrate progress and allow comparison with others. And when it comes to high interest issues such as diversity, it’s vital that figures are open and transparent. Increasing the number of women on a board, ensuring more representation from ethnic minorities on a panel – these things all help to increase visible diversity. 

This observable, measurable diversity is essential, particularly to hold to account those companies that are lagging behind. But it also has some pitfalls.

Firstly, as we’ve mentioned, numbers rarely reflect the everyday reality of underrepresented groups in the workplace. Although the data might say ‘things are becoming more balanced’, anecdotally this is commonly not matched by everyday experience. A lot of this comes down to unconscious bias – those automatic reactions that are so innate, we don’t even notice them. This might be assumptions or judgements about life plans or skills, words used more often in relation to women than men, even the tone of voice or body language used in everyday interactions with certain groups or individuals.

Until such biases are tackled systemically and until diversity goals are focused on processes and experiences as much as numbers, the practical reality is likely to continue lagging behind the figures. Workplaces might officially bemore diverse, but they won’t necessarily feelmore inclusive.

Secondly, there’s a risk that focusing on numbers or quotas can leave individuals feeling unrealistic pressure to perform as the visible minority. An example of this comes from one of our team members, who trained as a carpenter:

“I didn’t get to be an individual; I was the girl. I was there representing an entire gender whether I liked it or not. If one of the boys makes a mistake it’s no big deal; we say ‘Darren’s rubbish at carpentry’. If I fudged something up, my entire gender takes the hit: ‘GIRLS are rubbish at carpentry’.”

This experience is far from isolated and, in our opinion, is almost certainly a contributory factor for some individuals not taking opportunities that others might leap at – the pressure of judgement and the risk of failure on behalf of your entire gender, race, or any other defining factor are powerful motivators.

Which leads to our final point about data, which is that, while numbers might explain what the situation is regarding diversity, they can’t tell us anything about why. Without asking why certain groups are underrepresented either as a whole or within particular sectors or roles, we’re only tinkering around the edges.

Equity > equality

This “why?” question is really about identifying barriers: what’s stopping this person from going for that role, stepping onto that stage, progressing beyond a certain level? What do they need in terms of support? Do they have role models they can identify with and aspire to be like? Is the system or setting itself inherently biased by design?

Opening up these questions isn’t necessarily easy, but we think it will save a lot of time and resource in the long run. If we keep asking why people aren’t taking the opportunity given to them to sit at the table, we’re asking the wrong question. We should be asking what’s stopping them from getting to the door, getting into the room, or even knowing the table exists in the first place.

So perhaps when we talk about equality, we’re looking at the whole issue with the wrong filter. Equality is about providing the same opportunity for all. Great, but we’re not all the same. We think the conversation should shift far more towards equity: taking account of where people are starting from, understanding their needs and aspirations, and providing opportunity and support accordingly.

Less stick, more carrot

But people are busy, resources are tight, the job needs doing. Is there really any value in making the effort to dig deeper, when it might be easier just to meet the leadership-level diversity target and move on?

We think it’s more than valuable; it’s essential. Diversity of thought and experience bring challenge, innovation and opportunity at all levels. And with the many complex global issues facing businesses at the moment, the ability to innovate quickly and think differently is likely to become a point of difference for the most successful of companies.

Ultimately, this is about sustainability. In a fast-evolving marketplace, how can any business maximise its success in the long run if it – willingly or accidentally – excludes underrepresented voices from the table? These voices might spot risks and opportunities no-one else had thought about, or present fresh approaches to intractable problems. Indeed, the evidence linking diversity with profitability is increasingly compelling (e.g. see McKinsey and HBR).

For the real estate sector, embracing diversity and inclusivity might mean some challenging conversations about how decisions get made, where the debate happens, and who is involved – not just at board level, but across every part of the business. Another of our colleagues shares their experience:

“More often than not I’ve found that talented women involved in real estate are not always in the typical asset / property / development role. People in marketing and leasing roles, or with broader expertise in disciplines such as sociology and psychology often get overlooked, and therefore so does their ability to add a voice to the conversation.”

We think inclusivity also means fully sharing responsibility for calling out inappropriate behaviour or bias, and for creating positive change. Being a passive observer is no longer an option.

Ultimately, change requires a broadening of approach from the reactive response to external expectations to a deeper understanding that diversity and inclusivity are genuinely good for employers and employees alike. It is with that premise that genuinely meaningful action can be taken.

Our vision

None of this is easy, and all of it takes time. We’re talking about individuals and companies working together to tackle a systemic issue that has deep roots. Progress might be slow, but it is happening, and we think it can happen more effectively with some simple shifts in mindset and approach:

  • Acknowledging the social and systemic context to diversity and inclusiveness together, without blame. 
  • Understanding and addressing unconscious bias wherever possible, including through coaching and reverse mentoring.
  • Exploring what sits behind the numbers – being curious about whyas well as what, and focusing on processes and experiences as much as the figures.
  • Concentrating on equity (taking account of what people need to get to the same place), rather than blanket equality (offering people the same chance regardless of their background).
  • Changing the dialogue to include underrepresented voices at every level; a CEO and school leaver will both have valid and useful observations to offer.
  • Sharing responsibility for cultural change, which requires those in leadership roles to admit the limitations of their understanding, especially on unconscious bias – everyone is on the journey together.
  • Recognising and embracing the benefits of diversity in both the short and the long-term.

We’re happy to discuss our thoughts more deeply with anyone that’s interested in having a chat – whether at the personal, organisational or industry level. Do get in touch…

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Towards the Circular Economy through Urban Innovation

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In an article featured by PLACETECH, Lucy Matchett, Senior Consultant at Hillbreak, shares lessons from Amsterdam on ways in which innovative design and technology are being deployed to advance the circular economy.

The Netherlands is renowned for innovation and creative responses to global megatrends. For example, and despite geographic constraints, The Netherlands has recently become the world’s second largest exporter of food by value, second only to the United States, which has 270 times its landmass’[i]. It has also been paving the way for high tech water management for a number of years, as much of the country sits below sea level[ii]. Now, its cities must respond anew to the opportunities and challenges posed by urbanisation and population growth, despite already being one of the most densely populated countries in the world[iii].

Is the circular economy the solution?

The circular economy offers The Netherlands a solution to these unprecedented challenges. Understanding that the current model of economic growth is unsustainable and detrimental to society, the circular economy is a restorative and regenerative alternative[iv]. Based on a system which decouples ‘economic activity from the consumption of finite resources’[v], the circular economy encourages value to be found in typical waste materials and products. The Netherlands see this approach as a viable alternative to economic growth and prosperity for its citizens. The growth in population and further urbanisation without this paradigm shift would otherwise lead to environmental degradation, pollution and, potentially, social unrest as people compete for limited space, food and commodities.

The Netherlands therefore have chosen to develop a circular economy by 2050[vi]. Within the geographic constraints of their cities, a circular economic model would help to ensure that growth is sustainable. For example, in Amsterdam and Utrecht alone, it is expected that population figures will be 150,000 greater in both cities by 2040 (growing to 950,000 and 450,000 respectively). Beyond the binary growth opportunities this will bring for the market, how this impacts the real estate sector will be realised in two key ways: first in the design of buildings and the products within them for re-use and longevity (otherwise known as cradle to cradle design[vii]); and secondly, in the shared use of space and amenities.

How is the Dutch real estate market responding?

The Edge Olympic[viii]and Bajes Kwartier[ix]in Amsterdam are two great examples of how the circular economy is being integrated as both projects are renovating and reactivating areas that are already part of the city fabric. The Edge Olympic is Edge Technologies’ 11,117 sq m Grade A office, whilst Bajes Kwartier is an exciting redevelopment of a 1970s prison into a mixed-use quarter. Both developments, although at different scales, have firstly considered the re-use of buildings already positioned within the city, and then additionally, the flexibility of that space once redeveloped.

The result is a modern ‘inspiring workplace’ at The Edge Olympic which has used a smart, digital infrastructure to allow occupiers of the building to optimally utilise the space in the building. This type of building management not only improves the accessibility of the space, but also leads to energy efficiencies too, with comfort control being demand-led, taking into consideration real-time occupational density and personal comfort preferences.

At Bajes Kwartier, the circular economic model is being advanced through a number of different approaches. One example of how flexibility will be achieved is through the planned shared amenities and sustainable mobility. Smart landscape planning, for example, will ensure adequate provisions of green space for all the occupants, despite limited private outdoor space. In addition, carefully curated transportation routes will ensure that shared vehicles and active alternatives (walking and cycling) are preferred.

Another example which has circular economy principles incorporated into the entire design, is The Circl, a novel gastronomic venture in Amsterdam[x]. Although a temporary use of space, this building shows what is possible when cradle to cradle principles are designed throughout a building. Built for future disassembly and re-use, this energy positive building worked with a number of suppliers to offer them long-term services rather than a one-off product which has enabled this building to use 60% fewer virgin materials. For example, Mitsubishi provided a lift service rather than a product which ensured they didn’t over specify the number of lifts in the building and have designed them to last with easily replaceable components.

The future of the circular economy within the real estate sector in particular will be enabled and will rely heavily on data. As this area evolves, the real estate sector will see exciting disruptions. MADASTER, based in Amsterdam, creates digital material passports[xi]which will allow manufacturers to give their materials an identity so that value can be recreated at the end of their current use. Applied successfully, this type of innovation could have implications from a regulatory perspective too, as authorities change from a system of taxing labour, to the taxation of materials to further reduce the use of virgin and non-renewable materials.

Is the circular economy the future?

The circular economy presents The Netherlands and other economies with a practical and desirable means of realising better growth and prosperity. What is already clear from the Dutch approach is that partnerships will form, and profitable business models will follow, once a compelling, overarching vision (to develop a circular economy by 2050) is in place.

These insights were gathered during a study tour of Amsterdam and Utrecht organised by the Urban Land Institute, a non-for-profit professional research body focused on creating leadership in the responsible use of land and in creating and sustaining thriving communities.

[i]https://www.nationalgeographic.com/magazine/2017/09/holland-agriculture-sustainable-farming/
[ii]https://www.nytimes.com/interactive/2017/06/15/world/europe/climate-change-rotterdam.html
[iii]https://www.holland.com/global/tourism/information/facts-and-figures.htm
[iv]https://www.ellenmacarthurfoundation.org/circular-economy/concept
[v]https://www.ellenmacarthurfoundation.org/circular-economy/concept
[vi]https://www.government.nl/documents/policy-notes/2016/09/14/a-circular-economy-in-the-netherlands-by-2050
[vii]https://www.epea.com/cradle-to-cradle/
[viii]https://www.edge-olympic.com/
[ix]http://oma.eu/projects/bajes-kwartier
[x]https://circl.nl/themakingof/en/
[xi]https://www.madaster.com/nl
Oslo Opera

Perfect Storm for Managing Agents

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Consultants Howard Morgan & Jon Lovell offer a six-point solution to the problems of the property industry’s managing agents.

Managing agents caught in the ever-increasing whirlwind of client demands and occupier expectations must embrace risk and innovation if they are to survive.

This is the view of two independent experts, operating in complementary spheres of the real estate industry, who are offering them a blueprint for survival.

Jon Lovell, whose Hillbreak business provides strategic advice and training on sustainability and responsible investment, and Howard Morgan, whose RealService consultancy operates in the world of customer experience, believe the role of the traditional managing agent is now in peril.

Lovell and Morgan see a perfect storm of challenges coming from two principal directions:

  • Increasing performance, compliance, cost efficiency and transparency demands from landlords, including on environmental, social, wellbeing and health and safety matters. These are testing managing agents who are going to need stronger leadership, more effective systems and new capabilities to keep ahead of the game
  • Meanwhile, those who occupy the buildings they manage are becoming fickle and savvy customers, expecting a more enriching experience, greater flexibility and reliability.

With rising expectations from occupiers and their landlord clients, managing agents are feeling the pressure.

Bill Hughes, boss at Legal and General Investment Management recently turned up the heat. Writing in Property Week, Hughes said managing agents are being asked to provide services “they are not equipped to offer” as their role moves from rent-collection and basic maintenance to provider of “customer service, facilities maintenance and engineering, sustainability and CSR strategic thinking”.

In response, property managers MJ Mapp blamed property owners for instigating a tendering process which has outsourced management to the lowest bidder. They said owners should select managers who share their values and not take management in-house, risking losing focus on their core business.

Lovell and Morgan have sympathy with both perspectives, which points to a collective market failure rather than a single source of blame.

According to Morgan, salvation for the property industry’s operational intermediaries lies in persuading owners and investors to join them in forming strategic partnerships which harness the talent of the client, the managing agent and an increasingly disparate supply chain. This would require a fundamental change in thinking from the current “hands-off” outsourcing model.

Their Six-Point Survival Blueprint focuses on:

  1. Better business alignment and planning
  2. Clearer agreements and outcome-based performance contracts
  3. Stronger leadership from senior management
  4. More effective and consistent deployment of capability and technology
  5. Greater harmony of message & transparency to customers
  6. Closer alignment between performance and remuneration

Morgan’s blueprint inspiration came from a visit to John Lewis’s state-of-the-art warehouse complex in Milton Keynes. Here he saw collaboration in action, in the form of the company’s partnership with Knapp, an Austrian firm, which enables the retailer to deliver more than 220,000 different product lines to its stores and online customers.

He says: “John Lewis’s reputation is based around customer service and it is putting that reputation into the hands of a third party. It has been able to do this because of the relationship it has with Knapp; it is a strategic partnership.

“Property companies put their reputations in the hands of managing agents, but their relationship is nothing like the one between John Lewis and Knapp. Why would managing agents embrace risk or invest in technology when there is no long-term partnership?

“Our blueprint is about taking best practice from outside the industry and working with our clients to apply it to the world of property,” says Lovell.

To collaborate successfully, Lovell points out that owners and managing agents must work together on a business plan which identifies a mutual vision and documents key areas of responsibility, risk and reward. Having clear, outcome-based objectives across the spectrum of financial performance, customer experience, environmental responsibility and community impact means each partner knows exactly what they bring to the relationship and how they are accountable.

Being on the same page enables the creation of benchmarks or indicators to monitor progress, while recognising strengths and weaknesses allows each partner to utilise their particular expertise and concentrate on their core competencies.

Any arrangement must have the complete commitment of the senior executives of both parties and be promoted consistently to customers as a partnership of equals. Financial rewards should be based on key performance indicators and provide incentives while, in terms of governance, the arrangement should be reviewed regularly, in a spirit of collaboration and improvement rather than conflict and an ever-poised stick of retendering risk.

Bear in mind too, that partnerships can take time to flourish and need nurturing.

Morgan points out that research suggests it is cultural differences, rather than financial or corporate considerations, which cause partnerships to break down, hence his enthusiasm for putting the customer at the heart of every property company’s business strategy.

Lovell says: “Dissatisfaction of landlords with the service provided by managing agents is one of the key motivations for increasing the frequency of re-tendering. They see it as a way of incentivising performance but actually it’s part of a downward spiral; a race to the bottom which actually disincentivises investment in innovation and skills.

“We need to find an inclusive approach to performance management and remuneration to incentivise performance. Investor expectations are strengthening and likewise the demands of the occupier market.

“Strategic partnerships are being trialled but currently only really in the area of energy savings and, in many cases, with the managing agent having been circumvented by the client searching for a more reliable and responsive solution.

Morgan and Lovell do not underestimate the challenge to create an upward spiral of quality and reward.

“Unfortunately, clients have, over a sustained period, driven the agenda, which has been focused on realising more outcome for less money. Margins are very, very low as a result.”

Morgan is also frustrated that customer engagement is not factored into the performance of investment managers despite evidence proving that high customer satisfaction can improve the bottom line by almost two per cent.

“You can typically get information on energy, waste and water consumption but you can’t get information on occupier engagement,” he says.

Morgan and Lovell believe that occupiers will become increasingly vocal and willing to up sticks if they can’t get the solution and quality they want from their landlords, having seen new levels of aspirational workspace entering the market through disruptors such as WeWork.

As Morgan says: “Our approach is fundamentally about creating an alignment of interests between the owner, manager and occupier.” As the strategic partnership of John Lewis and Knapp shows, it’s ultimately the customer who benefits and there lies the key source of sustainable, competitive advantage in business.”

This article was authored jointly by Jon Lovell, Co-Founder & Director of Hillbreak, and Howard Morgan, Managing Director of RealService.

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The trouble with Science Based Targets

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Background

Formally-approved Science Based Targets (SBTs) are a scheme of the Science Based Targets Initiative (SBTi), a venture of the UN Global Compact, CDP, World Resources Institute and WWF. They have been gaining much attention and some traction amongst corporates and institutional investors; at the time of writing, 105 companies have in place targets formally approved by the SBTi.

In essence, these are targets adopted by companies to reduce emissions proportionately in line with the level of decarbonisation required to meet the <2oC global warming goal of the Paris Agreement on Climate Change.

Certainly, SBTs have useful application at a macro or portfolio level. For example, they can be a tool for policy-makers to establish future carbon budgets and related policy instruments for individual economic sectors, or they can assist investors in setting climate mitigation goals across their respective investment universes. However, a principal benefit often cited of SBTs is that they provide evidence-based pathways against which to pin the carbon reduction strategies of individual entities, including within sector-specific contexts. This, we challenge.

Whilst SBTs have their place, including a welcome shift in thinking towards corporate climate action being proportional to associated global impacts, we question their role and utility at the individual entity level in the absence of sector-wide agreements to meet the necessary pathways.

Indeed, rather than being a force for rapid progress on the urgent need to mitigate climate change, they may actually have an unintended and dangerous dampening effect on the rate and extent to which individual companies – and sectors – achieve their full carbon reduction potential.

Of the various methodologies recognised by the SBTi, the Sectoral Decarbonisation Approach (SDA) is the most applicable to real estate organisations, with a normalisation approach based on floor area and a carbon intensity pathway of 55 percent by 2050 from a 2010 baseline.

Driven by perceived or directly expressed investor requirements, a number of real estate organisations have established formal SBTs to demonstrate their commitment to the <2oC goal of the Paris Agreement. They have, understandably, received plaudits and achieved enhanced brand profile for taking an early stance in line with their market leadership on responsible property investment.

A race to the bottom

Aside from certain methodological limitations (including, in particular, on the question of how best to deal with Scope 3 emissions in a real estate context), we have a more fundamental concern with SBT-compliance being assumed by the industry as a badge of leadership for responsible investment when the SDA pathways represent the average level of decarbonisation needed of individual sectors. If organisations at the front of the ESG agenda are adopting targets based on the global sector average, the chances of those sector pathways being realised – and the goals of the Paris Agreement as a consequence – become very remote indeed.

There will be many real estate organisations with portfolios centred on advanced jurisdictions, such as the UK, where very little or no real action will be required of them, either because the continued decarbonisation of the grid will essentially do the job of achieving SBT-compliant trajectories for them, or arrangements can be made to purchase 100% of electricity from renewable sources at rates competitive with brown electricity. Worse than that, the efficiency of portfolios could actually regress, and an SBT could still be realised. There may also be unintended consequences relating to technology selection.

A problem amplified

In addition to specific investor requirements, the rationale for establishing SBTs at a house or entity level has been amplified by their positive recognition in the latest assessment framework of the Global Real Estate Sustainability Benchmark (GRESB), the most widely utilised portfolio-level barometer of attendance to ESG issues for the industry. By attaching ‘points’ to compliance, GRESB participants will have an added incentive to pursue formal SBT accreditation. Recognition is similar in the latest edition of the CDP Climate Change Module.

It means that schemes such as GRESB and CDP will be of limited effectiveness in driving the necessary sector-wide performance because they will be rewarding participants for setting out to achieve what should be considered a floor-level trajectory. In those cases where entities can rely entirely on grid decarbonisation in the jurisdictions in which they operate, this amounts to nothing more than recognising and rewarding an administrative process, albeit one that has involved a good deal of technical work undertaken in good faith by those wishing to demonstrate leadership. Perhaps this does warrant some time-limited credit, but the impact of true portfolio performance indicators on industry benchmark positions will be diluted in the meantime.

A better approach for investors

Investors that recognise the risks of climate change to capital market stability and investment performance, are, quite rightly, motivated to use their engagement activities with investee funds and companies as a means of positive influence to help drive decarbonisation. Requiring or encouraging the adoption of SBTs by those entities in which they are invested is, therefore, a seemingly obvious responsible investment tool. Interestingly, their widespread application across the asset classes may actually help to reinforce the merits of increasing capital allocations to real estate as part of comprehensive portfolio decarbonisation strategies.

However, we contend that, especially in mature markets, investors should not treat SBT compliance by individual entities as a marque of responsibility. Instead, they could aim to move towards science-based targets being a ‘lowest common denominator’ indicator for their allocations, complemented by stipulating clearer requirements on real estate companies and funds to demonstrate how, and by when, they will achieve (net) zero carbon status.

Towards net zero

In the meantime, and depending on case-by-case circumstances, we will continue to recommend and support our real estate clients’ efforts to pursue SBT compliance because of the increasingly clear demands for them to do so by investors and analysts. We will do this, however, with full acknowledgement of the limitations of the SBT approach, and will typically be encouraging greater emphasis on total decarbonisation pathways as part of a positive investor engagement and climate risk management journey.

This article was authored jointly by Jon Lovell, Co-Founder & Director of Hillbreak, and Dave Worthington, Managing Director of Verco.

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