carbon intensity Archives

Introduction

The Environment Agency, the administrator of the UK Government’s CRC Energy Efficiency Scheme (“the Scheme”), has published its Annual Report Publication (ARP) covering the first 2 Compliance Years of Phase 2 of the Scheme. Hillbreak has analysed a selection of the data with a particular focus on real estate sector participants, especially those in the listed sub-sectors.

Key findings

Listed real estate companies are underperforming the wider economy when it comes to reducing carbon emissions. Whilst all participants in the Scheme yielded an average reduction in their emissions of 9.7% last year, the average reduction across listed real estate participants was only 0.48%.
Although the energy consumption data of each participant has not been published, it can be deduced that energy procured by listed real estate companies (a proportion of which may have been supplied to tenants) increased over the two Compliance Years, with all of the carbon reduction realised by the companies arising from improvements in the emissions factors attributed to grid electricity and natural gas.
Analysis undertaken by Hillbreak also shows wide variations in both the year-on-year carbon performance of listed property vehicles, as well as in their relative carbon intensity by market capitalisation.
The Exchequer generated a little under £1bn of total revenue from the sale of allowances in the 2015/16 Compliance Year, of which over £5.2m* came from the 18 listed real estate companies that are participants in Phase 2 (an average of £290,760 per organisation).

*Based on a blended allowance price of £16.25 per tonne of CO₂.

Emissions trends

The chart below shows the absolute CRC emissions for each of the listed real estate companies that are participants in Phase 2 of the Scheme. It shows that emissions vary significantly between individual companies within each of the sub-sectors. This is unsurprising given differences in the scale and composition of their respective portfolios.

The change in emissions reported between the two Phase 2 compliance years is more revealing, as the graph below indicates. It shows an increase of nearly 50% at one end of the spectrum (a REIT with a heavy weighting towards central London offices) to a reduction of nearly 20% at the other (a REIT with a diversified portfolio, focused on London and the South East). The average level of reduction was only 0.48%, compared to an average across all CRC participants (in all sectors of the economy) of nearly 10%.

Carbon Intensity

The market capitalisation of the listed real estate companies varied significantly at the end of the 2015/16 Compliance Year (30 March 2016), from the largest at £8.729bn to the smallest at a little under one quarter of a billion pounds.

The variance in the carbon intensity (relating specifically to CRC emissions) is also very wide. There are five companies with a CRC carbon intensity of less than 5 tCO₂ per £1m of capitalisation value, whereas the most carbon intensive shows over 35 tCO₂ per £1m of value. The mean average is ~10 tCO₂ per £1m.

Note of caution

Whilst these trends are interesting and noteworthy, caution should be applied to drawing conclusions about the energy and carbon performance of individual entities based solely on CRC data. This is because variations in energy consumption can be influenced by a wide range of factors, many of which are likely to be outside of a landlord’s control or reasonable influence. Key examples include the impact of portfolio churn (both the buying and selling of buildings and changes to the occupational profile), and changes in energy consumption by tenants who may be procuring the energy from their landlord (and which falls into the landlord’s CRC reporting boundary).

However, responsible shareholders in the entities showing the most significant changes in year-on-year emissions, and indeed those with a particularly high carbon intensity relative to market capitalisation, may be minded to investigate the underlying causes of these performance characteristics further.

It is also important to note that CRC emissions, which are limited to those associated with the majority of the electricity and gas procured by an organisation, do not represent the total footprint of greenhouse gas emissions for an entity. Amendments to the Companies Act 2006 also require UK quoted companies to report GHG emissions in their Directors’ Reports and these should be referred to by analysts seeking a more comprehensive view of the carbon intensity of their, or their clients’, investments.

The full Hillbreak dashboard CRC Emissions of Listed Real Estate is available to view and download by clicking on the image below.