Sustainability in Real Estate Investments - CERES conference 2013, San Francisco

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At the recent annual conference of Ceres, a forum of investors to discuss environmental issues, I moderated a nice panel on how institutional investors (can) integrate sustainability into their real …

At the recent annual conference of Ceres, a forum of investors to discuss environmental issues, I moderated a nice panel on how institutional investors (can) integrate sustainability into their real estate decisions. The line-up was pretty amazing, with Laurie Weir of CalPERS, Jennifer Young of the Townsend Group, Mike Ibarra of Landon Butler & Co (responsible for the MEPT fund), and Darryl Neate of Ofxord Properties (OMERS). Here's the full slide deck, very interesting to see the different views:

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  • You're right, Nils, very interesting to see the different views converging on an important subject matter. I'm looking forward to the insights of this year's GRESB survey, as well as hearing more about new research from you and your colleagues. I applaud you in your efforts to expand the discussion among investor groups. Any ideas on how we expand the knowledge of the financial implications of sustainable real estate for investors - both public and private? Who are the key IT and technology players that can help bring benchmarking capable of supporting decision-making to the C-suite?
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  • 1. Breakfast SessionSustainability in RealEstate InvestmentsCeres ConferenceMay 1, 2013San Francisco
  • 2. Panel•  Nils Kok, UC Berkeley/Maastricht & GRESB•  Mike Ibarra, Landon Butler & Co (MEPT)•  Laurie Weir, CalPERS•  Darryl Neate, Oxford Properties (OMERS)•  Jennifer Young, Townsend Group
  • 3. Sustainable Investingin Real Estate Equity
  • 4. Multi-Employer Property Trust (MEPT)§  $5.65 billion open-end commingled core real estate fund§  7.64% gross return since inception. Benchmark 7.01%§  Portfolio of 136 assets (333 buildings) in 30 US markets§  357 pension plan investors across the U.S.§  Leader in Responsible Property Investing (RPI)§  100% Union Labor for all construction§  Leadership in LEED and EPA Energy Star Programs§  Ranked as #1 diversified-asset fund in US by the GlobalReal Estate Sustainability Benchmark (GRESB)
  • 5. Responsible Property Investing = ESG§  Environmental§  High Performance Property Operations§  Sustainable Development & Redevelopment§  Social§  Job Creation – Fair Labor Practices§  Economic Impact§  Governance§  Benchmarking, Monitoring, Reporting
  • 6. RPI Performance Impact on MEPTEnhances portfolio income and stability§  Superior asset operations and workplace environment retains tenants§  Operating costs lowered by up to 30% in green buildings§  Tax credits and reduced zoning/permitting costs§  Higher revenue + Lower costs = Increased property incomeIncreases long term property values§  Highly skilled construction labor results in better buildings§  Investors and tenants willing to pay a premium for sustainable assetsReduces risk for MEPT investors§  Emerging corporate and governmental environmental policies and mandates§  Transparent governance and reporting protects investors and trustees§  Quarterly mark-to-market process ensure accurate asset values
  • 7. Environmental Benchmarking ProgramsUS Green Building Council LEED : Leadership in Energy andEnvironmental Design (LEED) is a points-based certification system forexisting buildings, tenant improvement work and new construction.§  Currently 49 buildings representing $3.2 billion are LEEDCertifiedENERGY STAR: A joint program of the U.S. Environmental ProtectionAgency (EPA) and the U.S. Department of Energy that promotes energyefficiency to reduce greenhouse gas emissions.§  Currently 84 buildings representing $3.2 billion are in EnergyStar
  • 8. Responsible Contractor Policy§  MEPT maintains a Responsible Contractor Policy§  All work be performed by contractors signatory to a collectivebargaining agreement§  New construction, renovation or rehabilitation, and tenantimprovements§  Require that janitorial services be provided by signatorycontractors
  • 9. Economic Impact BenchmarkingEconometric Modeling MethodologyPeriod “Green” Job Hours based on TotalProject InvestmentEstimated Economic Impact2009 5.6 million $1.1 billion2010 2.0 million $401.6 million2011 8.0 million $1.6 billion2012 YTD 5.4 million $1.1 billionTIs 1.0 million $196.7 millionTotal (‘09-’12) 22.0 million $4.3 billionPeriod Job Hours based on Total ProjectInvestmentEconomic ImpactSince MEPT’sInception 85.0 million $17.9 billion
  • 10. ESG Benchmarking of MEPT§  UNPRI – MEPT is signatory to United Nations Principlesof Responsible Investment§  MEPT scored in first quartile of global asset owners§  GRESB – Global Real Estate Sustainability Benchmarksurvey – 443 respondents with $1 trillion in real estate§  MEPT ranked #1 diversified fund in the US§  Energy Star Partner of the Year - Bentall Kennedyrecipient 4 years in a rowTRUSTEEINVESTOR RELATIONS INVESTMENT ADVISOR
  • 11. Sustainability in Real Estate InvestmentsCERES ConferenceCERESSustainability in Real EstateInvestmentsLaurie WeirSenior Portfolio ManagerInvestment OfficeCalPERSTowards Sustainable InvestmentUNEP FI Property Working GroupMay 1, 2013
  • 12. Sustainability in Real Estate InvestmentsCERES ConferenceWhy sustainable investment?“Sustainable Investment in its simplest form is theability to continue, and for a long-term investor likeCalPERS with long-term liabilities, it’s at the heart ofwhat we do.”12
  • 13. Sustainability in Real Estate InvestmentsCERES ConferenceFinancial CapitalIncludes equity, debt, publicand private investmentsPhysical CapitalIncludes use of naturalresources and buildingsHuman CapitalIncludes labor practicesLong-term value creation13At the heart of sustainability
  • 14. Sustainability in Real Estate InvestmentsCERES ConferenceCalPERS putting principles into practice•  Environmental–  2004 to 2009: Exceeded 20 percent energy reduction goal incore portfolio over five-year period–  2012: CalPERS and Core Managers join ULI Greenprint andbegin participation in its Carbon Index Report–  Most portfolio assets that are new construction are built toLEED certification standards14Real Estate – ESG Integration
  • 15. Sustainability in Real Estate InvestmentsCERES ConferenceCalPERS putting principles into practice•  Social–  Established revised Responsible Contractor Policy and newNeutrality Trial Responsible Contractor Policy•  Governance–  Alignment of Interests: investment contract documentationthat aligns external managers with CalPERS–  Upcoming Manager Expectations: develop a set ofexpectations for internal (staff) and external managers forESG integration15Real Estate – ESG Integration
  • 16. Sustainability in Real Estate InvestmentsCERES ConferenceCalPERS putting principles into practice•  United Nationals Environment Programme Property Working Group–  Property investors from around the globe–  Advisory Group of experts–  Responsible Property Investment•  30 case studies•  CalPERS Responsible Contractor Policy–  Upcoming projects•  Energy Efficiency Retrofit Finance•  Valuation16•  Real Estate – ESG integration
  • 17. Sustainability in Real Estate InvestmentsCERES ConferenceQuestions?
  • 18. CERES Conference, May 2013Darryl Neate, Director SustainabilitySustainability & Shareholder ValueDrivers & Lessons Learned
  • 19. 191. CompetitivenessCore Drivers2. Customers3. Fiduciary Duty4. Employees
  • 20. 20Our DriversCompetitiveness
  • 21. 21Royal Bank PlazaInvestment Decision
  • 22. 22Sustainable IntelligenceTarget 2012Management Decision
  • 23. 23Customers
  • 24. 24Investment Decisions - New BuildingsLEED Core & ShellGold Certified, August 2011RBC WaterPark PlaceInvestment Decision
  • 25. 25Sustainable IntelligenceOccupant EngagementManagement Decision
  • 26. 26Our DriversCAPITAL &INCOME YIELDCUSTOMERS &CO-OWNERSEMPLOYEESOur Fiduciary Duty
  • 27. 27Our DriversOur Employees
  • 28. 28•  Data, Data, DataLessons Learned•  Credible & PerformanceBased Approach•  Complexity, Uncertainty& Transparency
  • 29. 29Our DriversSocialResponsibilityComplexity,Uncertainty &Transparency
  • 30. 30Our DriversManagement isManagementData, Data, Data
  • 31. 31Our DriversCredible, PerformanceBased Approach
  • 32. 32•  CoreDriversSummary•  LessonsLearnedwww.oxfordproperties.com/sustainablesustainableintelligence@oxfordproperties.com
  • 33. The Townsend GroupThe  Townsend  Group  Sustainability  in  Real  Estate  Investment  2013  
  • 34. The Townsend Group  ■  The  Townsend  Group  became  a  signatory  to  the  Principles  for  Responsible  Investment  (PRI)    on  April  13,  2010  and  are  in  acDve  conversaDons  with    the  Global  Real  Estate  Sustainability  Benchmark  (GRESB)  to  collaborate  on  best  pracDces  for  measuring  the  impact  of  sustainability  on  real  estate.      ■  The   Townsend   Group   integrates   an   analysis   of   ESG   issues   into   its   due   diligence   efforts   through   quarterly  monitoring  of  investment  posiDons  and  ongoing  dialogue    with  investment  managers  acDve  in  the  space.  ■  ESG  acDvists  include  asset  owners  (and  many  Townsend  clients),  investment  managers  and  professional  service  partners.    •  Townsend   esDmates   that   it   monitors   over   15   separate   vehicles   with   over   90   investment   posiDons   in  urban/revitalizaDon  focused  investments.  •  Townsend  monitors  3  investment  posiDons  in  2  pure  “Green”  funds  and  sits  on  the  Advisory  CommiSee  of  one  Green  fund.    •  Raising  awareness  has  led  to  increased  acDvity  in  this  space  since  2010,  as  denoted  by  the  number  of  signatories  to  the  UN  PRI  and  growing  parDcipaDon  in  GRESB.        34  Townsend  ESG  Overview  &  ObjecBves      UN  PRI  Signatories  (2010)    UN  PRI  Signatories  (2011)  UN  PRI  Signatories  (2013)  Asset  owners   210   241   268  Investment  managers   438   527   736  Professional  service  partners   161   152   184          Total   809   920   1188  
  • 35. The Townsend Group■  Fiduciary  ObligaDon  •  Townsend     is   not   responsible   for   making   investment   decisions   solely   based   on   ESG   iniDaDves   at   the  porolio,  investment  and/or  property  level.    However,  Townsend  believes  it  becomes  a  beSer  fiduciary  by  expanding  due  diligence  efforts  to  include  ESG  consideraDons.    ■  Limited  Performance  History  •  Analyzing  past  performance  remains  a  crucial  part  of  Townsend’s  underwriDng  process.    There  are  fewer  realized  exits  in  ESG  assets  and  limited  data  supporDng  the  performance  of  ESG  properDes.    Benchmarking  and   consistency   in   reporDng   pracDces   will   be   crucial   to   understanding   the   cost/benefit   analysis   for  incorporaDng  sustainability  at  the  property  level.    ■  Uncontrollable  Elements  •  Clients    –  Client  preferences,  specific  porolio  needs  and  market  opportunity  will  conDnue  to  guide  real  estate  investment  strategies.    •  Managers    –  Clients  and  Consultants  will  not  directly  influence  ESG  adaptaDon  at  the  property  level,  as  discreDon  generally  lies  with  the  real  estate  managers.    •  Property  Owners  –  Fund   managers   may   outsource   property   management   services,   thus   limiDng   involvement   in   the  decision-­‐making  process.    •  Tenants  –  End  users  are  not  contractually  obligated  to  adhere  to  ESG  principles,  making  it  difficult  to  control.      35  ESG  Overview    -­‐  Challenges  to  Consider  
  • 36. The Townsend Group■  Townsend  clients  are  amongst  the  signatories  to  the  UN  PRI  and  members  to  GRESB.      A  sample  list  is  below.      •  Allianz  Global  Investors  France            France  •  Amundi  (formerly  Crédit  Agricole  Asset  Management  Group)          France  •  ATP  -­‐  The  Danish  Labour  Market  Supplementary  Pension            Denmark  •  CalPERS                  USA    •  CalSTRS                  USA  •  Canada  Pension  Plan  Investment  Board              Canada  •  ConnecDcut  ReDrement  Plans  and  Trust  Funds  (CRPTF)            USA    •  Crédit  Agricole  Assurances                France    •  Government  Pension  Fund  of  Thailand              Thailand  •  Hermes  Pensions  Management            UK  •  Illinois  State  Board  of  Investments              USA  •  Korea  NaDonal  Pension  Service  (NPS)              South  Korea  •  Los  Angeles  County  Employees  ReDrement  AssociaDon  (LACERA)      USA  •  New  York  City  Employees  ReDrement  System            USA  •  SEIU  Pension  Plans  Master  Trust              USA  •  Strathclyde  Pension  Fund                UK  •  Teachers  ReDrement  System  of  the  City  of  New  York            USA  •  United  NaDons  Joint  Staff  Pension  Fund              InternaDonal    36  Examples  –  InsBtuBonal  Focus  
  • 37. The Townsend Group■  Several  investment  managers  are  signatories  to  the  UN  PRI  and/or  report  to  GRESB,  a  sample  of  which  is  below.      •  AEW  Europe                  France  •  BlackRock                  USA  •  CBRE  Investors                USA  •  MulD-­‐Employer  Property  Trust              USA  •  Deutsche  Asset  Management              Germany  •  DEXUS  Property  Group                Australia  •  Hamilton  Lane                USA  •  Henderson  Global  Investors              UK  •  JPMorgan  Asset  Management              USA  •  Kennedy  Associates  Real  Estate  Counsel,  LP            USA  •  LaSalle  Investment  Management              UK  •  Legg  Mason  Asset  Management  Australia  Limited            Australia    •  Lend  Lease  Investment  Management            Australia  •  Longview  Partners                UK  •  PrudenDal  Real  Estate  Investors              USA  •  Principal  Global  Investors          USA  •  Schroders                  UK  •  Standard  Life  Investments                UK  •  Stratus                  Brazil  37  Examples  –  Investment  Manager  Focus  
  • 38. The Townsend GroupSample  Ques3ons  from  Request  For  Proposal  (Winter  2013)    ■  Please  describe  your  resources  relevant  to  analyzing  ESG  issues,  risks  and  opportuniDes  in  real  assets.  Please  idenDfy  any  individuals  dedicated  to  this  area  within  your  firm.    ■  If  ESG  responsibiliDes  are  spread  across  the  investment  team,  discuss  your  process  for  ensuring  adequate  experDse.  Please  list  any  third-­‐party  resources  you  use  to  provide  ESG  analysis  and  research.  ■  What  is  your  expected  allocaDon  to  “sustainable”  funds?    What  areas  are  of  parDcular  interest?    ■  Please  explain  how  you  idenDfy  suitable  sustainable/ESG-­‐focused  investments.        38  UN  PRI  Overview  –  Sample  Townsend  Client  Request  for  Proposal     Property   Infrastructure  Restricted  Some   controversy,  mixed  environmental  impacts.  Investment   may  depend   on   specific  impact   and/   or  management  N/A  Not   currently   willing   to   participate   in  GRESB  • Gas  fired  power  generation  • Gas  pipelines,  distribution  • Nuclear  power  generation/  storage  • Desalination  plants  • Tidal  barrages  • Seaports  and  ferries  • Military  establishments  • Hydro  • Dams  Excluded   N/A  Not   currently   willing   to   participate   in  GRESB.  High  carbon  energy  • Coal  fired  power  generation  • Oil  pipelines  and  refineries  High  carbon  transport  • Motorways  &  service  stations  • Roads  &  road  bridges  • Airports  &  traffic  control    
  • 39. The Townsend GroupSample  Investment  Mandate  (Fall  2010)    The  Manager  will  act  in  the  best  long-­‐term  interests  of  its  beneficiaries  and  believes  that  environmental,  social,  and  corporate  governance  (“ESG”)  issues  may  affect  the  performance  of  investment  porolios.  As  one  part  of  its  responsible  investment  strategy,  the  Manager  has  signed  the  Principles  for  Responsible  Investment  ("PRI").  This  is  an   industry   focused   iniDaDve   that   promotes   long   term   responsible   investment   and   share   ownership,   and   the  integraDon  of  material  ESG  issues  into  investment  analysis.      •  The   Manager   intends   to   remain   an   acDve   and   engaged   member   of   the   PRI,   and   meet   its   ongoing  membership  commitments.  •  The   Manager   is   willing   to   make   available   to   the   Client   on   request   a   copy   of   each   assessment  quesDonnaire  that  it  submits  to  the  PRI,  as  well  as  the  PRIs  analysis  of  its  relaDve  performance.  The  Client  may  also  request  copies  of  the  voDng  and  engagement  work  undertaken  within  the  context  of  the  PRI.    •  The  Manager  will  noDfy  all  clients  if  its  intenDon  to  remain  engaged  with  PRI  changes,  for  example  if  the  PRI   materially   changes   in   a   way   it   does   not   support   and   will   fully   explain   to   clients   its   raDonale   for  withdrawing.  •  The  Manager  will  report  to  the  Client  on  an  annual  basis  on  its  responsible  investment  acDviDes  and  included  therein  will  be  comments  on  such  acDviDes  which  (a)  specifically  relate  to  the  porolio  that  is  managed  on  the  Client’s  behalf  and  (b)  generally  relate  to  all  of  the  above.    This  will  be  delivered  to  the  Client  in  an  electronic  format  as  specified  by  the  Client,  within  at  least  25  Business  Days  from  the  year  end.        39  UN  PRI  Overview  –  Sample  Townsend  Client  Mandate  
  • 40. Panel•  Nils Kok, UC Berkeley/Maastricht & GRESB•  Mike Ibarra, Landon Butler & Co (MEPT)•  Laurie Weir, CalPERS•  Darryl Neate, Oxford Properties (OMERS)•  Jennifer Young, Townsend Group40