Reflections on the Second 40 Percent Symposium Frankfurt

Mon 1 Dec 2014

40 Percent Symposium Founder and Managing Director John Pike reflects on the second 40 Percent Symposium Frankfurt held on the 5th November 2014 at the Steigenberger Frankfurter Hof.

Three clear themes emerged through the day and the real estate industry must grapple with these if sustainability is to be a value driver rather than just “something to be added to a property’s details.

These are:

1.       The property industry needs to move beyond the narrow definition of sustainability in terms of energy management and embrace the broader elements of ESG used at a corporate level.

2.       Data collection needs to be done only once in a recognised format, that includes the principles of ESG, so that real estate is more readily a part of a company’s overall reporting structure.

3.       If certification and labels such as EPCs are to be effective much more needs to be done to identify the value advantages and yield improvements.

 

At the start of the day the Symposium heard that:-

·         Big storms will switch to continental Europe and the big ones will get bigger with increasing risks of tornadoes. In the future regions hit by floods will not only be coastlines and rivers but a much broader swathe of our landmass.

·         Research by Regensburg University showed that extreme weather events have doubled but losses have tripled because we are still building where we should not.

·         Large urban areas are the most vulnerable to climate change. Whilst cities such as London were at high risk it was likely they would adapt to the challenge with increased protection. It is in the cities that are growing the fastest which are the least resilient because building outstrips the ability to provide adequate protection.

Six critical areas were identified and debated during the day by delegates and speakers.

 

ESG versus the narrower definition of property sustainability.

The Symposium heard that there is a substantial disconnect between the ESG agenda for corporates and the term sustainability as used by the real estate industry. ESG (environmental, social and governance) is a broadly based measure including social aspects while sustainability tends to be narrow in its definition often concentrating on energy and carbon which can be as little as 1% of a company’s total costs, This ignores many other relevant factors and in turn leads to short term thinking. Real gains are made when a company embraces real estate as part of the ESG agenda. This is beginning to happen. PGGM have called for the “integration of an ESG veto for all asset classes”. Is this a sign of things to come? The conference heard that the real estate industry needs to rethink the concept of sustainability so it aligns more closely with ESG.

 

Green bonds, growing rapidly

The Symposium heard that the industry has to get used to using new markets. The use of green bonds was a way of diversifying the source of funding. The experience of one speaker was that there is a high demand from ESG funds not currently being met. The market is growing year on year. To attract green funds the industry needed to reduce its alphabet soup of acronyms and present a standard form of measurement for green bonds. The adoption of ESG principles in the measurement of how sustainable a building is was considered important from an audit perspective to give credibility, accompanied by a form of certification attaching to the buildings.

 

Involving the tenant remains a challenge.

The Symposium heard that when tenants were asked, “what do you think of green leases”  75% said they were not interested. The key question asked by the Symposium was why was this case “when so many companies adhere to ESG principles in say their procurement policies for raw materials. Why is there less of an appetite to engage with landlords when it came to developing an environmental policy for the buildings they occupy?” A number of reasons were identified including

·         Data protection laws in Germany

·         Different usage especially in shopping centres required differing  standards, eg cooling for food, restaurants with high energy use

·         Green leases easier at the point of a new letting, difficult to introduce mid term

·         The tenants representative will be focused on one thing, reducing the rent

Yet ESG considerations (and the front page of newspapers) mean that companies remain very sensitive to sustainability issues relating to the source of their goods for instance. The challenge to the property industry is to make sustainability in real estate just as relevant.

 

Green certification in decline?

The panel was posed the question, “why has building certification not expanded in the way expected over the last 4 years”. The RICS suggest certification is declining and certainly the numbers of certified buildings in Europe is low when compared to the total stock. One reason suggested was that the yield on a fund without certification was higher because of the costs of certification. This was borne out by a quick survey in the conference room which by 2:1 suggested there is no evidence you get a better yield with certification. The reality is that certification is market driven and the certification bodies need to do much more to demonstrate the value of their products, especially in the “in use” area. The Symposium heard that the missing element of certification was that it was not used as a way of improving a building but was more a marketing tool to get a building let or sold.

 

Energiewende

The Symposium heard that the German government’s aim, in order to meet climate change targets, was to increase refurbishment of existing buildings from 1 to 3% plus a substantial increase in the use of renewable energy. Partly this was to be achieved by the increasing use of EPCs in Germany. A forthright debate then occurred with the Symposium hearing that there is very little evidence of an increase in value as a result of EPCs, certainly outside the main cities in Germany. The conclusion was that the German government needed to intervene with incentives. If not an increase in refurbishments from 1% to even just 2% would not happen.

 

Is reporting really necessary?

Two benefits of reporting at a company level were identified.

·         Stakeholder driven and compliance. This was seen as a reactive reason

·         Business driven, proactive and to bring down costs

The two were not seen as connected yet this is where the opportunity lies as all reporting requires the same data points in terms of information. One data base was seen as the answer to completion of returns from the FTSE for Good, indices like GRESB to individual building certification. The Symposium then focused on what could be considered as a central data platform so that companies answered questions only once. The Symposium felt that the data base would need to require input on a range of ESG issues from energy through to social issues so that real estate was seen as a component of a company’s response not as something entirely separate. Some discussion centred on the use of GRI in this respect but there was far from unanimity that GRI was the answer. Delegates also felt that self-certification of data was not sufficient.