Climate change is the biggest threat facing the world. As it is, the US and parts of Europe and China are already suffering from the impact of climate change, with forest fires, heat waves and floods. These changes inevitably will impact the value of assets, including property. Hence, the concerted effort, some say the race, to get to “net zero” by 2050, beyond which the polar caps will melt, seas will rise, the land will be subsumed and pandemics will seize the day.
Put simply, net zero refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere. We reach net zero when the amount we add is no more than the amount taken away.
According to Regan Smith, Toronto-based director of sustainability for real estate at Manulife Financial Corporation, the group’s operating assets are already at net zero.
“We are already net zero under our operating assets because we have very large holdings in timber and agriculture, and that enables us to realise net zero in our operations. We are uniquely positioned,” she says.
“Our parent company has set a target for net zero of investments by 2050 and a mid-term reduction of absolute Scope 1 and 2 emissions by 35% reduction by 2035 for assets within operational control,” Smith adds.
Increasingly, environmental, social and governance or ESG is becoming an important part of equity and debt capital markets. According to EY, investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
Some corporates such as CapitaLand started their sustainability journey as far back as in 2000, before ESG became a buzzword.
“Investors and governments are increasingly incorporating ESG considerations in their investment and policy decisions. CapitaLand views the importance of meeting stakeholder interests as we grow our business in a responsible way — that is, delivering long-term economic value, while continuing to contribute to the environmental and social well-being of our communities,” says Lynette Leong, chief sustainability officer at CapitaLand.
The main application of ESG considerations is through risk management, which itself is a major driver of ESG investing, Fitch Ratings says in a recent report. For credit markets, industry studies have demonstrated that ESG integration techniques can help identify unknown or undervalued credit drivers and that material ESG issues can affect credit spreads, according to Fitch. ESG focus indicates better returns, more stability
The ratings agency cites a study by Hermes Investment Management which showed an inverse relationship between CDS (credit default swap) spreads and their proprietary ESG scores of North American and European companies. The study showed corporates with the highest ESG scores — issuers that perform well based on ESG factors — have the narrowest distribution of spreads, which should result in a more stable return profile.
“An investor who only held companies with above-average ESG scores on both environmental and social scores would have avoided most US bankruptcies,” Fitch Ratings suggests.
“One of the biggest drivers in the last few years has been the percentage of asset owners considering ESG in their selection and contractual processes. This practice is still most common for investments in listed equities but has been widely adopted for investments in fixed income and private assets. This has driven a marked acceleration in asset managers integrating ESG considerations into their investment processes,” Fitch adds.
On the equity front, some ESG practices are common sense and lead to lower expenses benefiting investors. For instance, green buildings cost less to maintain and are more attractive to tenants.
“Eight out of our nine properties are green buildings and the cost savings there are operational cost savings. By keeping the buildings fresh and green you can make yourself desirable to tenants,” notes Caroline Fong, chief investment and capital markets officer and chief sustainability officer at Manulife US REIT’s (MUST) manager.
“Getting a LEED (Leadership in Energy and Environmental Design) is also about materials used and location. These make the buildings more marketable,” she adds. One of MUST’s stated sustainability objectives is to create value for tenants by reducing the environmental impact of its properties and generating sustainable value for its unitholders.
For instance, all of MUST’s buildings are located in key cities in the US and are Class A, which means they are the best in class in terms of materials used and location, Fong indicates. “Most class B buildings are difficult to change into a green building,” she says. “We’re also big on tenant engagement to make sure we know what they want.”
Cost savings
As Leong sees, for companies like CapitaLand, ESG is a catalyst for cost avoidance. “In 2020, we achieved utilities cost avoidance of $270 million for the group since 2009,” she points out. Improving ESG scores can help developers and REITs not only lower costs to operate a building but help bring about lower interest expenses from sustainability-linked bonds and loans.
“We aim to measure the value created through our sustainability efforts and are developing a Return on Sustainability metric. Some of the tangible outcomes that contribute to value include utilities cost avoidance and savings from reduced interest rates on our sustainability-linked loans,” Leong continues. Sustainability-linked bonds and loans are linked to the issuer’s or borrower’s achievement in meeting a goal or target, of which the result will be either a stick or a carrot.
As an example, CapitaLand’s two sustainability-linked loans of $500 million and $300 million obtained in May and June of 2020 respectively are tied to its Global Real Estate Sustainability Benchmark (GRESB) ratings. Those loans encourage CapitaLand to stay at No 1 in the benchmark. In 2019 and 2020, CapitaLand was ranked at the top for “Global Sector Leader for Diversified — Listed” in the GRESB.
“With CapitaLand’s ratings on the GRESB 2020, CapitaLand will receive interest rate savings from the reduced interest rates on these sustainability-linked loans,” the company says.
One of the goals of CapitaLand’s 2030 Master Plan is to triple its sustainable finance portfolio to $6 billion by 2030. By end of the year, the developer had secured about $3.8 billion in sustainable finance.
Another REIT, Frasers Logistics and Commercial Trust (FLCT) was named “Industrial – Global Listed Sector Leader” by GRESB in 2020, for the third consecutive year. Singapore’s first sustainability bond was priced in July for FLCT, raising $150 million, with proceeds raised to be deployed towards the financing or refinancing of Eligible Sustainable Projects as defined by the REIT’s Sustainable Finance Framework. The coupon rate was just 2.18% for the seven-year notes.
(Green bonds and loans can only fund green projects, while sustainability bonds and loans can fund green and/or social projects.)
CapitaLand at 11-year high
CapitaLand’s share price, up more than 21% this year, and at an 11-year high is not due to its green and ESG initiatives alone, but to other value-enhancers as well. At any rate, CapitaLand continues to press ahead on the ESG front. Last November, it launched its 2030 Sustainability Master Plan, which outlines five pathways to achieve its targets and involves more than 1,000 properties.
As a key goal, CapitaLand’s science-based targets aim to reduce absolute greenhouse gases (GHG) of scope 1 and 2 by 28% by 2030 from a 2019 base year and to reduce scope 3 GHG emissions from capital goods by 22% per square metre by 2030 from a 2019 base year.
The Singapore government has set a carbon tax at a rate of $5 per tonne of GHG emissions (tCO2e) from 2019 to 2023. The carbon tax level and trajectory post-2023 will be reviewed by 2022, to give time for businesses to adjust to any revision in the carbon tax trajectory.
Although CapitaLand’s GHG reductions exclude Ascendas REIT’s data centres, in November, CapitaLand, SP Group and Sembcorp Industries signed a Memorandum of Understanding (MOU) to jointly study the use of integrated energy solutions to power data centres. The energy solutions will potentially include a combination of solar photovoltaic, green hydrogen and energy storage amongst others.
In addition, CapitaLand is the only property-related company in Singapore and Asia ex-Japan to have its carbon emissions reduction targets validated by the Science Based Targets initiative (SBTi). In November 2020, its carbon emissions reduction targets were approved by the SBTi for a “well-below 2°C” scenario.
Attractive to investors
Indices and benchmarks help corporates stay competitive on the ESG front. Among them, GRESB provides standardised and validated data for ESG to capital providers in the property sector as it is an investor-led organisation.
“GRESB has become an internationally recognised standard, allowing investors to equally assess many companies,” notes Manulife’s Smith.
“Three years ago, MUST had less than 12 ESG funds invested in us. Today we have 20 ESG funds. Most of them have in-house ESG specialists to focus on ESG and the bigger funds have an internal scoring system in what they see are important to their funds and clients,” observes Fong.
Other indices that investors can follow are Dow Jones Sustainability World Index (DJSI World), Dow Jones Sustainability Asia Pacific Index (DJSI Asia Pacific), Global 100 Most Sustainable Corporations in the World, The Sustainability Yearbook, FTSE4Good Index Series, the MSCI World ESG Leaders and MSCI World Socially Responsible Investment Index.
CapitaLand has been on the DJSI World for nine consecutive years and on the DJSI Asia Pacific for 12 consecutive years. The local developer has also been on the FTSE4Good Index Series, the MSCI World ESG Leaders and MSCI World Socially Responsible Investment Index, all for seven consecutive years respectively, and in The Sustainability Yearbook for 12 years.
“CapitaLand’s inclusion in sustainability indices that serve as benchmarks for investors has allowed us to reap interest savings from our sustainability-linked loans. These savings are deployed to fund sustainability innovation initiatives, and we will continue to work with our capital partners to roll out more sustainable financial products and services,” Leong says.
If all our companies take similar steps on the environment, we could perhaps hold back the waves, which is in the interests of everybody.
Photo from CapitaLand: Funan’s urban farm and climate climate-friendly refrigerant chilled-water system prevent about 5 kilotons of CO2 emissions from being emitted. This is equivalent to the annual emissions of about 1,500 cars
