TH Real Estate Commits to Science-Based Energy Target
30 January 2018
TH Real Estate Commits to Science-Based Energy Target
30 January 2018TH Real Estate has made a public commitment to reduce the energy intensity of its entire global equity portfolio by 30% by the year 2030, based on a 2015 baseline. This responds to and supports the ambitious goals for sustainable real estate established at the 21st annual Conference of Parties (COP21) held in Paris in 2015.
Key Facts
- Preparing for Tomorrow’s World
- De-risking for investors
- Demonstrating good asset management
- Showing sustainability leadership
- Contributing to global CO2 reductions
Situation
TH Real Estate is one of the largest real estate investment managers in the world, with equity investments in nearly 900 office, retail, industrial and residential assets globally. Through its Tomorrow’s World approach, TH Real Estate integrates environmental, social and governance principles into its investment strategies and business operations.
At COP21, ambitious goals were established to limit global warming to 2 degrees and strive towards 1.5 degrees. It is estimated that real estate is responsible for about 40% of global CO2 emissions. These emissions arise from onsite fuel usage (such as gas for boilers) and from the use of electricity and other energy sources.
Actions
As a sustainability leader, TH Real Estate reviewed the implications of COP21 across its global equity portfolio.
Discussions with teams across the business, including investment, sustainability and research, revealed consensus for a science-based target covering all funds, not only those where investors have expressed a strong interest in sustainability. This is in line with the Tomorrow’s World philosophy, ensuring that assets are ready for the heightened pressures, growing responsibilities and new opportunities in the markets of tomorrow, so that TH Real Estate consistently outperforms. Setting a science-based target is simply good asset management, as failure to prepare for the implications of COP21 now would be letting investors down and risking stranded assets.
TH Real Estate commissioned sustainability consultants Verco to establish a reduction target in line with the science-based approach. Verco applied the Sectoral Decarbonisation Approach methodology, released by the Science Based Targets initiative. This splits the global economy into sectors, each attributed their portion of the world’s 1,000 gigatonne carbon budget for 2011-2050 and set a decarbonisation pathway.
Following this review, TH Real Estate made a public commitment in March 2017 to reduce the energy intensity of its global equity portfolio by 30% by the year 2030, based on a 2015 baseline. Energy intensity is measured by the asset’s use of kilowatts per hour, per sq ft1.
TH Real Estate is currently going through the process of having the target accredited by the Science Based Targets initiative and expects this to be complete in early 2018.
Financials
The basis for setting the target is that improving the energy efficiency of the portfolio is always associated with a payback based on energy savings and also that it future-proofs the assets as market expectations on energy performance continue to evolve. Therefore, while there are costs associated with specific activity, the business case for these is always proven.
- All properties that have above a £250,000 (or local currency equivalent) per annum spend on energy to have an energy audit at least every three years, plus a package of remote support from a specialist energy management consultancy in that region. Wherever possible, this comprises a performance-guaranteed energy management service comprising remote analytics. This applies to c.60 properties across the TH Real Estate portfolio in the UK, USA, across continental Europe and in Asia Pacific. The cost of the package of support is typically accompanied by a guarantee that the energy savings will outstrip the cost of the service.
- All properties have a Sustainability Action Plan that includes energy efficiency measures such as LED rollout and HVAC upgrades. The business case for these is assessed on a case-by-case basis.
Benefits
- Preparing for Tomorrow’s World – demonstrating good asset management and protecting investors from the risk of stranded assets.
- Showing sustainability leadership – building on TH Real Estate’s long-established effort to embrace sustainability and reduce the risk and impact of climate change.
- Reducing occupiers’ utility bills through energy reductions and supporting their sustainability objectives.
- Cutting carbon emissions and contributing to the global movement to limit global warming to 2 degrees and strive towards 1.5 degrees, as agreed in the Paris Accord.
[1] This is measured by kWh of ‘electricity equivalent’ (kWhee) of whole building imported energy use per sq ft. The numerator is calculated by adding kWh of imported electricity to kWh of any imported fuel multiplied by 0.4 and kWh of imported hot or chilled water multiplied by 0.5kWh. The kWhee energy metric enables direct aggregations of building energy use and comparisons of efficiency across international property portfolios. The denominator represents the gross internal floor area of space to which TH Real Estate supplies energy.
Challenges and Achievements
METHODOLOGY
How to apply the science-based methodology across a diverse international portfolio?
There were two main challenges in applying the Sectoral Decarbonisation Approach:
- Different levels of Grid carbonisation: A target to cut CO2 per m2 across a global portfolio like TH Real Estate’s would reflect more on the countries where assets are bought and sold than on efficiency improvements, e.g. France’s Grid is almost zero carbon due to nuclear power sources; the UK Grid has a high proportion of zero-carbon electricity due to renewables; whereas other countries tend to have more carbon-intensive Grids. Rather than setting a CO2 target, TH Real Estate therefore set an energy target to drive real reductions.
- Different levels of energy intensity: A target to cut energy per m2 across a portfolio of diverse assets like TH Real Estate’s would reflect more on the types of property bought and sold than on efficiency improvements, e.g. offices tend to be high intensity, with the property owner typically buying energy for the whole building and onward billing it to occupiers; whereas retail parks and industrial assets tend to be much lower intensity, with the owner generally only buying energy for external lighting and communal facilities. To address this issue, TH Real Estate applied an indexing approach developed by the BBP in tracking member energy portfolio performance as part of their Real Estate Environmental Benchmark that allows for the inclusion of different property types.
TH Real Estate plans to engage with the Science Based Targets initiative on the methodology.
ACQUISITIONS
How to achieve reductions in a fast-changing portfolio?
When TH Real Estate modelled the target assuming a fairly modest portfolio churn (around 10% of assets bought or sold per year), only 15% of the properties it owns today will still be in its equity portfolio in 2030. The firm’s acquisition strategy is therefore key to meeting the target, particularly from 2020. To integrate sustainability into acquisitions, the Head of Sustainability sits on the Investment Committee. Throughout the acquisition process, they work with the due diligence team to gather information on energy efficiency, exposure to climate change impacts, flood risks, land contamination, climate change legislation risks (e.g. Minimum Energy Efficiency Standards in the UK) and other sustainability factors. They then put a paper forward to the Investment Committee outlining whether the acquisition is supported or not and, if it is supported, whether there are caveats and items that need to be included in the business plans. The risks relating to energy efficiency will increase in the run-up to 2030.
MANAGEMENT
How to achieve reductions in individual buildings?
TH Real Estate has a strong track record of delivering energy reductions in buildings, e.g. realising its 2007 target to reduce US energy consumption by 20% by 2020 ahead of schedule. The team is investigating various technologies to support the 30% reduction target, e.g. reviewing costs to install smart energy metering and management systems in around 25 office and retail assets across Europe and Asia Pacific. There are a further 40 properties in the USA where similar solutions are being investigated. The main challenges in installing these new technologies relate to lease arrangements and the split incentive, where the property owner pays for retrofits but does not benefit from energy cost savings, which accrue to occupiers. Whilst this is not an insurmountable challenge, leasing rules are particularly complex in some countries, and this slows down progress.
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