Real estate and infrastructure top a list of five sectors that prominent Canadian analysts have tagged as the most obvious prospects to deliver returns on investment in reducing greenhouse gas (GHG) emissions and improving resilience to climatic extremes. Even so, the recently released interim report from Canada’s Expert Panel on Sustainable Finance suggests there is more untapped opportunity than coordinated action in a market grappling with emerging imperatives for climate-related financial disclosure and integrating ESG (environmental, social, governance) measures.
“The Panel witnessed remarkable institutional commitment to progress; important pockets of growth in sustainable finance; and widespread confidence in Canada’s opportunity to prosper in the global movement toward clean, climate resilient economic growth. Yet, overall, Canada’s sustainable finance market is not growing in a manner that reflects the dialogue,” the report states.
The Panel, which reports to Canada’s Ministers of Finance and Environment and Climate Change, is chaired by Tiff Macklem, Dean of University of Toronto’s Rotman School of Management and includes senior executives from Ontario Teachers’ Pension Plan, Caisse de dépôt et placement du Québec and Royal Bank of Canada. After widespread consultation with the financial services industry, they maintain that investors and their key advisors lack appropriate structured guidance, benchmark indices are not incorporating sufficient sustainability criteria and lenders fail to adequately focus on the long-term impact of climate change.
“The majority of investors remain confident that they can adjust their portfolios if or when climate impacts become more tangible, and are not meaningfully adjusting their investment strategies today,” the interim report submits.
The Panel cites “transformative importance and economic potential” as reasons for categorizing real estate and infrastructure among the low-carbon vanguard, but the two sectors are also making progress in filling in some of the informational gaps that the interim report decries. GRESB, the assessment and benchmarking program tracking the ESG performance of commercial real estate and infrastructure portfolios worldwide, again extended its reach in 2018.
Beginning with just three European pension funds in 2009, this year’s real estate results reflect data collected from 903 participating entities that hold 79,000 assets in 64 countries, collectively valued at about USD $3.5 trillion. This includes dozens of the largest REITs, direct property holders and private equity firms globally.
“There is a huge amount of global activity. The real goal is having more and more common language,” Neil Pegram, GRESB director for the Americas, told a gathering in Toronto earlier this fall, as he drew connections to initiatives like the Task Force on Climate-related Financial Disclosure, UN Sustainable Development Goals and various national and sub-national targets and policies for reducing GHG emissions, conserving water and energy, and safeguarding ecosystems. “We’re always looking from the perspective of the investor and how they need sustainability KPIs (key performance indicators) to work for them.”
Peer-to-peer ESG benchmarking
GRESB participants report in seven variously weighted categories — management; policy and disclosure; risk and opportunity assessment; environmental monitoring/management; performance indicators, including energy and water consumption and waste diversion; building certifications; and stakeholder engagement — to provide a picture of their strategy-level environmental commitment and oversight, implementation rigour and measurable outcomes. For investors and asset managers alike this offers a means to track ESG compliance and delineate linkages to other elements of portfolio performance.
Submissions are scored and then benchmarked within peer groups based on global regions, asset types and listed or private status. Participants that score at least 50 on the scale of 100 also earn a star rating, prorated to their quintile of performance within the total field.
“Increasingly, social and environmental responsibility is seen as not only positive branding, but also a moral and market imperative,” says Michael Brooks, chief executive officer of the commercial real estate industry association, REALPAC, which partners with GRESB in Canada. “GRESB is the key global tool to identify relative performance through peer-to-peer benchmarking, driving increased corporate accountability, responsibility and morality.”
Six Canadian based organizations are among the current contingent of fifty-eight investor members, collectively representing more than USD $18 trillion in institutional capital, that have access to GRESB’s comprehensive results database. Speaking at the Toronto release of this year’s results, Dan Winters, GRESB head of the Americas, affirmed that institutional investors “are the players at highest level of our pyramid”, but expressed no surprise that private equity firms are also on board.
“For value-add funds, that’s exactly where the rubber meets the road,” he asserted. “In a tight time horizon, that’s really where sustainability pays off financially.”
In recognition of what’s commonly acknowledged to be an arduous reporting process, first-time participants are offered confidentially for their initial results, keeping them off-limits to GRESB investor member scrutiny. “There is a lot of work, particularly in the first year. The first year is a heavy lift,” noted Pegram, who brings participants’ insight to his role, having served as Morguard’s head of sustainability prior to joining GRESB earlier this year.
However, when called out of the audience to comment on her company’s recent experience as a newcomer, Anushka Grant, vice president, sustainability and asset efficiency at RioCan, voiced no regrets. She pointed to internal and external drivers that bolster the case for making the effort.
“Last year, we took advantage of the grace period. The struggle (to report) is real, but we are really happy with the progress we have made,” she said. “We have our senior leadership team strongly supporting our sustainability program. It also helps that investors are asking more and more questions.”
Burgeoning infrastructure investment opportunities
In light of such questions, the scope of GRESB analysis has been widening — via new topics within the real estate assessment and with the 2016 launch of a separate infrastructure assessment. Alberta Investment Management Corporation and Ontario Teachers’ Pension Plan were among 10 founding members of the infrastructure benchmark, which, this year, draws on data from 75 funds reporting on 280 assets, collectively worth an estimated USD $500 billion.
“Globally, we are seeing more infrastructure and the need for more infrastructure. In some ways, it’s the sexy new asset class,” mused Rick Walters, GRESB infrastructure director.
In Canada, that coincides with the federal government’s commitment to invest $180 billion over a 12-year period. That includes a $5 billion Disaster Mitigation and Adaptation Fund to be awarded via a competitive bid process, which is open to both public and private ventures valued at a minimum of $20 million. All bids will be vetted for alignment with ISO standard 14067 for greenhouse gas mitigation and ISO 31000 for risk management and climate change resilience.
“The condition our assets are going to have to endure over time are changing,” Emily Partington, project director, sustainability and energy, with the engineering consulting firm, WSP, advised the gathering. “What’s changed in the market is our ability to actually anticipate some of these trends, down to the asset level. We have the ability to know what the world is going to throw at us.”
Together, provincial and municipal governments currently own the overwhelming majority of existing infrastructure assets in Canada. However, the confluence of oft-documented vast requirements for renewal and replacement, new funding and prospective investors previously shut out of the market sets the scene for a shift. The Expert Panel on Sustainable Finance again stresses that better information is needed.
“Canada’s major public pension funds are among the top infrastructure investors in the world and have had a longstanding appetite for investment in domestic infrastructure. Because private infrastructure investment has not been widely pursued in Canada, these funds are largely invested offshore,” the interim report states. “Greater shared access to reliable, consistent, timely information and more modern assessment methodologies would both eliminate redundant effort and cost, and enhance risk comfort among investors, lenders, insurance underwriters and developers.”
GRESB is a potential source of that information, which many of the targeted investors are already using for real estate. “It’s terrific that GRESB is now dealing with infrastructure because these lines (between real estate and infrastructure) blur,” Brooks maintained.
“We have to think more about the resilience piece,” concurred Thomas Mueller, president and chief executive officer of the Canada Green Building Council. “There is going to be billions and billions and billions of dollars that communities are going to invest in resiliency — because they have to.”
Meanwhile, 13 per cent of real estate participants chose to report under a new voluntary resilience component designed to gain insight into their portfolios’ vulnerability to, and ability to endure, environmental upheaval. Over the course of the three-year pilot, GRESB administrators will further refine the questions and their approach to interpreting collected data.
This mirrors the evolution of the health and well-being module, offered as a pilot from 2016 to 2018. Volunteer respondents, representing fully one third of the database this year, have helped to shape the assessment for the future.
“When we started, we didn’t know how to ask questions about it,” recalled Chris Pyke, research officer with the U.S. Green Building Council, who has been leading both pilots. “The best working of the health and well-being indicators will now graduate to the core program and the rest will hit the road.”
Barbara Carss is editor-in-chief of Canadian Property Management.