Investing in a sustainable society LGIM Real Assets ESG Report The Walney Extension
Newcastle Helix (2016): Leading the regeneration of Newcastle City Centre Introduction Environmental, Social and Corporate Governance (ESG) are the primary factors that measure the sustainable impact of a business. As one of the top 20 largest global asset managers, 1 LGIM has a duty not just to our clients, but to society as a whole for ensuring investment activity is conducted in a sustainable way - a responsibility shared by LGIM Real Assets as part of LGIM, and as an active participant in both domestic and international markets. As one of the UK s largest institutional investors and real estate owners, we have the opportunity and responsibility to lead the way in driving the adoption of best-practice ESG principles and behaviours in the sector. The following document provides a brief overview of how LGIM applies ESG factors to the real assets investment universe, and how our business is seeking to bring about positive changes to policy and practice in both our industry and wider society through thought-leadership and pro-active implementation. 1 Source: IPE Top 400 Asset Managers 2017 Survey. LGIM had 983.3bn assets under management as at 31 December 2017. 2
Our platform LGIM Real Assets Real estate 19.8bn 27.0bn 2 Private credit 7.2bn 6bn 3,037 Transactions Occupiers in 2017 3 50 Years of experience 25 Investment mandates 849 Assets Team of c.150 Top 3UK investor 2 Source: LGIM Real Assets. AUM data to 31 December 2017 (including crossholdings). Real estate AUM provided on a GAV basis. Private credit AUM provided on a committed capital basis. 3 Source: LGIM Real Assets. Transactions data provided over the 12 months to 31 December 2017 across both our direct real estate and private credit capabilities. 3
ENVIRONMENTAL April 2018 LGIM Real Assets ESG Report ESG in a real assets context SOCIAL GOVERNANCE Sustainable stock selection Quantifying social value Robust policy framework Investing to improve assets Communication with stakeholders Business practices Clean energy infrastructure assets Influencing policy and best practice Company culture Accountability through benchmarking Promoting community engagement Actively screening sectors OUR COMMITMENT TO ESG We understand our scale brings responsibilities: as one of the UK s largest landlords, we are highly conscious of our duty to go above and beyond the industry standards in the incorporation of ESG factors into both our investment decision-making and the long-term management of our assets. LGIM Real Assets is committed to the creation of a sustainable investment platform across all the asset classes we manage; from actively investing to improve the environmental credentials of our direct property holdings, to the integration of renewable energies and robust governance principles across our private credit portfolio. Our commitment to ESG is driven by: Performance: The belief that protecting and enhancing the sustainability of real assets creates long-term value and performance benefits that contribute to our clients returns; Our long-term perspective: Caring for our clients and society s future through leading by example and empowering our stakeholders to deliver positive change; and Responsibility: The recognition that the built environment has a significant impact on UK society and its ecosystem. 4 In February 2017, LGIM announced the launch of its Future World strategy: an umbrella brand which will encompass a series of pioneering, ESG-aware investment solutions spanning a diversified range of asset classes. The Future World strategy represents an organic evolution of LGIM s existing policies and approach to ESG investing - expanding our active approach over a wider range of strategies with a global reach - and is reflective of our corporate culture. 4
Board committee oversees all our sustainability activity and processes Alongside the wider LGIM business, LGIM Real Assets seeks to mitigate risk, capture value and deliver better riskadjusted returns for investors in the transition to a lowcarbon economy through incorporating long-term thematic thinking in our investment approach. LGIM s identified macro trends of demographic change; the evolution of technology; and paradigm shifts in the energy industry towards renewable sources of power inform our ESG policies and behaviours - ensuring both our business and our investors are best-positioned to drive, and benefit from, the transition to the Future World. 4 Our comprehensive approach seeks to embed ESG throughout every operational level of our investment platform. LGIM Real Assets board-level sustainability committee, Project Green, oversees all our sustainability activity and processes, and fosters the ownership and team dynamic that underlies our approach to governance. At a fund and asset level, we collaborate with our business partners to collect data, measure progress, and invest in improvements to the significant proportion of the built environment for which we are custodian. 5 We also have a dedicated Head of Sustainability, who helps to coordinate the integration of ESG into all our activities and works with our Research team to constantly develop our philosophy and practices. Cardiff Central Square (2015): 1.2 million sq. ft. of mixed-use development creating space for 10,000 jobs 5 LGIM Real Assets had 27.0bn assets under management as at 31 December 2017 (including crossholdings). 5
Environmental ENVIRONMENTAL CONSIDERATIONS ARE INGRAINED THROUGHOUT AN ASSET S LIFE-SPAN We believe our sustainability requirements in the stockselection and acquisition process lead the industry. Importantly, assessment of the environmental risks and efficiency of an asset extends beyond the transactional due diligence process. Asset Sustainability Plans (ASPs) are put in place on acquisition to align the long-term interests of occupiers, agents and asset-owners; and Annual Sustainability Action Plans (ASAPs) are developed to continually progress each asset and ensure the highest standards are upheld. These lead to annual energy and waste reduction targets for each asset, with progress reported quarterly by our managing agents within their contracted responsibilities. STAYING AHEAD THROUGH STRETCHING TARGETS AND PRUDENT RISK MANAGEMENT Pro-activity is key to leadership in a constantly evolving field. We try to take action in advance of future legislation: ahead of the implementation of the new Minimum Energy Efficiency Standards (MEES) in April 2018, we have been working to de-risk our portfolio through improving the energy-efficiency of our assets. Only 10% of assets across our platform have Energy Performance Certificates (EPCs) rated at the lowest levels of F and G all of which have preprepared improvement plans for remedial action in place for implementation at the next lease event. 6 In 2016 we revisited our framework for Sustainable Property Investment, which governs all our activities, from policy and target setting, to capital works, monitoring and communication. In 2017 we exceeded our current published targets of 20% by 2020 (encompassing savings across energy, carbon and water) and will be setting more stretching, science-based targets next. 90% of property assets have secure energy performance ratings across upper bands A-E Direct Property Portfolio EPC Breakdown 1% 5% 4% 10% A 13% B C D 33% E F G 33% 6 Sources: Jones Lang LaSalle (Property Managing Agents) and Savills (Property Managing Agents). Data as at March 2018. Data set includes more than 3,000 EPC ratings across 10 different direct real estate funds where JLL and Savills are the appointed third party property managing agents. 6
Newcastle Helix (2016): Funding new educational facilities and stimulating local economic growth COLLABORATING TO DRIVE CHANGE Together with our property managing agents, we set ambitious and achievable targets to improve the environmental efficiency of our assets across a broad range of metrics, spanning carbon emissions; energy consumption; water usage; waste management; green travel plans; biodiversity; occupier liaison; and community engagement. drive the adoption of best-practice principles. LGIM Real Assets is a member of the UK Green Building Council (GBC), the British Council of Offices (BCO) Sustainability Committee, the British Property Federation (BPF) Sustainability Committee, and is on the board of the Better Buildings Partnership. We believe close collaboration with our peers, industry bodies and occupiers adds to the industry s collective ability to achieve a greener operating model. Our Managing Director, Bill Hughes, was elected Chairman of the Property Industry Alliance in March 2016; a coalition of eight leading property bodies which provides a platform to share research and lends a stronger, allied voice to influence policy and 7
INVESTING TO INCREASE THE EFFICIENCY OF OUR Achieved Green Stars (the highest accolade) across all 13 funds BUILDINGS; THE WELLBEING OF THEIR OCCUPIERS; AND EXTRACT LATENT VALUE MAINTAINING INDUSTRY LEADERSHIP THROUGH BENCHMARKING PERFORMANCE LGIM Real Assets is a participant in the annual Global Real Estate Sustainability Benchmark (GRESB) across all applicable funds. We achieved Green Stars (the highest accolade) across all 13 funds submitting to GRESB in 2017; a clean sweep that we have maintained for the past four years (see chart below). 7 Additionally, we evaluate all operational assets against the Better Buildings Partnership Real Estate Environmental Benchmark (REEB) and aim to achieve best practice levels across all assets. Working in partnership with the National Energy Foundation, LGIM Real Assets has developed Voluntary Display Environmental Certificates. VolDECs represent an industry-wide solution to the lack of distinguishable data sets between those aspects of environmental performance controlled by the occupier and those controlled by the owner, thereby helping to pinpoint the measures required to improve a property s environmental performance. This innovation exemplifies our dedication and ability to exceed industry expectations of standard practice and deliver sector-wide enhancements. Case Study: Future-proofing our standing investments In 2008, one of our Central London office assets, 210 High Holborn, received a low EPC rating that put it on the risk register. Data collection allowed us to diagnose the causes over a four year period and, when we undertook planned maintenance works to replace heating, water and lighting systems, we ensured that energy-efficient options were used. An environmental strategy was embedded throughout, from sourcing sustainable materials to maximising recycling in the strip-out and construction phases. This rejuvenating investment raised the EPC rating from a G to a B; future-proofed the building through bringing it in-line with operational best practice targets; and reduced energy costs by 71%, or 58,000 per year. This premium-priced office space is now fully-let, and the asset is contributing significantly more to fund performance. Consistent House out-performance of the average GRESB score 8 100 90 84 84 80 70 60 50 71 47 55 60 76 63 Reduced energy costs by 71%, or 58,000 per year 40 30 20 10-2014 2015 2016 2017 Average LGIM Real Assets Score GRESB Global Average Score 7 Source: GRESB 2017 Annual Reports. 8 Source: GRESB Annual Reports from 2014-2017. 8
Case Study: Freeman s Reach, Durham - Developing assets fit for the future From 2013-2016, we funded and delivered a state-of-the-art new office complex across two phases in Durham s historic city centre. Located on the eastern bank of the River Wear, the development included the installation of a hydro-turbine and associated energy centre. The turbine generates in excess of 90% of the development s energy requirements, and exporting energy to the National Grid is forecast to provide a minimum net income of 100,000 p.a. over the next 20 years with the added benefit of RPI-linked Government Feed in Tariffs (FITs). The project achieved a BREEAM rating of Excellent - a standard we strive to obtain on all new construction and refurbishment projects - and an A+ EPC rating. The first A+ EPC rating in LGIM Real Assets portfolio Freeman s Reach, Durham (2013) 9
Renewable energy Over 500 million invested in clean energy to date across two continents DIRECTLY HELPING TO SHAPE A GREENER ECONOMY THROUGH INVESTMENT IN CLEAN ENERGY INFRASTRUCTURE The renewable energy sector is an increasing investment focus across both the direct real estate and private credit arms of LGIM Real Assets platform. Solar energy We have completed four solar debt transactions in the UK totalling over 130 million to date. More recently, we have expanded our investment horizon to the US, agreeing a $65 million transaction in 2017 re-financing 59 photovoltaic cell installations across California, Massachusetts and New Jersey which will contribute an aggregate total of 45.8MWh to the electricity grid. Offshore wind 2017 also saw LGIM Real Assets debut transaction in offshore wind with the completion of a 344 million investment into the world s largest offshore wind farm (see image left and cover) - our second largest infrastructure debt deal to date. We acted as the anchor investor, providing acquisition finance to a consortium of European pension funds supporting a 2 billion purchase of a 50% share of the Walney Extension from Ørsted (formerly DONG Energy). Located in the Irish Sea and with a capacity of 660MW, the asset will provide power to over 500,000 homes in the UK. The project will support up to 185 fulltime jobs annually over its estimated 25-year operational lifespan a direct and significant social benefit facilitated by our investment. The Walney Extension (2017): Powering over 500,000 homes in the UK 10
Hydropower, geothermal energy and onshore wind LGIM, Real Assets has continued to expand its horizons in 2018, making our first private corporate credit investment into the largest renewable energy provider in Iceland, Landsvirkjun. The company dominates domestic markets with a 73% market share, and has over 50 years of experience in building and operating hydro, geothermal and wind power assets. Landsvirkjun produces electricity exclusively through clean methods: their portfolio currently includes 14 hydropower plants (see image below), three geothermal plants, and two wind turbines; and the company is in the process of assessing new opportunities across the country. Renewables in our direct real estate portfolio We continue to build on our existing track record of investing directly in renewable energy assets: we have invested nearly 35 million in the sector so far 9 and have achieved planning permission for two new waste management plants in the West Midlands where we are collaborating closely with the Local Authority. Working in collaboration with our occupiers, we have also installed PV panels in a number of assets across our real estate portfolio. Búrfellsstöð - Landsvirkjun, Iceland (2018): Investing in alternative sources of clean energy 9 LGIM Real Assets Limited Price Inflation (LPI) Income Property Fund invested in renewable energy facilities in Q1 2015. Approximate investment value provided as at 31 December 2017. 11
Social SPECIALISTS IN URBAN REGENERATION LGIM Real Assets has established a strong track record in delivering large-scale urban regeneration projects that simultaneously deliver our clients long-term performance objectives; rejuvenate local communities; and stimulate economic growth. Our projects to date, have included the 400 million regeneration of Cardiff Central Square - Wales largest regeneration project, which is set to deliver over 10,000 new jobs and will host the new BBC Wales Headquarters and a new Government hub; and Newcastle Helix a 24-acre 350 million regeneration project which will create over 4,000 jobs, 450 new homes, state-of-theart educational facilities, and unlock further growth and investment potential for the North East (see images pp.2-3 and p.7). DEMONSTRATING THE SOCIAL VALUE OF OUR DIRECT INVESTMENTS We work hard to demonstrate and improve the social impact of our business through transparent reporting to our stakeholders and investors, and continually enhancing our data quality. Improving data quality has been a key part of recent work with our managing agents, which in turn has allowed us to present a more detailed picture of our ESG achievements to our increasingly interested investors. LGIM Real Assets has partnered with specialist industry bodies to pioneer the quantitative measurement of the social value of real estate and development projects. LGIM Real Assets is determined to provide our occupiers with exceptional buildings to work and live in, and to benefit local communities and economies through our investments, supply chain and regeneration projects. PROACTIVE STAKEHOLDER-ENGAGEMENT LIES AT THE HEART OF OUR APPROACH We strive to ensure that our priorities, policies and practices are informed by our active engagement and communication with our stakeholders, including our investors; occupiers; business partners; Central and Local Government; and local communities. Not only are these relationships critical for encouraging the adoption of best practice principles and behaviours, but they allow us to influence policy and thinking at the highest level; delivering change through a combined bottom-up and top-down approach. SUPPORTING CHARITABLE CAUSES Our corporate culture, ethos and sense of social responsibility means LGIM Real Assets is committed to supporting charitable causes. For the last three years we have proudly sponsored a number of cycling events which bring together real estate professionals from across the industry. The largest of these is Cycle to MIPIM, which this year saw 190 cyclists cover a distance of 1,500km in six days, riding from London to Cannes in the South of France. We also launched the inaugural Northern Power-Leg stage - a two day ride from Leeds to London - and continue to support the annual three day women only ride, pedelle. These annual events run by Club Peloton help raise funds for a number of charity partners, including main beneficiary, Coram - the UK s first and oldest children s charity which has been offering practical and emotional support to vulnerable young people and their families for over 275 years. To date, Club Peloton has raised more than 2.88 million. 12
Case Study: 245 Hammersmith Road This West London development project (see image below) has given us the opportunity to pilot a new approach to social value assessment across the entire construction cycle, from design right through to construction and the completed functional building. LGIM Real Assets is working with the British Council of Offices and the Social Value Portal to address whether development could do more for local communities by re-thinking how buildings are constructed, managed and occupied, and to devise a strategy to capture maximum social value. Our project proves it is possible to deliver social value add (which could total an estimated 15 billion annually across the industry in the UK) through improved procurement practices focussing on local sourcing of manufacturing and skills and through community engagement programmes. 10 We have now committed to a target of measuring social value across 20% of Real Assets. 245 Hammersmith Road (2012): Creating a better local environment for communities 10 The Social Value Portal and LGIM, Measuring the Social Value of Offices (report published 13 October 2016). 13
Corporate governance Safe-guarding our clients capital and LGIM s reputation through policies and procedures GOOD GOVERNANCE EMBEDDED IN OUR LENDING ACTIVITIES We apply a negative screening process for investment sectors and companies identified as incompatible with an ESG-aware ethos, including mining, weaponry and coal. This policy extends to cover sanctioned geographical jurisdictions, and can lead to enhanced due diligence on any transactions with the potential to carry augmented reputational risk. We ensure appropriate long-term covenant protections are in place on all debt investments regarding the nature, purpose and remit of business activities, and work closely with our borrowers to both facilitate their commercial needs and performance while protecting our clients capital. ROBUST POLICY FRAMEWORK We operate within LGIM s overarching policy guidance on stakeholder engagement, sustainable procurement, and corporate social responsibility. In addition, a specific Sustainable Real Assets Framework aligns our practice with the principles set out in our Responsible Real Assets Investment Policy. The framework is regularly reviewed by our Project Green Committee and encompasses policies and objectives at both a fund and corporate level; operational monitoring; benchmarking procedures; and the integration of green lease clauses. FOSTERING A CORPORATE CULTURE OF TRANSPARENCY, DIVERSITY AND SHARED RESPONSIBILITY LGIM Real Assets commitment to driving change is demonstrated through the way quantitative ESG targets are embedded into all our employees annual performance and appraisal processes, thereby linking the ESG performance of our assets and business directly to remuneration. This alignment of values ensures real responsibility is taken by individuals, as well as LGIM Real Assets at a corporate level, for driving positive change. 14
Kröflustöð - Landsvirkjun, Iceland (2018): Investing in alternative clean energy sources 15
CONTACT US For further information, please contact us: contactrealassets@lgim.com www.lgim.com/realassets Important Notice This is not a consumer advertisement. This document should not be taken as an invitation to deal in any Legal & General investments including the stated investments. The value of investments and any income from them may fall as well as rise and investors may get back less than they invest. The value of property is generally a matter of valuer s opinion rather than fact. Issued by LGIM Real Assets (Operator) Limited (Company No. 02091897) which is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 447041) and has its registered office at One Coleman Street, London, EC2R 5AA. 16