Third-party Opinion on Impact Investment Project by Industrial & Infrastructure Fund Investment Corporation January 9, 2019 CSR Design Green Investment Advisory, Co., Ltd.
Introduction This written statement was prepared for CSR Design Green Investment Advisory, Co., Ltd. (hereinafter called "we/our/us") to express an opinion from a third party standpoint regarding whether the impact investment project (hereinafter called "this PJ") for "OTA Techno CORE" announced on January 9, 2019 by Industrial & Infrastructure Fund Investment Corporation (hereinafter called "IIF") together with its asset management company, Mitsubishi Corp. - UBS Realty Inc. (hereinafter called "MCUBS"), is aligned with the concept of "The Principles for Positive Impact Finance" (hereinafter called "PI Principles") advocated by UNEP Finance Initiative (hereinafter called "UNEP FI") and "Positive Impact Real Estate Investment Framework" (hereinafter called "PI Framework") based on them. We concluded a consignment contract with IIF regarding expression of this opinion. For preparation of this written statement, we reviewed publicly available information about the organization and performance related to the sustainability of IIF and MCUBS, and conducted interviews of the MCUBS project team. This opinion is composed of reviews on the following two matters. (1) Opinion about the sustainability management system and performance of IIF and MCUBS, which are the responsible organizations of this PJ (2) Opinion about the alignment of this PJ with the PI Principles and PI Framework as shown in the investment consideration process and commitment by IIF and MCUBS Overview of IIF, MCUBS, and this PJ Overview of IIF IIF was listed on Tokyo Stock Exchange in 2007 as the only real-estate investment trust (REIT) dedicated to industrial real estates in Japan. It has been investing in real estates expected to be used stably in mid- and long-term targeting at logistics facilities, plants, research and development facilities, etc. to be the foundation of industrial activities and infrastructure facilities with the mission to "support Japan's economic activities by investing in social infrastructure, which forms the base for economic growth." As of July 31, 2018, it manages 66 properties (including 43 logistics facilities, 14 plants, research and development facilities, etc., and 9 infrastructure facilities) and its total acquisition price is 274,764 million yen. In the system of J-REIT, the asset management of IIF is outsourced to MCUBS, and MCUBS manages IIF s assets according to the investment policy defined by them. Overview of MCUBS MCUBS is a joint venture company between Mitsubishi Corporation and UBS Asset Management AG, and manages assets of IIF as well as Japan Retail Fund Investment Corporation (hereinafter called "JRF"). In addition, MCUBS MidCity Inc. 2 CSR DESIGN GREEN INVESTMENT ADOVISORY
which is a subsidiary of MCUBS group manages assets of MCUBS MidCity Investment Corporation (hereinafter called "MidCity REIT"), and the total assets under management (based on acquisition prices) of the three funds (IIF, JRF, and MidCity REIT) in managed by the MCUBS group in total is 1,448.1 billion yen as of the end of December 2018. Overview of this PJ This PJ is an investment project considered and decided to execute as a part of asset management of IIF by MCUBS. The investment destination is equity interest in a silent partnership of 100 million yen (equivalent to 6.06% of the equity interest in a silent partnership) in which the outstanding assets are the interests in trusts with domestic real estates as assets in trust. SPC, in which this silent partnership invests, is planned to own the interests in trusts of this property, which is the subject property of trusts in March 1, 2019. Based on the Tokyo Ota City 10-year basic plan, "Ota Future Plan 10 Years", this property represents the characteristics of the manufacturing industry promoted by Tokyo Ota City. More precisely, Tokyo Ota City is aiming to cultivate manufacturing industry with high value-added. This property (i.e., share factory) incubates medium- to small-sized manufacturers mainly in the precision processing field, as well as manufacturers in the related industries, and R&D enterprises for engineering and metalworking industry. This property is leased solely to Tokyo Ota City for a long term (about 20 years) and Tokyo Ota City sub-leases the property to about 20 end tenants. In this PJ, IIF is planned to secure the first refusal right for the acquisition of the interests in trust of this property with the exercise deadline set to the last day of February 2024. MCUBS considered the investment of this PJ mainly from July, 2018 to January, 2019 and made the investment decision on January 9, 2019. Opinion (1) Opinion about the sustainability management system and performance of IIF and MCUBS We are of the opinion that IIF and MCUBS have established a robust governance system for sustainability and have shown excellent ESG performance results. Upon constitution of this opinion, we considered the following points. Governance system for sustainability/esg MCUBS has established the "Environment Charter" and "Responsible Property Investment (hereinafter called "RPI") Policy" as the "strategy and policy" of sustainability aimed at by the MCUBS group. By implementing these policies, they integrated the considerations for the issues of ESG (environment, society, and governance) into the investment and management process for the assets owned by IIF. 3 CSR DESIGN GREEN INVESTMENT ADOVISORY
We evaluated it as the best practice in the Japanese market that MCUBS has expressed their official commitment for the issues of sustainability in the "Environment Charter" and has established the framework of ESG integration in the specific investment management process in the "RPI Policy" and "RPI Strategy." MCUBS has organized the Sustainability Committee in 2013 as a meeting structure to handle ESG issues in-house and holds its meetings about four times a year for execution of the defined policy and strategy. The chairperson of the Sustainability Committee is the representative director and its members include the senior management of each division head of MCUBS, etc. The Sustainability Committee resolves the goals, targets and plans of the sustainability of the three funds of the group including IIF as well as monitors the activities and performance regarding sustainability/esg and discusses them for continuous improvements. We regard it as a market best practice that the system in the Sustainability Committee of MCUBS makes the representative director, who is a member of the board meeting, commit to the issues of sustainability because it is effective for matching the overall management policy of the company with the policy of sustainability/esg. We confirmed that in this PJ, they made an investment judgment through environmental and social risk evaluations including soil contamination based on RPI, and that the ESG performance (i.e., KPIs shown below) post-investment is to be monitored by the Sustainability Committee. Performance results regarding the sustainability/esg of IIF and MCUBS IIF and MCUBS set "the goal of sustainability" to "monitoring of the ESG factors of the fund by participating in assessments conducted by external evaluation institutions such as GRESB" and "utilization of the evaluation results for future improvements." Based on this goal, IIF has participated in the GRESB assessment since 2012 and disclosed the environment performance of the portfolio, implementation of stakeholder engagement, etc. to investors based on its framework. As the assessment result, it acquired Green Star for six consecutive years and was selected as the "Sector Leader" as the participant which achieved the best result in the Asian industrial sector in 2013. In addition to utilization of such external evaluations, IIF performs activities to improve the transparency of sustainability by disclosing the environmental and social efforts related to asset management, performance data of CO2 emissions, etc., policy of communication with stakeholders, etc. at the section "Activities for sustainability" in its website. In 2013, MCUBS became the first institution which signed the Principles for Responsible Investment (hereinafter called "PRI") among the J-REIT asset management companies and expressed its commitment to ESG investments as the early adopter. In 2016, it also became the first J-REIT management company which signed UNEP FI and United Nations Global Compact (UNGC). It is active as a member of the property working group (PWG) of each of UNEP FI (globally) and PRI (locally). We consider that the GRESB Assessment result of IIF and the commitments of MCUBS to PRI, UNEPFI, etc. mentioned above support their performance for sustainability as well as indicate their will to aim at further development and enhancement of their activities. 4 CSR DESIGN GREEN INVESTMENT ADOVISORY
(2) Opinion about the alignment of this PJ with the PI Principles and PI Framework as shown in the investment consideration process and commitment by IIF and MCUBS Alignment with the "Positive Impact Real Estate Investment Framework" We first confirmed the alignment of the investment consideration process and commitment of IIF and MCUBS with the contents of "Four Investment Objectives" and their "Guidance" shown in the PI Framework as follows. i) "Clarity of impact" (Definition contents in the guidance: "Does my impact-based approach clearly determine and describe my intended impacts and outcomes?") MCUBS positions this PJ as an activity for "Social" of ESG and aims at contribution to continuous development of the local community with the characteristics that this property provides support for small and medium-sized companies, mainly local manufacturers. MCUBS stated that the specific positive impact which it focuses on is "development of human resources for mid- and long-term industrial development and securing the places for technology succession" and that it will set and monitor the indicators mentioned below as the KPIs. MCUBS considers that the pursuit of this impact will contribute to achievements of the Target 8.3 "Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services" and Target 9.5 "Enhance scientific research, upgrade the technological capabilities of industrial sectors in all countries, in particular developing countries, including, by 2030, encouraging innovation and substantially increasing the number of research and development workers per 1 million people and public and private research and development spending" of SDGs. In addition, this property is a facility established and managed based on the direction of the lessee, Ota City, "support toward maintenance and development of industrial accumulation" as a part of the pursuit of the basic objective "city where its attractiveness and industries shine toward the world". As such, the pursuit of the positive impact by IIF and MCUBS matches the direction of the town management measures promoted by Ota City. Therefore, this PJ would contribute to the SDGs Target 11.3 "By 2030, enhance inclusive and sustainable urbanization and capacity for participatory, integrated and sustainable human settlement planning and management in all countries." Moreover, as this property is the first domestic private factory apartment which introduced the method of public-private partnership and the Development Bank of Japan will participate as the senior lender of this PJ, it also matches Target 17.17 "Encourage and promote effective public, public-private and civil society partnerships, building on the experience and resourcing strategies of partnerships." The positive impact which MCUBS focuses on in this PJ is also related to "Japanese execution guideline (3): Creating Growth Market, Revitalization of Rural Areas, and Promoting Technological Innovation" for SDGs announced by the 5 CSR DESIGN GREEN INVESTMENT ADOVISORY
Japanese government. The specific goals listed in this execution guideline are "create about 1,000 leading projects by regional core companies in 5 years at a pace of about 200 per year" and "increase the number of profit-making small and medium-sized companies/small-scale operators from 0.7 to 1.4 million by 2020." The impact "development of human resources for mid- and long-term industrial development and securing the places for technology succession" pursued by MCUBS also aligns with the achievement of this goal. Considering such positive impacts according to the PI Impact Radar (hereinafter called "PI radar") prescribed in the PI Framework, we are of the opinion that mainly the following impacts are applicable. Impact category: "Employment" and "Inclusive, healthy economy" Contents: development of human resources for mid- and long-term industrial development and securing the places for technology succession Key Performance Indicators (KPIs): Affordable rental area for small and medium-sized companies, number of employment maintained and created by tenant companies, and number of innovations made by and awards acquired by tenant companies MCUBS also considers the potential negative impacts of this PJ. MCUBS evaluates environmental and social risks and identified the following potential negative impacts through the Investment Committee according to the RPI strategy. MCUBS has set a response policy for minimization of each negative impact on these risks. Impact category: "Climate" Contents: Risk of an increase in CO2 emissions due to inefficient energy usage in this facility KPIs: Energy consumption intensity and CO2 emission intensity Impact category: "Soil" Contents: Risk of pollution in surrounding area due to hazardous wastes discharged from tenant plants of this property KPI: Hazardous waste discharge amount In addition to the above impacts, the possibility of deterioration of the surrounding environment caused by the noise, emissions exhausted and disorganized disposal of waste materials due to activities in the factories was considered as a risk particular to this facility, however, the regulations for each risk are in place, and based on the result from the interview with a property manager in charge of this facility, these risks have not caused any trouble to date, thus the possibility that these risks actually rise up to the surface as a negative impact is considered low. 6 CSR DESIGN GREEN INVESTMENT ADOVISORY
As for the Climate impact, we consider that it could have Clarity of impacts in more comprehensive way when including the energy consumption not only onsite but also offsite such as for transportation used in commute to the building as a scope of the impact. Since the main measure to access to this building is private automobiles, taking initiatives to mitigate the impact from the transportation (i.e., introduction of alternative transportation) is suggested in the future stage of managing the asset. As stated above, IIF and MCUBS considered and identified potential positive and negative impacts of this PJ. The time when MCUBS made investment consideration of this PJ is mainly before the announcement of the PI Frameworks, but we evaluated that similar impact identifications as using "PI radar" were performed in the environmental and social risk evaluation process conducted by MCUBS. Based on above, we consider that this PJ aligns with the purpose "Clarity of impacts" shown in the PI Frameworks. ii) "Market and sustainable return" (Definition contents in the guidance: "Does my investment approach meet market norms and fiduciary standards while tangibly contributing to sustainable development?") IIF and MCUBS made the investment decision of this PJ through the highly transparent investment decision-making process clearly predefined and publicly announced. In this process, the investment was judged to be able to pursue the impacts which can contribute to sustainable development "development of human resources for mid- and long-term industrial development and securing of the place of technology succession," which characterizes this PJ as well as achieve the market-level return. In this PJ, while rent levels offered to end tenants are affordable utilizing subsidies by Ota City, the direct tenant is Ota City itself with high creditworthiness and the lease contract is as long as about 20 years. Moreover, IIF has adopted the mechanism of securing a preferential negotiation rights to acquire the whole property at the future price lower than its acquisition price of the SPC. This PJ is also positioned as a part of the "Public Real Estate (hereinafter called PRE ) development" strategy of IIF and MCUBS, and considered to generate advantages in the future investment strategy of IIF. Based on above, we consider that this PJ aligns with the objective "Market and sustainable return" shown in the PI Frameworks. iii) "Measurement of impact" (Definition contents in the guidance: "Do I have clear and transparent methodology(ies) to measure ex-ante and ex-post the expected outputs, and intended outcomes?") As confirmed in "Clarity of impacts", MCUBS defined the KPIs for the positive and negative impacts of this PJ as follows. 7 CSR DESIGN GREEN INVESTMENT ADOVISORY
Positive impact: "Employment" and "Inclusive, healthy economies" KPIs: Affordable rental area for small and medium-sized companies, number of employments maintained and created by tenant companies, and number of innovations made by and awards acquired by tenant companies Monitoring policy: It is planned to monitor the first two indicators by questionnaires with tenant companies through the property management company, Nomura Real Estate Partners, and the third indicator by the investigations through Web pages of tenant companies, Ota City, etc. Negative impact: "Climate" KPIs: Energy consumption intensity and CO2 emission intensity Monitoring policy: As of now, the energy consumption status of this property is not grasped clearly, but it is confirmed that this facility considers low carbonization such as adoption of LED lighting in the whole building and introduction of renewable energy by solar panels installed on the roof. In addition, it is planned to adopt the environment performance management system based on the framework of GRESB, grasp the performance, and make improvements continuously after the investment of this PJ. Negative impact: "Soil" KPI: Hazardous waste discharge amount Monitoring policy: As of now, the possibility of soil contamination of this property has turned out to be low, but it is planned to continue to monitor and manage the hazardous waste discharge amount after the investment of this PJ. IIF and MCUBS expressed its intention to continue to disclose the measurement results of these indicators. Based on above, we consider that this PJ generally aligns with the purpose "Measurement of impact" shown in the PI Frameworks. However, as of now, MCUBS does not commit to the clear numerical target of the impact pursued by this PJ. We recommend MCUBS to set the targets to be achieved for the defined indicators as early as practically possible after execution of this PJ by IIF. iv) "Additional finance and/or impact flows" (Definition contents in the guidance: "Has this approach enabled my institution to go beyond a business as usual or best practice as usual trajectory has it yielded impact and finance flows which otherwise would not have been delivered? Does it cover underserved markets?") 8 CSR DESIGN GREEN INVESTMENT ADOVISORY
As mentioned above, IIF and MCUBS consider that this PJ will contribute to the activity of "PRE development," which is a part of investment strategy of IIF and expand the future acquisition opportunities of PREs. It is recognized as the policy agenda by the Japanese government to quantitatively/qualitatively expand the domestic real estate transaction market by expansion of the PRE market and to promote utilization of private capital, etc. by public institutions such as municipalities which require efficient financial management. It is the first case in Japan that a PRE investment was positioned and announced as "positive impact investment" for sustainable development of the society, which will contribute to the construction of a new public-private finance flow. Also, MCUBS considers that a PRE investment such as this PJ by a J-REIT assuming long-term ownership will construct a win-win relationship of provision of a stable place for long-term activities of administrative body as the lessee. We consider that the influence of such a pioneer activity by a listed REIT with certain presence in the domestic real estate market like IIF is difficult to quantify but has a certain impact on the market and is meaningful as a valuable pioneer case. Based on these, we consider that the "Additional finance and/or impact flows" of this PJ shown in the PI Frameworks is difficult to measure quantitatively but this PJ generally aligns with the objective. Alignment with the "Principles for Positive Impact Finance" We also confirmed that this PJ aligns with the four principles of the PI Principles (i.e., "Definition," "Frameworks," "Transparency," and "Assessment") in the process of confirming consistency between the contents of this PJ and the "Four Objectives" of the PI Frameworks described in the preceding sections. "Principle 1. Definition" As confirmed in "Clarity of impacts," MCUBS considered and identified the positive and negative economic, environmental, and social impacts of this PJ and judged that it can positively contribute to the economic and social aspects and its potential negative environmental impacts can be managed and mitigated. As confirmed in "Market and sustainable return" this PJ is considered to achieve positive social impacts and market-level economic return. Judging from these analysis, we consider that this PJ is a finance project with net positive impacts in terms of economy, environment, and society. Based on above, we consider that this PJ aligns with the contents of Principle 1. "Principle 2. Frameworks" This PJ is considered and decided to invest based on the framework of the RPI strategy defined by MCUBS. In addition, as confirmed in "Measurement of impact," MCUBS is planned to set appropriate indicators, methods, etc. to measure impacts for monitoring. Based on above, we consider that this PJ aligns with the contents of Principle 2. 9 CSR DESIGN GREEN INVESTMENT ADOVISORY
"Principle 3. Transparency" IIF and MCUBS secure the transparency of governance regarding investment decision-making and publicly announce sustainability policies and practices through disclosure materials such as their websites and reports. Also, they have committed to announce the results and performance of impacts generated by this PJ through such materials to secure transparency. Based on above, we consider that this PJ aligns with the contents of Principle 3. "Principle 4. Assessment" As confirmed in "Clarity of impact" and "Measurement of impact," the policy was expressed to monitor the pre-identified impacts, measure the actual impacts and evaluate them in-house in this PJ. However, third-party evaluation the impacts achieved are yet to be considered. Based on above, we consider that this PJ generally aligns with the contents of Principle 4. Conclusion We are of the opinion that IIF and MCUBS have a robust governance system and excellent performance for sustainability and the investment consideration process executed and commitments expressed by them for this PJ align with the PI Principles and PI Framework. 10 CSR DESIGN GREEN INVESTMENT ADOVISORY
Disclaimer No part of this written statement may be reproduced, reprinted and published without our permission. This written statement aims to provide information only. Neither the information nor any opinion expressed constitutes a recommendation or an invitation to make an offer, to buy, sell or deal with any securities or other financial instrument. We are not liable for any induced consequences or damages when third parties use this written statement to make any kind of decision or action. This written statement was prepared based on the information which IIF and MCUBS made available to us. We do not guarantee the accuracy, comprehensiveness and trustworthiness of the information. About CSR Design Green Investment Advisory, Co., Ltd. CSR Design Green Investment Advisory, Co., Ltd.(CSR Design) is an independent consulting firm/think-tank which provides advisory services on ESG integration into real estate investment management, as well as research on policies and investor trends related to green buildings and sustainable finance globally and locally. CSR Design has thorough knowledge and expertise on ESG aspects in the real estate industry as proven by assuming the role of recommended advisor for GRESB, the global standard for ESG benchmark for real estate. CSR Design s CEO, Ryuichi Horie contributed to development of Positive Impact Real Estate Framework as a Member of Advisory Group of UNEP FI Property Working Group as well as assumes the position of chairperson for the property working group of PRI Japan Network. For more information: http://www.csr-design-gia.com/english/ For inquires, contact: gia@csr-design.com 11 CSR DESIGN GREEN INVESTMENT ADOVISORY