Building climate smart real estate & infrastructure into your portfolio presentation to IFSWF members by Paul Clements-Hunt The Blended Capital Group June 20, 2017
What the presentation will cover: The Big Picture: Cities, infrastructure, real estate and sustainability Game changer: How policy is changing the carbon investment game Green gold in real estate: a public markets case Getting to carbon zero: a passive approach to learn the climate game Climate smart infrastructure: where equality, environment & investment meet
The Big Picture: Cities, infrastructure, real estate & sustainability
The Big Picture: Cities, infrastructure, real estate and sustainability 7.5 billion people on the planet with 60% living in cities with an expected increase to 9 billion plus by 2050 and rising to 70% urban population The number of megacities with 10 million+ has jumped from 14 in 1995 to 29 in 2016 77 million people migrate from rural areas to cities each year Properties consume 40% of world energy and generate 30% of greenhouse emissions USD50 Trillion of investable real estate assets worldwide Real estate companies & funds: 1.2% reduction in energy consumption; 2% reduction in GHG emissions; and 1% reduction in water use.
Game changer: How policy is changing the carbon investment game
Green gold in real estate: a public markets case
SUSTAINABLE REAL ESTATE SECURITIES STRATEGY Green real estate securities outperform A backtest based on a sustainable real estate securities universe (of companies with above average ESG scores) compared to historical performance of the global real estate index demonstrated an average outperformance of 5.9% over the benchmark index 350 300 Backtested Global Performance 250 200 150 100 50 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Green Real Estate Securities Universe Global Real Estate Securities Index Return - Risk Comparison TOTAL RETURN MEAN ANNUAL RETURN VOLATILITY SHARPE RATIO MEAN EXCESS RETURN (ANNUAL) BETA GREEN REAL ESTATE SECURITIES UNIVERSE 223.4% 11.3% 21.3% 0.53 5.6% 1.050 GLOBAL REAL ESTATE SECURITIES 77.5% 5.4% 19.9% 0.27 Source: Bloomberg, La Française Forum Securities. As at December 31, 2016. Note: Global Real Estate Securities Index = FTSE EPRA/NAREIT Developed Index USD (Bloomberg Ticker = RUGL Index). All index performance figures are quoted in USD GROSS OF FEES. All figures are reflective of a proprietary backtest. Backtested performance does not represent actual results. Actual results can differ significantly from the backtested returns being presented. Methodology includes daily rebalancing and excludes foreign exchange hedging and transaction costs. PLEASE REFER TO BACKTEST DISCLOSURES.
ESG INVESTMENT PROCESS Wide range of ESG key performance indicators (KPIs) Each KPI is scored 0-10 and a weighted aggregate score is calculated ENVIRONMENT Green Building Opportunities: Certification, Energy Reduction, Geographic and Portfolio Exposures, Green Leases, Waste Management, Tenant Outreach Carbon Management Approach: Exposure, Recognition, Rationale, Initiatives, Management, Reporting, Outlook Carbon Efficiency Latest: Intensity Scope 1&2 CO₂ MT/ USDm. Carbon Efficiency Trend: Change in Intensity Scope 1&2 CO₂ MT/ USDm. Toxic Emissions Management: Indoor VOCs, Outdoor emissions Water Efficiency Management: Water Withdrawal Intensity m³/usdm, 5yr Change in Water Withdrawal Intensity, Exposure, Initiatives, Outlook Environmental Pillar: Overall Policy, Executive Oversight, EMS, Awards, Green/Brownfield Sites
ESG INVESTMENT UNIVERSE Examples of Alpha Pool companies with moderate to high ESG scores Boston Properties Entra (BXP US) (ENTRA NO) City Developments (CIT SP) US landlord and developer of quality urban offices with a costal markets focus Good capital allocator with ability to do JVs with large partners; currently building one of the largest projects in the country (Salesforce Tower in San Francisco) Strong balance sheet and quality mgmt. team Overdone fears of a pronounced slowdown in core urban markets provide a good entry point ESG Factors: Recognized for corporate environmental responsibility: Leader in the Light Award, GRESB Green Star, Green Lease Leader and Energy Star certification executive member Targets min. LEED Silver certification on developments ESG score: 6.3 Market Cap (US$B) : 20.0 Expected Return : 4.6% Gross Div. Yield p.a.: 2.3% P/FFO : 21.5x Leverage : 49.2% Leading Norwegian real estate company focused on flexible and green office space in central locations Over 70% of space is let to companies in public sector High portfolio occupancy, long average lease of close to 8 years Dominant market position, focus on acquisition and value add development projects ESG Factors: Focus on environmental, health & safety, anticorruption and business crime Targets BREEAM standards, specific targets for energy & water consumption reduction by 2017 ESG score: 7.5 Market Cap (US$B) : 2.0 Expected Return : 8.5% Gross Div. Yield p.a.: 3.8% P/FFO : 15.4x Leverage : 45.2% Leading Singapore developer with over 50 years track record Global presence in residential, commercial and hotel sectors Focused on investing in China, UK, US, Japan and Australia through growing its funds management business and prime assets ESG Factors: First Singapore company to be listed on all 3 of the world s top sustainability benchmarks Invests 2-5% of construction costs on green innovation Carbon reduction targets set at 22% by 2020, 25% by 2030 with net zero carbon emissions on corporate office Environmental, health and safety assessment system & awards for contractors & suppliers ESG score: 8.4 Market Cap (US$B) : 6.0 Expected Return : 24.1% Gross Div. Yield p.a.: 0.9% P/FFO : 26.6x Leverage : 31.2% Source: La Française Forum Securities Research, Inflection Point Capital Management, Bloomberg. As at Jan 31, 2017. Note: Non-contractual and for informational purposes only. Examples are non-binding as to future investments and depend on market conditions.
Getting to carbon zero: a passive approach to learn the climate investment
A passive ESG strategy tackling climate change Investment Case About the Index The Zero Carbon Indices offer exposure to a broad and diversified selection of companies that have demonstrated carbon footprint and ESG leadership when compared to peers. The Zero Carbon indices do not avoid or underweight any sector but rather aim at selecting best-in-class players while neutralizing regional and sectoral biases. The Zero Carbon Indices are particularly suited to investors seeking to: Reduce the carbon footprint of their investments Invest in ESG leader Without compromising with relative performance To build the Index, we use a positive screening methodology to review c. 3000 international companies The Index identifies companies that satisfy both of our criteria: The most carbon-efficient The ESG leaders The Index selects companies within the first quartile of its peer group on both Carbon & ESG indicators Within each cluster (regional/sector) of the stocks universe, selected companies are weighted based on their score The Index is rebalanced on a quarterly basis. The changes are implemented on the first working day of January, April, July and October of each year
The CZ Index design in a nutshell Parallel Approach Core portfolio Low Carbon + = Satellite Portfolio Solution Providers Zero Carbon Index Objective Create a «Low Carbon» portfolio With a strong ESG profile using a best-in-class approach Create a diversified portfolio of companies involved in clean and renewable energy Create an index with a zero carbon footprint and strong ESG profile without any bias Investment Universe Filtering criteria International ex-renewable companies Size & liquidity filters Best-in-class filter based on: Carbon footprint 1. Financed Emissions 2. Carbon Intensity International renewable companies Filter of the renewable universe based on size and liquidity criteria 1. Market cap $300M 2. Free float $100M 3. Liquidity: 3 month ADV $3M North America Eurozone Asia Pacific ex- Japan Developed Market Brick construction Japan Europe Developed Market Latin America Asia Pacific ex- Japan Emerging Market Europe Emerging Market Middle East & Africa ESG Scores IPCM collects and/or estimates avoided emissions Index Construction ~ 150 stocks Low Carbon + Strong ESG scores ~ 20 stocks Avoided Emissions ~ 170 stocks Zero Carbon Footprint
Climate smart infrastructure: where equality, environment & investment meet
Up to 2030 the world needs to invest 3.8% of GDP equivalent to USD 3.3 trillion a year in economic infrastructure simply to keep up with expected growth rates; Current estimates have the infrastructure gap at USD 350 billion a year but if we want to deliver the UNSDGs that triples to a gap in excess of USD 1 trillion a year; Mature infrastructure (stage 4) in developed markets is equivalent to a «coupon clipping» exercise for asset owners; However, investment in greenfield and early maturing infrastructure (Stage 1-2) in the emerging markets is where the greatest need is requiring the highest risk appetite: The problem of timid capital? Desperate need for new, de-politicized public-private models to initiate projects; A new role for SWFs working with National Development Banks and international private capital with a risk appetite? The need to recycle infrastructure debt more rapidly; New opportunities associated with smart, resilient cities benefiting from technology leaps from metering to decentralised energy.