Energy transition and risk management: a new insight

​The loss in value of property with an excessive carbon footprint is poised to have a negative effect on the returns on pension fund portfolios. Energy neutrality is set to become the standard in the property world, says Hans op ’t Veld.

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​The announcement, eighteen months ago, that PGGM would start halving the carbon footprint of its property portfolio evoked mixed reactions at the time. There was enthusiasm, particularly from a sustainability perspective. But there was also criticism: Would the aim to achieve sustainability not detract from the financial performance, and was the level of ambition not much too high? Moreover, hadn’t all the funds and companies in which PGGM is investing already been focusing on sustainability for a long time and weren’t they aware of the CO2 emissions down to the last gram?

Since then, we have developed some necessary progressive insight. In terms of performance, partly as a result of the Paris climate agreement we now realise that the energy transition is unavoidable and that property will have to play a major role in this development. It has become obvious that, in the long term, property must start making a positive contribution to the global energy system.

This means that property with an excessively large carbon footprint will start losing value over time. The speed at which the process takes place will depend on the (chosen) speed of the energy transition and the nature and intensity of the related measures. It is also certain that this will affect PGGM’s customers. Both the nature of the liabilities of PGGM’s clients and the fact that property is built to last contribute to this. In principle, a new building that is completed today in the Netherlands could function as long as a 21-year-old participant might be part of a pension fund.

In terms of risk management, therefore, it is important to pre-select investment portfolios now that there is as yet relatively little discrimination between valuations of those properties that are sustainable and those that are not . A number of companies have since acknowledged this and aim to do more than reduce their footprint. In March, listed British company Hammerson even announced that it wanted to achieve a ‘net positive’ contribution by 2030, which is less than thirteen years away.

It is interesting that Hammerson not only involves that part of the property that it controls financially – just as most other real estate parties actually do – but also the behavior of the tenants, as well as the (sub) contractors during development projects. This is a fundamental difference, given that sixty percent of the energy is consumed by the tenants and is therefore not reported in the landlord’s figures.

Hammerson is the first property company in the world that has committed to a strategy in which it is regarded as business-critical to (partly) base management of the company on sustainability factors. Hammerson is part of the property portfolio of the PGGM Listed Real Estate Fund. The company owns large shopping centres in France and the United Kingdom, as well as in outlet centres (such as an interest in Batavia City in the Netherlands).

Hammerson’s shopping centres are located at central positions in urban areas. The quality of these shopping centres and the stability of the rents that are partly driven by the locations, are generating excellent yields for the pension funds for which we are investing the capital. This particularly applies to promising locations that didn’t yet have high-quality shopping areas, such as Croyden and Brent Cross in London and Terrasses du Port in Marseille. The revitalisation of these types of locations in growing and dynamic urban environments is presenting us with very attractive opportunities as an investor.

Our discussions with the chairpersons of the Board of Directors and the Supervisory Board have shown that this vision is primarily dictated by considerations of risk management. The chance that the company has to deal with the consequences of a difficult energy transition is simply too big for them.

Experiences in countries such as Australia show that this danger is real. For example, in February 2017 during a heatwave in South Australia, areas in cities suffered a number of power outages because of the excess demand for air conditioning (and hence power). Shopping centres in South Australia were unable to open and suffered significant sales losses.

In contrast, other cities such as Sydney – where the electricity supply was not disrupted – the shopping centres were busier than ever because people went there to stay cool. These are the risks and opportunities that Hammerson is now addressing by anticipating them ahead of time. The management expects the strategy to contribute to the performance by lowering the portfolio’s risk. Incidentally, academic research has also shown that sustainability lowers risk.

The Hammerson case demonstrates that the intention to halve the footprint by 2020 is not overly ambitious, nor should it affect performance negatively. What’s more: Hammerson has since moved the goalposts on this target. It is our expectation and hope that others will follow. That will help us to enter a new era in which energy neutrality is no longer just a noble ambition but is the new de-facto standard. We will urge other parties to display the same courage and to set out their ambitions so that they become tangible objectives. Given the nature of the investments in property and the horizon of PGGM’s customers, we believe that this development is inevitable.

Head of Responsible Investment

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