"There are way too many environmental standards for real estate"

It was a good thing that the urgency of global CO₂ reduction was placed high on the agenda again in ‘Glasgow'. But it is all by far not fast enough for Derk Welling. As a Senior Responsible Investment & Governance Specialist he and his colleagues verify every real estate investment made by APG on sustainable criteria. And that is a major challenge.

“Of course it's a good thing the world is forcing us again to face the facts of having to reduce the global CO₂ emission really very quickly,” says Welling looking back on the international climate summit in Glasgow. But if you ask him point blank, things are going far too slowly. “APG is convinced that we shouldn't wait for new regulations to be implemented, but that we have to assume the challenge ourselves and take our corporate social responsibility. That is also what people expect from us. It is a pity that we meanwhile have such an enormous number of global environmental standards in the field of real estate, some two hundred all together. This means people do not see the wood for the trees anymore. Moreover, such a large number of standards gives rise to divergent interpretations and, as a result, in greenwashing. We really need unequivocalness. That is the reason why we partly initiated a standard such as the Carbon Real Estate Monitor. That standard shows the amount of CO₂ and kWh a country is allowed to emit or consume annually per square meter per type of real estate up to 2050 in order to remain within the objectives of the Paris Climate Agreement. This CRREM aims at the establishment of a global standard used to measure to what extent a real estate object meets the Paris Climate Agreement.”

What is the contribution of real estate worldwide to the climate problem?

“It is definitely one of the most polluting industries. That is why it has our full attention. Buildings are globally responsible for approximately 30 percent of the overall CO₂ emission. And account for 40 percent of the energy demand! Fortunately, the awareness of truly having to do something about it now is increasing. Also within APG. When I started working here four years ago, our Global Responsible Investment & Governance team had thirteen employees and has meanwhile expanded to 28. And that is highly necessary, as we verify all investment plans in different sustainable criteria. That is part of the policy of APG and its customers: we assess every investment based on risks, returns, costs and ESG. These factors are also mutually influencing. Some real estate investments also increase in value as sustainability increases.”

How does APG ensure that it continues to make progress when it comes to sustainability?

“We have been using the Global Real Estate Sustainability Benchmark (GRESB) since 2009, a commonly used standard for the assessment of real estate investments. That standard was developed by APG in 2009, together with a number of other organizations. GRESB is perfectly suited to measure the sustainability performance of real estate investments. More than 55 percent of our real estate investments are meanwhile scoring four or the maximum five stars. Maybe even more important is that we make participation in GRESB mandatory for any new investments. As of last year, we also commit to the CRREMM, the standard we developed in collaboration with PGGM and other investors. Through so-called pathways, or CO₂ reduction pathways, it is possible to see how much energy a building is allowed to consume. This is a way to reverse-calculate if and when the insulation in a building should be improved.”

What are the benefits of the above for APG as an investor in concrete terms?

“Well, it allows us, for instance, to set requirements in advance for the real estate we are willing to invest in. For our investment VIA Outlets, among other things known for Batavia Stad, we have paid a lot of attention to the sustainability performance and imposed some requirements in that respect. VIA Outlets is now challenging the clothing stores in their outlets to make their business operations more sustainable. This is a way, as an investor, to contribute to the process of companies integrating sustainability into their processes. It should further be added that in practice we often work together with other investors which means we sometimes also have to convince those other parties. We are, in principle, never the sole investor in a fund.”

So, APG wants to see the sustainability performance of real estate in which an investment is made or not made. Are the building owners or the managers or tenants of all of those buildings cooperating adequately when it comes to providing the proper sustainability data?

“That is indeed a challenge. We often hear that parties have no insight into the energy consumption of buildings. That is way too easy for me. From own experience, I know it sometimes requires having to go to much greater lengths. In some countries data on energy consumption by private tenants and companies are considered too privacy sensitive. That to me is one of the reasons to make an increasing use of certified data in the future. Not just at portfolio level, but even at building level. A daunting task as APG is globally investing in about one hundred thousand buildings.” 

This means you strive for insight into all the climate effects of each of those buildings. Surely, that is an impossible task?

“Yet, we have already come a long way. We have created a database containing the geo-coordinates of all the buildings we invest in. Our asset managers provide a quarterly update on those data. We are able to zoom in up to street level. We then look locally into the influence of climate change. Think of tornadoes, floods and forest fires; disasters caused by climate change that can damage or destroy the properties.

In addition to these physical risks, we are now also expanding the database with the CO₂ emission and the kWh energy consumption per square meter of the building. This provides us with a proper overview of the climate risks in our portfolio. We also use these data to engage in conversations with the local manager and the real estate companies to see whether they share our vision. This to understand to what extent they are working on making the portfolio Paris proof and whether they also take into account the physical consequences of climate change.” 

Isn't it true that real estate owners will also be able to trade CO₂ rights soon?

“Yes, preparatory work is currently undertaken in European context. In such Emission Trading Scheme real estate owners, given a certain CO₂ limit, will be able to purchase rights to emit more CO₂ where needed. If one emits less than the rights obtained, it will be possible to sell those rights. This means the polluter will pay the bill. We obviously want to prevent us from ending up in that situation with regard to our real estate investments.”

By what long-term megatrends is APG guided when selecting real estate investments?

“In addition to the climate developments, we are of course also looking at the trends in the field of demography and technology. People live longer, live at home for longer; that increases the demand for care homes and facilities for senior citizens. A migration into cities is witnessed in many countries. At the same time, Corona makes others look for the space available in rural areas. The question where people want to live, work and shop eventually determines the demand for buildings. Besides that, technological trends such as digitization and e-commerce are of major influence. The latter trends increase the demand for distribution centers and data centers for example, in which we also invest. We follow the trends in innovation, such as increasingly more efficient solar panels on building facades.”    

Do you already abstain from real estate in areas that are threatened first by the rising sea levels?

“We have identified the extent to which all buildings we have invested in are exposed to climate change. For that purpose, we look at nine different risks at building level. In the event of major risks, we want to know whether possible floods for instance have been considered. These risks are also taken into account for the anticipated returns. In addition, we are currently investigating how countries and cities are handling climate adaptation. We also want to start considering those country risks. The reason we invest is to offer a stable pension to the 4.7 million Dutch people who have their pension invested through us. We invest globally, so if there is a hurricane or flood in the United States can also have an impact on our investments.”

Do such climate actions also offer new investment opportunities?
“Absolutely. We invest, among other things, in a fund focusing on making older offices more sustainable. That is a good and responsible investment as the CO2 emission is reduced and we generate a good return. In other words: the energy transition imposes a risk on the one hand, but also offers opportunities on the other hand.”

What does APG do to encourage the pension industry in making real estate investments more responsible?
“Well, increasingly more is happening at the moment and as an investor of pension funds, we can play a booster-role towards sustainability. We are also regularly approached by other pension funds and administrators asking us about our strategy. These other parties like to learn from us, as we are considered a frontrunner in this area. We are happy to share our knowledge and experiences, because we accomplish a whole lot more together. Moreover, we sometimes bump into one another as joint investors in a certain real estate investment. The more time we spend together, the larger the flywheel effect. There is still a lot of work to be done in making real estate more sustainable, but we are definitely moving into the right direction.”