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 carboninvestment game
Green gold in real estate: a public markets case
SUSTAINABLE REAL ESTATE SECURITIES STRATEGYGreen real estate securities outperform
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.
Return - Risk Comparison
TOTAL
RETURN
MEAN
ANNUAL
RETURN
VOLATILITYSHARPE
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
0
50
100
150
200
250
300
350
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
• 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
Backtested Global Performance
PLEASE REFER TO BACKTEST DISCLOSURES.
ESG INVESTMENT PROCESSWide range of ESG key performance indicators (KPIs)
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
Each KPI is scored 0-10 and a weighted aggregate score is calculated
ESG INVESTMENT UNIVERSEExamples of Alpha Pool companies with moderate to high ESG scores
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.
Boston Properties(BXP US)
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$B) : 20.0
Expected Return : 4.6%
Gross Div. Yield p.a.: 2.3%
P/FFO : 21.5x
Leverage : 49.2%
Entra(ENTRA NO)
Leading Norwegian real estate company focused on flexible and green office space in central locations
Over 70% of space is let to companies in public sector
High portfolio occupancy, long average lease of close to 8 years
Dominant market position, focus on acquisition and value add development projects
ESG Factors:
Focus on environmental, health & safety, anticorruption and business crime
Targets BREEAM standards, specific targets for energy & water consumption reduction by 2017
ESG score: 7.5
Market Cap (US$B) : 2.0
Expected Return : 8.5%
Gross Div. Yield p.a.: 3.8%
P/FFO : 15.4x
Leverage : 45.2%
City Developments(CIT SP)
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%
Getting to carbon zero: a passive approach to learn
the climate investment
A passive ESG strategy tackling climate change
• 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
Investment Case About the Index
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
Zero Carbon Index
Create an index with a zero carbon footprint and strong ESG profile
without any bias
Core portfolioLow Carbon
Create a « Low Carbon » portfolioWith a strong ESG profile
using a best-in-class approach
International ex-renewable companies
Size & liquidity filters
Best-in-class filter based on:
~ 150 stocks
Low Carbon + Strong ESG scores
Satellite PortfolioSolution Providers
International renewable companies
Create a diversified portfolio of companies involved in clean and
renewable energy
Filter of the renewable universe based on size and liquidity criteria
1. Market cap ≥ $300M2. Free float ≥ $100M
3. Liquidity: 3 month ADV ≥ $3M
IPCM collects and/or estimates avoided emissions
~ 20 stocks
Avoided Emissions
+ =
~ 170 stocks
Zero Carbon Footprint
Parallel Approach
Carbon footprint
1. Financed Emissions
2. Carbon Intensity
ESG Scores
North America
EurozoneEuropeDeveloped
Market
Latin America
Japan
EuropeEmerging Market
Asia Pacific
ex-Japan
Emerging Market
Asia Pacific ex-Japan
Developed Market
Middle East & Africa
Brick construction
Objective
Investment Universe
Filteringcriteria
Index Construction
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 yearin 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 wantto 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.