IIGCC urges consideration of climate change risks to property investment value (EUR) Thursday 5 February 2009 |
| A new report entitled 'A changing climate for property investment, a trustee’s guide', published by the Institutional Investors Group on Climate Change (IIGCC), explores the contribution of property to climate change and highlights the risks to current and future property investment values and performance. |
Produced by the IIGCC’s Property Working Group, the report seeks to increase pension fund trustees awareness of the risks and opportunities associated with climate change and encourages consultation with property fund managers over possible strategies that can be undertaken to reduce the potential negative impacts of climate change on property values.
The IIGCC is a group of leading European investors collaborating to address investment risks and opportunities associated with climate change. The group represents a combined value of around €4 trillion (£3.78 trillion) of assets under management.
The report highlights the fiduciary duty and responsibilities held by both trustees and their real estate fund managers. It also provides the information needed to better understand the potential impacts and risks of climate change on property portfolios and its influence on current and future real estate values.
If the threats to property values highlighted in the report are ignored many property assets risk becoming more illiquid. Environmentally poor assets may experience further de-valuation, as their lower net rents are capitalised at higher yields. Owners and fund managers should therefore consider taking swift action, either through stock selection or cost effective asset management, to avoid these potentially damaging effects on investment values and performance.
As well as exploring the long-term physical impacts of climate change on property assets, investment values and performance, the report also provides a list of pertinent questions and suggested responses that trustees should ask of themselves, and their fund managers. The checklist will help ensure that these risks are not ignored and that responsible property investment strategies can be easily implemented to guard against asset depreciation.
The major risks to asset values and investment performance identified in the report can be summarised as follows:
- Property will be affected by a growing incidence of extreme weather events such as flooding, storm or heat stress.
- Governments will focus greater attention on properties as major energy users and will look to implement tighter regulations, through stricter building standards and “cap-and-trade”* schemes to force property owners and users to reduce carbon dioxide emissions.
- Shift in occupier sentiment - larger commercial property occupiers will increasingly ‘reject’ properties that are not socially or environmentally acceptable.
Simply understanding how values and investment performance might be affected by climate change and related government policy and social reactions makes for an ‘informed’ rather than ‘responsible’ property investor. The aim of the report is to provide trustees with the knowledge and impetus to take positive action now to futureproof assets. It encourages trustees to have a full and frank dialogue with their fund managers and advisors and implement responsible property investment strategies to ensure that such risks and opportunities are integrated into investment and property management decisions.
The report also recognizes that property is a significant contributor to climate change. Property assets can therefore provide occupiers and owners with a substantial opportunity to improve their environmental footprint, while supporting or enhancing total returns from investments.
For example, the UK Government’s Carbon Reduction Commitment, which comes into force in April 2010, may result in the most energy efficient buildings generating a new income stream. Reduced energy use will provide operational cost savings, plus surplus carbon credits that can be traded back to the government under the new cap-and-trade schemes.
Paul McNamara, Head of the IIGCC Property Working Group and Head of Property Research at PRUPIM said: “Property investments face a climate change double-whammy in the years ahead as global warming affects assets both physically and financially. The changing environment will be more destructive to buildings, potentially shortening lifespan and making maintenance more costly, while choosier tenants are less likely to occupy unsustainable buildings, lowering returns as a result.”
“Pension fund trustees should be asking property fund managers difficult questions about the extent to which they are addressing climate change issues when making investment decisions.”
Andrew Szyman, Sustainability Manager at F&C REIT Asset Management and co-author of the report commented: “Institutional investors and trustees have crucial parts to play in this arena as they have the capacity to select and influence the way their fund managers administer their commercial property assets. By highlighting the risks and opportunities of climate change within a property investment context, the aim of this report is to stimulate interest and generate clear and authoritative mandates for action.”
David Russell, co-head of Responsible Investment, USS, added: “This report is an important guide for pension funds with existing or potential investments in property funds or assets. As a long-term investor, we are concerned with the contribution of buildings to climate change, as well as the impact of climate change and related policy on our investments in this asset class. The report supports an active approach towards the responsible management of our property investments.”
Source: IIGCC
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