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Responsible Investing
Aiming for a net zero carbon real estate portfolio
In 2017, Nuveen Real Estate made a public commitment to reduce our energy intensity of our global equity portfolio by 30% by the year 2030, based on a 2015 baseline. Richard Hamilton-Grey provided detailed insights on our commitment on a webinar hosted by Principles for Responsible Investment in February. Below are the key takeaway points from the webinar.
How has Nuveen Real Estate supported the goals which were established at the 21st Conference of the Parties (COP21) in 2015?
Our energy reduction target was set in line with climate science and was our first step towards a long-term energy reduction target. It aims to optimise the landlord procured energy use intensity across our portfolio, with an overall purpose of reducing obsolescence risk and ensuring that value creation opportunities on the shift to a low carbon economy are fully capitalised upon. We have deployed a series of energy optimisation products across our portfolio, focused on fine-tuning the operational performance of the assets (usually resulting in energy savings of between 10-20% without additional capex). In 2018 we undertook an RFP across our entire European and Asia Pacific portfolio for such solutions in order to take further.
We are now moving beyond just those areas served by landlord procured utilities, to develop a net zero carbon strategy which covers the whole building – including both landlord and tenant consumption. Although we have already adopted this approach across several assets, we want to scale-up at pace. The net zero carbon strategy will focus on funds which represent assets located in Europe, due to the maturity of transition risk to a low-carbon economy within the European market. We are analysing the intervention packages which are needed for assets to achieve a net zero carbon status and will pilot these before applying more widely. The modelling includes a focus on building optimisation, as well as other intervention packages which focus primarily on the electrification of heat and on-site renewables (in addition to low-hanging fruit such as LED upgrades)
Which types of real estate are in scope and which are out of scope?
Our 2030 energy intensity reduction target applies to all global equity investments – office, retail, multi-family, industrial and alternatives – across the United States, Asia Pacific, and Europe.
New acquisitions enter our target modelling once they have stabilised (if a development) and when we can establish a robust baseline (usually 15 months post acquisition). We structure our managed assets across a set of three tiers – each tier represents the materiality of the assets by total energy spend and energy use intensity.
Our Tier 1 assets have a large energy spend and typically have a high energy use intensity, such as large multi-let offices or covered shopping malls. Conversely, our Tier 3 assets have relatively low energy consumption and energy use intensity. Our Tier 2 properties are somewhere in between. We apply a target to each tier to help us achieve the required 2030 reduction – which corresponds to a house-level 2% annualised reduction between 2015 and 2030.
It’s important to highlight the ability of the landlord to receive and analyse tenant data – this varies by asset type. In the majority of multi-let offices, the landlord is responsible for procuring the energy for the whole building, and so we have visibility of whole building energy usage. Therefore, our energy use intensity metric is calculated by dividing whole building energy consumption by the whole building floor area. However, for covered shopping centres, the landlord is usually only responsible for delivering heating and cooling to the mall area (although this can sometimes vary). Each of the tenants will directly procure their energy contracts, which means we can only report on the mall usage and calculate the energy use intensity by dividing the mall usage by the floor area of the mall.
What metric does Nuveen Real Estate use to measure progress, and what are the other options?
We considered three ways to set an energy use intensity target. The first consideration was a blended approach which would have become messy quite quickly - by effectively taking total energy use and dividing it by a range of different floor areas depending on the property – offering limited value in judging performance. The second option was a ‘like-for-like’ energy use intensity approach, however given the nature of our business, we are likely to only hold 10% of the property in 2030, that we do today. Again, this would offer limited value.
The final, and preferred, approach was a weighted index methodology. This model recognises that property is a heterogenous asset class with varying availability of tenant data. This approach groups assets into benchmark categories based on simple characteristics, such as the coverage of energy data (effective metering is key) and property type. Individual targets are set for each asset class and aggregated up to a house level. Each benchmark category is then assigned a weighting in index points, in accordance with its energy materiality. For example, if benchmark group ‘air-conditioned offices’ represents 50% of the total Nuveen energy usage, this group is allocated a 50pt weighting in the index. Therefore, if the ‘air-conditioned offices’ benchmark group achieves a 10% reduction, this equals a 5pt reduction overall.
We used this weighted index methodology to develop our 30% reduction by 2030. To achieve this reduction, we need to move the index position from 100pts (in the 2015 baseline), to 70pts in 2030.
What is your baseline, how did you choose it, and how far away are you from reaching the target?
For our 30% reduction by 2030 target, we settled on a 2015 baseline. The business went through several changes prior to this time where the European and Asia Pacific portfolio (previously the real estate arm of Henderson Global Investments) merged with U.S. Insurance and Annuities company – TIAA. Both portfolios now operate under the investment management arm of TIAA – Nuveen. We have essentially gone from managing c.$15 billion of real estate assets to $115 billion within four or five years. Given that our global platform consolidation around this time, this was the first time we had a global, consolidated, and standardised overview of our energy data.
Our approach for meeting the target is a combination of both asset management and in/(di)vestment strategy. From an asset management side, we have scaled up our global energy performance programme using a suite of market-leading providers, who are tailored to our house and fund-level requirements. These providers use cutting-edge technology, behavioural change programmes and deep technical insight to ensure we operate our buildings as efficiently as possible. From a net zero carbon perspective, we expect this provides us with around a quarter of what we need.
Beyond this we are undertaking deep retrofits across our funds - where mandates exist - in line with global best practice, as demonstrated in Australia. We are one of the Design for Performance Pioneers – an initiative to reduce the ‘performance’ gap between a building’s designed and operational performance – into our major renovations and new constructions. One challenge we face is that the supply chain to deliver transformative performance is still emerging. We can clearly only implement the Design for Performance standards at certain stages in the asset lifecycle – the opportunity for deep retrofit of our existing stock doesn’t come along all that often, therefore it’s key that we get it right, when the opportunity arises. Again, from a Net Zero Carbon perspective, deep retrofits should provide another quarter of what we need.
In countries with carbon intensive electricity grids, as part of the deep retrofits, we are considering heat pumps to electrify our heat. The economics can stack-up, however we need to consider the plant replacement as well as the distribution systems which can significantly increase costs. This can address the carbon associated with heat.
We are also considering renewables across the portfolio and are not convinced proximity to site is the essential factor. This is a nice-to-have, rather than a must-have. We are exploring robust corporate purchase-power agreements which link back to the generators of electricity and allow us to avoid double counting our emission reductions. We still believe more work is needed to transparently differentiate between commitments that organisations are making here.
Our approach also starts before asset ownership. We work with the fund teams at the point of asset acquisition to ensure assets either meet our efficiency standards already or can be viably improved to meet them. Energy audits are built into the acquisition process, as well as improvement measures into cash flows over the hold term.
What role does renewable energy play?
We need to determine the target energy use intensity of each asset, in order to achieve a net zero carbon portfolio, as this target will determine the correct asset management approach and scheduling of intervention packages prior to renewables deployment. The Dutch Green Building Council have provided indications of a ‘Paris compliant’ energy use intensity for different asset types. For offices, this is set at 60kWh/m2 (NLA) by 2050.
We believe there are a series of intervention packages which can be considered before renewables. For example, first we need to execute ‘easy wins’ such as building optimisation solutions which are simply focusing on ensuring the central plant and terminal units are running effectively (i.e. the chillers and boilers are coming on and off when then need to and the distribution systems are performing at a well-regulated level), or LEDs. Then there are more capital-intensive intervention packages which include upgrading HVAC. The next include heat pumps which are focused on the electrification of heat – this is crucial from a carbon perspective.
On-site photovoltaics (PV) then come into play. There are some key pre-requisites for successful PV – roof size, roof condition, and position of the roof. For industrial or retail parks, there is usually a good commercial case, depending on jurisdictional differences with regards to incentives and the ability of the landlord to sell energy to the tenant. However, a high-rise office in a CBD, with limited roof space, is going to struggle. There is technology developing which involves the integration of PV into facades, and over time I expect that this will become more commercially attractive. If on-site PV isn’t an option, an asset management firm or REIT could invest directly into a wind farm and secure the energy that way. It could also get a Power Purchase Agreement (PPA) in place to have confidence in the renewable provenance of that energy source. In countries such as France, where the electrical grid is already heavily utilising renewable sources, there may be limited incentive to install renewables further, since any residual energy consumption at the building will be low carbon anyway.
Can you suggest any good resources or initiatives for people to find out more information about net zero carbon strategy?
Net zero carbon was not on the table a year or two ago. It was not even in the room. The market has moved quickly. Asset owners, managers, and occupiers are all demanding change. Thankfully, we have been preparing for this acceleration to a low carbon economy for some time and therefore we are well positioned to capitalise on the significant value creation opportunities ahead.
As previously raised, a key first step in developing a net zero carbon strategy is determining the target energy use intensity of each asset within your portfolio, to then create a tailored schedule of intervention packages. We think the most credible approach is the Dutch Green Building Council’s method, although U.K. Green Building Council and others are also developing their thinking in this space.
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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof.
Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate.
This information does not constitute investment research as defined under MiFID.
This material may contain “forward-looking” information that is not purely historical in nature. Such information may include projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, certain historical performance information of other investment vehicles or composite accounts managed by Nuveen may be included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Nuveen to be reliable, and not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Company name is only for explanatory purposes and does not constitute as investment advice and is subject to change. Any investments named within this material may not necessarily be held in any funds/accounts managed by Nuveen. Reliance upon information in this material is at the sole discretion of the reader. Views of the author may not necessarily reflect the view s of Nuveen as a whole or any part thereof.
Past performance is not a guide to future performance. Investment involves risk, including loss of principal. The value of investments and the income from them can fall as well as rise and is not guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate.
This information does not constitute investment research as defined under MiFID.