TH Real Estate has made a public commitment to reduce the energy intensity of its entire global equity portfolio by 30% by the year 2030, based on a 2015 baseline. This responds to and supports the ambitious goals for sustainable real estate established at the 21st annual Conference of Parties (COP21) held in Paris in 2015.
Preparing for Tomorrow’s World
De-risking for investors
Demonstrating good asset management
Showing sustainability leadership
Contributing to global CO2 reductions
TH Real Estate is one of the largest real estate investment managers in the world, with equity investments in nearly 900 office, retail, industrial and residential assets globally. Through its Tomorrow’s World approach, TH Real Estate integrates environmental, social and governance principles into its investment strategies and business operations.
At COP21, ambitious goals were established to limit global warming to 2 degrees and strive towards 1.5 degrees. It is estimated that real estate is responsible for about 40% of global CO2 emissions. These emissions arise from onsite fuel usage (such as gas for boilers) and from the use of electricity and other energy sources.
As a sustainability leader, TH Real Estate reviewed the implications of COP21 across its global equity portfolio.
Discussions with teams across the business, including investment, sustainability and research, revealed consensus for a science-based target covering all funds, not only those where investors have expressed a strong interest in sustainability. This is in line with the Tomorrow’s World philosophy, ensuring that assets are ready for the heightened pressures, growing responsibilities and new opportunities in the markets of tomorrow, so that TH Real Estate consistently outperforms. Setting a science-based target is simply good asset management, as failure to prepare for the implications of COP21 now would be letting investors down and risking stranded assets.
TH Real Estate commissioned sustainability consultants Verco to establish a reduction target in line with the science-based approach. Verco applied the Sectoral Decarbonisation Approach methodology, released by the Science Based Targets initiative. This splits the global economy into sectors, each attributed their portion of the world’s 1,000 gigatonne carbon budget for 2011-2050 and set a decarbonisation pathway.
Following this review, TH Real Estate made a public commitment in March 2017 to reduce the energy intensity of its global equity portfolio by 30% by the year 2030, based on a 2015 baseline. Energy intensity is measured by the asset’s use of kilowatts per hour, per sq ft1.
TH Real Estate is currently going through the process of having the target accredited by the Science Based Targets initiative and expects this to be complete in early 2018.
The basis for setting the target is that improving the energy efficiency of the portfolio is always associated with a payback based on energy savings and also that it future-proofs the assets as market expectations on energy performance continue to evolve. Therefore, while there are costs associated with specific activity, the business case for these is always proven.
 This is measured by kWh of ‘electricity equivalent’ (kWhee) of whole building imported energy use per sq ft. The numerator is calculated by adding kWh of imported electricity to kWh of any imported fuel multiplied by 0.4 and kWh of imported hot or chilled water multiplied by 0.5kWh. The kWhee energy metric enables direct aggregations of building energy use and comparisons of efficiency across international property portfolios. The denominator represents the gross internal floor area of space to which TH Real Estate supplies energy.
How to apply the science-based methodology across a diverse international portfolio?
There were two main challenges in applying the Sectoral Decarbonisation Approach:
TH Real Estate plans to engage with the Science Based Targets initiative on the methodology.
How to achieve reductions in a fast-changing portfolio?
When TH Real Estate modelled the target assuming a fairly modest portfolio churn (around 10% of assets bought or sold per year), only 15% of the properties it owns today will still be in its equity portfolio in 2030. The firm’s acquisition strategy is therefore key to meeting the target, particularly from 2020. To integrate sustainability into acquisitions, the Head of Sustainability sits on the Investment Committee. Throughout the acquisition process, they work with the due diligence team to gather information on energy efficiency, exposure to climate change impacts, flood risks, land contamination, climate change legislation risks (e.g. Minimum Energy Efficiency Standards in the UK) and other sustainability factors. They then put a paper forward to the Investment Committee outlining whether the acquisition is supported or not and, if it is supported, whether there are caveats and items that need to be included in the business plans. The risks relating to energy efficiency will increase in the run-up to 2030.
How to achieve reductions in individual buildings?
TH Real Estate has a strong track record of delivering energy reductions in buildings, e.g. realising its 2007 target to reduce US energy consumption by 20% by 2020 ahead of schedule. The team is investigating various technologies to support the 30% reduction target, e.g. reviewing costs to install smart energy metering and management systems in around 25 office and retail assets across Europe and Asia Pacific. There are a further 40 properties in the USA where similar solutions are being investigated. The main challenges in installing these new technologies relate to lease arrangements and the split incentive, where the property owner pays for retrofits but does not benefit from energy cost savings, which accrue to occupiers. Whilst this is not an insurmountable challenge, leasing rules are particularly complex in some countries, and this slows down progress.
Head of Sustainability
TH Real Estate
Abigail Dean, Head of Sustainability, TH Real Estate
“This target is in line with current industry interpretations of climate change science, and means that our business is playing its part in the global movement to limit global warming to 2 degrees and strive towards 1.5 degrees, as agreed in the Paris Accord. Over time, we will continue to review our targets to ensure they meet global best practice.”