The deep impact of sustainability

The start of a new year can take time to really get going. More often than not, January is about regrouping, recalibrating and gearing up for the 12 months ahead. The return to work gently builds momentum as people return in dribs and drabs from extended festive breaks scratching their heads over much-needed double-shot Americanos as they struggle to remember passwords and logon details. But there has been something different about 2020. Companies, individuals, funds, investors and politicians alike were off the starting blocks almost as soon as the new year rang in. The obligatory “Happy New Year” small talk felt somewhat – and refreshingly – stemmed in favour of serious conversations and action across the board. From geopolitical issues to the state of the global real estate market, the dawn of a new decade seems to have brought with it a renewed, razor-sharp focus. And that focus has never been more intense when it comes to climate change and sustainability. Maybe it was the sight of the bushfires raging in Australia at the end of 2019 and into the new year. Maybe it is the surge of public anger, passion and calls for accountability. Maybe it is the realisation that the regulators will not stand for buildings that don’t meet new, more rigorous sustainability standards. Whatever the reason, 2020 has the potential to become the year that major players in the real estate sector start to take proactive responsibility for addressing climate change. Fifth Wall set the ball rolling when, just two weeks into 2020, the California-based VC firm made an announcement that put tech investment at the heart of tackling the problem. Epic scale “This is one of the biggest things to happen to real estate since the invention of the internet”. That was Brendan Wallace’s reasoning behind the launch of Fifth Wall’s $200m (£153m) Carbon Impact Fund in January. The VC’s co-founder and managing partner warned that this will be the year everyone realises that, above all else, climate change is “a real estate problem” as he urged the sector to prepare for a “pitchfork moment”. He adds that as the general public, financial markets and regulators become increasingly focused on climate change, real estate – as the single biggest culprit – no longer has a choice when it comes to addressing its carbon footprint. Those who don’t change will not only be hit with huge financial penalties but will have to face the wrath of the world. “The industry needs to do something,” says Wallace. “People will be looking at you and asking: ‘what are you doing?’ We don’t believe the real estate sector has a good answer to that. But when people realise how culpable the industry is, they will be angry, and they will want action. “We want to make the real estate industry more energy efficient than it is currently,” he adds. “Everyone on planet Earth is in the middle of this crisis and real estate owners haven’t accepted the responsibility they have. It is time. The real estate industry has to come together to solve this.” Given that Fifth Wall manages “a billion dollars’ worth of capital” from 52 real estate corporates across the world, it feels well placed to be the driving force behind bringing the sector together. That, says Wallace, is why Fifth Wall launched the Carbon Impact Fund. Led by venture partner Tyson Woeste, it will offer real estate companies the opportunity to invest in sustainable technology. “There is often a focus on transportation and plastics when we talk about the climate crisis,” says Woeste. “But they are a drop in the bucket compared to real estate. While businesses might not understand that yet, regulators certainly do and huge financial burdens will mean massive consequences for the sector.” The Carbon Impact Fund will operate in the same way as Fifth Wall’s previous two techn funds and will be built using investment from the largest real estate companies in the world. It will be broken down into four categories: decarbonisation; climate resilience – which will focus on technologies that manage and mitigate risk to prepare for future heat, water and fire stress; circular economy – to ensure materials are better reused within the sector; and general tracking and reporting – which will help the sector better understand the damage they are causing. Wallace argues that what the industry has been doing thus far to tackle climate change has been done on an “amateurish scale” and warns the current state of the world is all the evidence the sector should need that the time to change is now. “This is not just about saving money anymore,” he says. “It is imperative the entire sector accepts responsibility for being the single biggest contributor to the climate change crisis. “This is one of the most important fights of our generation. Australia is on fire, Brazil was on fire, and people are dying. If this is not your number one priority as a real estate owner, you have got your priorities wrong.” To send feedback, e-mail emily.wright@egi.co.uk or tweet @EmilyW_9 or @estatesgazette Putting our money where our mouths are It isn’t just Fifth Wall we have seen taking a stand this year. In February, Great Portland Estates announced it was putting its money where its green-talking mouth is with the signing of an innovative £450m ESG-linked unsecured revolving credit facility. The facility, which has been signed at a headline margin of 90 basis points over Libor with Santander, NatWest, Wells Fargo, Lloyds and Bank of China, has an initial term of five years with the option to extend to seven years. It is the first ESG-linked facility of its type to be signed by a UK REIT and will see GPE have to hit three clearly measurable key performance indicators designed to help it deliver on its sustainability strategy. Last October, Derwent London agreed a £450m revolving credit facility with a £300m “green” tranche. That “green” money will be used specifically to fund projects to meet its sustainability targets. That was the first revolving credit facility to be provided to a UK REIT that met the Loan Market Association’s Green Loan Principles. Nick Sanderson, finance and operations director at GPE, said: “We have come up with what we think is an innovative structure where we have implemented very clear and transparent performance KPIs that demonstrate we are seeking to align our sustainability strategy not just with specific projects but all the way across our business.” The three KPIs, all of which will be annualised over the life of the facility, revolve around energy usage, embodied carbon and biodiversity. The first will see GPE having to reduce its energy usage by 40% by 2030, a KPI which will include occupier emissions. The second addresses the industry-wide challenge of embodied carbon and sets a 40% reduction target across its new-build developments and major refurbishments by 2030. The third KPI is focused on increasing biodiversity net gain across the portfolio by 20%, also by 2030. If GPE exceeds its targets on all of the KPIs, the margin on the facility will decrease by 2.5 basis points; it increases by the same figure if it fails to meet targets. That margin change – regardless of direction – will be given by GPE to registered charities focused on environmental issues. GPE’s director of sustainability and community, Janine Cole, said: “When we developed these KPIs, the key was that they would drive real behavioural change, not just within our business but have them touch on our stakeholders as well.” She added: “These are challenging, but our view is that we have to push for this. And it is absolutely imperative that we do. We need to challenge ourselves and challenge our supply chain to deliver, and these are going to be key in supporting us to do that.” Sanderson said: “This is a clear statement of intent of where the social and environmental agenda sits within our broader strategic agenda. “We are realistic about the changes that we and others need to make, and that we won’t be able to do all of them overnight. Equally, we recognise that capital can get reallocated quickly.” He added that talking about initiatives and the sustainability agenda was easy to do, but said as an industry real estate needed to move into the “action stage”. “It is clearly the right thing to be doing from a moral perspective, but it is increasingly becoming the right thing to do from an economic perspective, because it will inform the decisions that occupiers take,” he said. “If you are not addressing these challenges then you are going to lose occupiers.” GPE will start measuring performance against each KPI from May 2021 and is keen to see its peers follow suit. “We’d be delighted if people copied this and will share the technology we have used around this facility, because we think it will drive continued behavioural change, not just within property companies but within their supply chain,” said Sanderson. He added: “It is pretty clear that as an industry there is a very important role, we all have to play in trying to address the many issues of the day, particularly around climate change.” The facility, which is available for general corporate purposes, includes GPE’s standard unsecured financial covenants and is an amendment and extension of its £450m facility signed in October 2018, which had a headline margin of 92.5 basis points over Libor. To send feedback, e-mail samantha.mcclary@egi.co.uk or tweet @samanthamcclary or @estatesgazette