ESG Integration in Real EstateThe European investors’ view

UC Berkeley, 2 December 2010

Hans Op ‘t VeldHead of Listed Real EstatePGGM

2

Responsible Investing at PGGM

All investment activities in which environmental, social and corporate governance (ESG)

issues are consciously taken into account

All investment activities in which environmental, social and corporate governance (ESG)

issues are consciously taken into account

Responsible investment is one of our core Investments Beliefs: it is a necessity

Responsible investment is one of our core Investments Beliefs: it is a necessity

We want to integrate ESG factors in all asset classes and investment decisions

3

Integral approach towards Responsible Investing

ESG Integration in investment decisions•ESG factors in all investments

Exclusions•Based on our identity: weapons and human rights

Engagement & Voting•Active ownership: engagements to improve ESGperformance of companies/markets•Informed voting on all equities

Accountability•Inform stakeholders what we have done and why•Annual RI report; quarterly engagement reports •Transparency in holdings

RI Policy

Core themesClimate Change

GovernanceHealth careWeapons

Human rights

Integration RI in all asset

classes

4

Sustainability is wonderful…

5

…but other factors need to be taken into account too

Performance Prologis vs. FTSE EPRA/NAREIT Global Indexin US$, 31/12/2007 = 100

0

20

40

60

80

100

120

31-12-07 30-06-08 31-12-08 30-06-09

FTSE EPRA/NAREIT WorldPrologis

• Performance of property companies is dependent on a lot of factors i.e. availabilty of financing

• Independent of sustainability scores, companies face issues

• In this case: Logistics companies like Prologis are hit particularly hard by credit crisis by drop in global trade

Comments

ESG is onlyone factor in the investment

decision and should be evaluated as such

6

Sustainability: focus on risk and return

Return

Risk

Element

• Improve portfolio total return• Through better leases• Through lower vacancies• Through higher value

• Reduce risk of vacancies and soaring costs• Regulation

• Building codes• Taxation

• Tenant’ demands

Objective

Integrationin investment processis the real challenge

7

We engage with companies to improve ESG standards

Environmental

Governance

Actions Example

• Query companies on environ-mental factors

– Energy– CO2

• Measure environmental performance of companies and portfolio

• Engage with companies to improve governance structure

• Discuss issues with financial authorities where needed

• Liaise with trade organisations to improve self-regulation What are sensible

metrics to engage on?

for illustration

8

PGGM Real Estate has commissioned the Maastricht University to research sustainability of portfolio

• Maastricht University commissioned by PGGM, APG and USS to initiate an environmental real estate survey

• Focused on the main environmental aspects – energy – water – waste – CO2

• Data is collected to provide overview of entire portfolio:– Complete indirect property sector: listed and non-listed– Covering the main sectors: retail, office, residential and industrial

• Partnership with other investors and associations (EPRA, INREV and ACSI)

Focus of environmental study

Goal is to measure and to monitor the environmental

performance of the real estate portfolio

9

To measure is to know: are companies practicing what they are preaching?

• Do companies work with a policy regarding environmental aspects?

• What are the elements of such a policy?

• Do companies look at environmental aspects in portfolio decisions (i.e. in buying – holding and selling assets)?

• Are companies measuring the output?•CO2 emissions•Water use•Waste

• Is the output externally verified? •There are several rating standards

• Are ambitions formulated to drive down the environmental impact?

Implementation Policy

Promises, promises

Walking thetalk!

10

Focus on existing stock: 98% of portfolio

• The most sustainable real estate is no real estate

• Is adding new green real estate sustainable?• Not just real estate in isolation: but also environment to take into

account

• Or should we focus on improving existing stock?• Different metrics• Cost / benefit analysis of retrofitting

Since only 2% of stock is added yearly, focus should be on existing stock

Considerations