abrdn European Logistics Income | ESG

The Board believes that integrating environmental, social and governance (ESG) best practice into the Company’s strategy, operations and ASI’s investment processes will help to generate strong, sustainable, returns for its shareholders and investors over the long term.

ASI views the management of ESG issues as a fundamental part of its business. As a real estate investment and asset manager, it recognises that while real estate investment provides valuable economic benefits and returns for clients it has, by its nature, the potential to affect environmental and social outcomes. ASI has committed to:

• Identifying, assessing, monitoring and controlling environmental, societal and regulatory risks at key stages of the investment, development and asset management operations;
• Ensuring effective governance and responding to, and complying with, regulatory requirements in every country in which it operates;
• Sharing its knowledge and engaging with central government, with local government and with other bodies in order to encourage best practice in the market and to steer government policy; and
• Working in partnership with key stakeholder groups – our investors, occupiers, employees, suppliers and the communities the Company and ASI serve.

The Company believes that comprehensive assessment of ESG factors leads to better outcomes for shareholders and adopts ASI’s policy and approach to integrating ESG. A key element of this is the employment of ASI’s ESG Impact Dial – a proprietary research framework - in support of investment strategies, underwriting decisions and the asset management approach. ASI has identified a range of key forces for change - Environment & Climate, Governance & Engagement, Demographics and Technology & Infrastructure - which together form the basis of the ESG Impact Dial. These guide the prioritisation and integration of ESG factors at the Company and property level, whilst providing a structure for engagement with, and reporting to stakeholders.

ASI makes use of the expertise within its ESG Real Estate team and is actively engaged with the European Union, national governments and industry working groups, including a number of Green Building Councils, the Global Real Estate Sustainability Benchmark (GRESB), the UK Better Building Partnership and the UN Principles for Responsible Investment (UN PRI). This ensures that it can help to formulate government policies and that its management teams are well informed of future government intent and market direction.

ASI has adopted the 2017 EPRA Sustainability Best Practice Recommendations Guidelines (sBPR) to inform the scope of indicators that it reports against. ASI has reported against all EPRA sBPR indicators that are material to the Company.

How ESG policies are integrated into real estate management is becoming increasingly important. In general, investors have become more ethically and environmentally conscious and take a far more holistic approach to their investments. Global environmental targets and legislation at a national and European level are also pushing the boundaries for ESG integration.

Buildings, by their nature, are energy intensive. From the carbon used in bricks, concrete and steel, to day-to-day running costs, all have a direct impact on the environment. Unlike shares and bonds, properties are tangible assets that people can see, visit, work and live in. How they look, how they operate and how they are managed affects occupiers, employees, landlords, investors, and the local community.

Research has shown though that investors do not all share a common view when it comes to managing assets. Some traditional investors are more focused on financial returns Although many now take a more responsible investment approach where they are primarily driven by financial returns whilst also taking ESG factors into account. Others are seeking to make a positive impact and see financial returns and ESG concerns as equally important considerations.

The four ‘forces for change’ Investors also differ on what specific ESG factors they view as important. For example, some may be particularly concerned about limiting any damage to the environment but they may consider social aspects to be of less importance. ESG concerns can also vary by location and geography. Investors in the UK may have different priorities from those in Scandinavia, Germany or in the US. And those with global aspirations may differ again.

The four forces naturally encompass a diverse range of topics and concerns. Our Investment Manager has translated and codified these into its investment approach, while also aligning them to the UN Sustainable Development Goals. It believes that these forces will shape the future and, in turn, shape our long-term approach by guiding how ESG factors are prioritised at the Company and asset level.

ASI created a new, bespoke solution for investors that enables it to dial ESG aspirations up or down based on investors’ desired outcomes. When it comes to integrating ESG into real estate, its house standard will be the absolute minimum policy that it would use for all mandates. This house standard focuses on avoiding undue risk when managing a real estate asset.

This strategy influences the assets ASI buys, how they are managed and the future plans for the asset. After that, investors can decide which of the ‘forces for change’ are key priorities for them and where on the ESG investment spectrum they aspire to sit. There is a sliding scale from acting to avoid harm or risk through to policies that benefit stakeholders; there are even strategies for those who want to drive innovative ESG solutions (where they aim to solve specific problems, or generate specific positive environmental or social impacts). Some investors may have a desire to be innovators for environmental and climate challenges, but may prefer to focus less on social and demographics.

Others may have different priorities. This bespoke approach also takes their risk profile into account and their target return aspirations for now and the longer term. Through ASI, ASELI is currently in the process of rolling out the ESG Impact Dial with training sessions for asset and property managers starting in the Netherlands with other countries following soon after. The outcome of this analysis will help the Company in formulating its main priorities, comparing this to a market benchmark which will ultimately result in asset level strategies. Topics of particular interest at this early stage are biodiversity, carbon emissions, data collection and tenant well-being.

The current portfolio has strong ESG credentials. Eight out of fourteen properties were brand new when purchased, meaning that from an environmental perspective these assets are already relatively high performing being constructed to recent high industry standards. Rolling out the ESG Impact Dial in 2021 is an important step to structure the thought process and create a structured focus for the Company from a top-down perspective.

The Company is also making its first steps in describing its path towards net zero carbon emissions. In the meantime, several initiatives have helped to contribute to better green performance resulting in a high GRESB rating (see below).

In the real estate market, GRESB is seen as the worldwide leading indicator to measure the green performance of a property portfolio against a peer group of comparable funds. This is an important measuring framework which can be used in conjunction with the ESG Impact Dial. In the 2019 GRESB survey, the results released in late 2020, saw the Company’s score improving from 2 to 4 Green Stars out of the maximum possible of 5, with a total score of 79 out of 100 points against 63/100 for the benchmark. The Company’s portfolio outperformed the benchmark in almost every category with maximum scores in 5 categories. It was particularly pleasing to see good performance with regards stakeholder engagement showing that ASI has worked closely together with tenants, bolstered by an annual tenant satisfaction survey. ASI has collected energy usage data on all the buildings in the portfolio and aims to collect similar data for all areas on a more frequent basis. More recently a consultant has been engaged to seek BREEAM in Use certificates for the buildings in Den Hoorn, Madrid and Warsaw.

The Company's GRESB scorecard, together with details of the Company's much improved GRESB score contributed by solar panel initiatives and structured data collection can be found on page 41 of the Annual Report (see the link above).

The Company has undertaken a review of materiality against each of the EPRA sBPR indicators. The table set out on page 42 of the Annual Report records the outcome of the review.

Reporting methodology - The Company was launched specifically in December 2017 to invest in logistics assets and, as a result, is not in a position to report on all indicators as determined in the materiality assessment. As the Company matures further reporting will be available.

Renewable energy - The Company and ASI have ambitions to reduce the carbon footprint of its buildings. Green energy produced by solar panels will not only help to contribute towards this ambition but has several other benefits. Buildings with green credentials are more attractive to tenants and easier to lease out. ASI will install further solar panels in 2021 at locations in Ede, Den Hoorn and Meung-sur-Loire where roof leases have been signed generating an additional income stream of almost €100,000 per annum.

Auditing and assurance - ASI has not currently sought third party assurance for the ESG data included in this report although this is something that ASI is looking at introducing in future years.

Energy Consumption, like-for-like - On a like-for-like basis energy consumption remained stable for the three warehouses in Avignon, Waddinxveen and Ede. ASI expects to include a larger number of buildings in next year’s analysis as the majority of the buildings in portfolio were developments with deliveries in the course of 2019 making it difficult to compare year-on-year.

Detailed reporting on energy consumption, absolute energy consumption, greenhouse gas emissions, absolute greenhouse gas emissions, water consumption and absolute water consumption as well as sustainability certifications for the properties in the Company's portfolio can be found on pages 43 and 44 of the Annual Report.