Environmental, Social and Governance Policy
This Environmental, Social and Governance Policy applies to LXi REIT plc (the “Company”) and all its subsidiary companies (both directly and indirectly held) (together, the “Group”).
The Board of Directors, together with the Investment Advisor (together, “we”) have a responsibility to conduct the Company’s investment business in a socially responsible way and we recognise that our investors may have the same values.
We seek to provide shareholders with regular, attractive income, together with capital growth over the medium term in accordance with the Company’s investment policy and objective which this policy does not alter or supersede. This policy documents the Company’s commitment to and process of carrying out investing activity at the lowest possible cost to or indeed to the benefit of the environment and society as a whole.
We recognise that our investment activities directly and indirectly impact the environment. We are committed to managing the Company’s environmental impact in the most effective and responsible manner and seek continuously to improve our level of environmental performance.
Where consistent with the Board’s fiduciary responsibilities, we reduce the carbon footprint of assets coming under our ownership and encourage our tenants, developers and other service providers to do the same.
Where appropriate, we engage specialist consultants to evaluate the sustainable characteristics of properties as part of our pre-acquisition due diligence, identifying risks to future financial performance and exploring opportunities to create additional value or to improve environmental performance. We also endeavour to assess the impact of new acquisitions on the overall environmental performance of the fund.
We will not ordinarily acquire buildings that fall short of our minimum standards unless we are able to demonstrate that affordable improvements can be made. Our minimum standard varies between built and forward-funded new asset acquisitions due to the difference in influence that we are able to exert.
We would not ordinarily acquire built assets, for example, with an Energy Performance Certificate (“EPC”) rating lower than D without having an affordable plan in place to improve the rating during the period of the Group’s ownership.
Where we forward fund new developments, we use our influence to encourage the tenant, developer and contractors to consider sustainability-related matters in the design, construction and fit-out of buildings. We ensure the environmental performance of new developments to exceed the minimum standards laid down by building regulations and planning policy. New commercial buildings acquired should have a BREEAM rating of at least “Very Good”.
We expect all new buildings to have Energy Performance Certificates rated at C or higher and that the design will incorporate enhanced insulation, advanced energy efficiency and a suitable range of water-saving features.
Aside from managing assets in an environmentally responsible manner, we see sustainability as both a threat and an opportunity. There is a risk that the future value of some properties may be adversely affected by issues of sustainability and that potential tenants that share our values would be minded against the occupation of a building with a comparatively negative impact on the environment. We have systems in place to enable us to monitor and then manage these emerging risks as part of our overall approach to risk management.
Conversely, we believe that some assets may experience positive change in value as a result of the move towards a lower carbon economy and the increase among our tenants (or potential tenants) to value buildings that have a comparatively positive impact on the environment. As such, we prioritise assets that already demonstrate strong environmental performance or where opportunities to improve it are identified.
Sustainability is considered under these key headings:
- Financial performance
- CO2 emissions
- Physical risks
Some of these issues may have implications for the future financial performance of the Group. Others relate to “best practice” and social responsibility but we would not expect them to have an impact on the Group’s financial performance. Our policy is intended to:
- Promote environmental protection;
- Promote pollution reduction;
- Promote sustainable development;
- Anticipate future policy impacts;
- Identify risks from the physical impacts of climate change and develop mitigation strategies; and
- Promote reduction of waste.
Due to the ever-changing nature of sustainability we will continue to improve and update the relevant criteria that are used within the investment process
While keeping our focus on maximising individual assets’ financial performance, we take account of our sustainability objectives by incorporating them into our business planning and reporting. By integrating such issues into the investment appraisal process we aim to minimise downside risks and capitalise on opportunities for enhancing returns wherever possible.
We assess the likely implications of climate change related government policies on each individual asset and on the overall performance the Group.
In particular, we identify properties where there is a risk of losing income from existing tenants through migration to properties with better environmental qualities and quantify the potential impact of lower than average tenant retention rates, longer voids and higher costs on projected income returns.
We ensure that risks from sustainability-related issues are consistent with our defensive strategy for investing and reducing over-exposure to sustainability-related risk, during asset allocation and stock selection decisions and in the day to day management of the portfolio.
We identify the cost of improvements that may be required, either to protect the future quality of an asset or as a result of statutory interventions and ensure that they are properly reflected in individual asset management plans.
We monitor the emerging impact of sustainability-related issues on values and will amend performance projections in the light of hard evidence as it emerges.
Energy is the most significant contributor to CO2 emissions from the built environment and during the building of new forward-funded assets and we are committed in promoting reduction of consumption.
The Company does not directly operate or manage its assets. Therefore, we have no direct control over the way that energy is used by our tenants and have no ability to improve energy efficiency as responsibility for buildings has been devolved to our tenants. In spite of this we will engage with our tenants to encourage the more efficient use of energy and to promote energy efficiency improvements.
A number of tenants are obliged to provide details of consumption and some large organisations are unable to identify consumption at individual buildings where they are part of a large operational estate. We do, however, identify tenants who are likely to have the highest levels of consumption using generic data. For these buildings, we undertake a high-level assessment of energy efficiency and identify ways in which energy efficiency can be improved.
Where a Cost Benefit Analysis suggests that energy savings are proportionate to the costs, we invite tenants to undertake a more detailed assessment and give favourable consideration to applications for consent to alter.
We recognise that, after the consumption of energy, the most significant source of CO2 emissions is from transport and that assets which are less accessible, based on the criteria set out below, may prove less attractive to occupiers and as a result be less desirable to occupiers for whom energy cost is a consideration and/or to those that share our values.
We consider the accessibility of all assets as part of our investment due diligence.
There is no common measure of accessibility, but our analysis is based on three factors:
- Distance from public transport. Over-reliance on private transport generates higher emissions than properties which are well served by public transport. Offices, hotels and retail properties which are more than one kilometre from suitable public transport may be considered “inaccessible”.
- Congestion. Properties which rely on road transport (distribution facilities, retail warehouses, industrial properties) should be within easy reach of the national motorway network and accessible from a major trunk road without being ensnarled in stationary traffic. Properties which are more than a 15-minute drive-time from the nearest motorway or major trunk road may be considered “inaccessible”.
- Car parking. The adequate provision of car parking can be a major contributor to the value of properties. Under-provision, displacing vehicles into neighbouring streets, will have a negative impact on the quality of the surrounding area. Over-provision may encourage the unnecessary use of private transport. Buildings which differ +/- 20% from local standards may be considered “inaccessible”.
We recognise that some property is at risk of flooding and that, in some locations, the risk of flooding may worsen over time as a result of climate change-related issues. In some cases, the risk is not reflected in current market values but that may change.
We identify which assets are at risk from flooding and forecast the extent to which values may be compromised. We can then ensure that the exposure of the Group as a whole is consistent with our appetite for risk.
On acquiring new assets, we have regard both to the impact of flood issues on the future performance of each asset and its impact on the overall exposure of the fund as a whole to flood-related risks.
We recognise that water is a scarce commodity in some regions and that, over time, scarcity is likely to affect an increasing number of territories. We consider ourselves to be under an obligation to use all natural resources, including water, responsibly.
To this end, we promote the use of water-saving measures in areas of our buildings devolved to our tenants and, where we retain direct responsibility for the use of water, measure our consumption and explore ways in which it can be reduced at all our assets.
We encourage our tenants to identify water saving measures that can be achieved at little or no cost. We also evaluate the cost and likely return on more significant measures. We then set targets for year-on-year reductions.
We also have regard to water saving opportunities during the regular repair, refurbishment and replacement of water-related services.
We support the principle of “re-use, recycle, reduce” and its application to waste.
We encourage our tenants to recycle waste and to reduce waste sent to landfill sites.
We recognise that the largest impact we can make on the environment is through influencing the behaviour of others – our tenants, our developers, our other service providers.
We ensure all our counterparties are aware of our policy, objectives and targets and that relevant individuals have the knowledge and skills necessary to implement the strategy in their day-to-day roles. We provide appropriate training to our staff.
Through our procurement policies and practices, we encourage all our counterparties to minimise the negative impact of their operations on the environment.
We engage with our tenants to encourage the sustainable management of areas under their direct control. We encourage tenants to make improvements to energy efficiency and, where appropriate, prepare high level “sustainable design guides” for tenants’ reference in preparing plans for fit outs and periodic refurbishments.
We identify tenants whose businesses are most influenced by sustainability-related issues and who have the most advanced Environmental Policies and explore ways in which tenants’ aspirations to reduce carbon emissions are consistent with the social and financial objectives of the Group.
Shareholders: As a public company listed on the London Stock Exchange, the Company is subject to the Listing Rules and the Disclosure Guidance and Transparency Rules. The Listing Rules include a listing principle that a listed company must ensure that it treats all holders of the same class of shares that are in the same position equally in respect of the rights attaching to such shares. We use our best endeavours to abide by the Listing Rules at all times.
Employees: As a real estate investment trust, the Company does not have any employees as all its functions are carried out by third party service providers. However, the Company has a Board of Directors who non- executive and receive fixed fee remuneration. Since all investment decisions have to be approved by the Board, they remain insulant to excessive risk taking which could potentially have harmful impact to the environment. The Company’s Board receive regular market and regulatory updates from its professional advisors such as the Investment Advisor, Broker and Company Secretary and attend seminars where required. The Company’s Board is comprised by three male directors and one female. Diversity is in the centre of the Company’s recruitment policy and future director recruitment processes will reflect this.
Tenants: The Investment Advisor performs extensive due diligence before a tenant is selected, and during the tenancy agreement we maintain a constructive relationship. We take into account our tenants’ changing needs and we use our expertise to assist them in any way within our ability.
Service Providers: A list of the Company’s key service providers can be found in Part 3 of the Company’s Prospectus (pages 58-60). The Company conducts all its business through its key service providers. Before the engagement of a service provider, we ensure that out business outlook as well as our values are similar. The Company performs an annual evaluation of all of its key service providers to ensure inter alia that our values remain aligned.
Our investing activities are overseen by the Investment Advisor, the Company’s Board of Directors and the Company’s AIFM, who work together to ensure proper execution of our investment strategy, consistent application of our policies, compliance with our procedures and compliance with local and regional regulatory requirements.
Our approach to good governance is set out in detail in our Corporate Governance policy and, for the purposes of this policy, is summarised below:
The Company was incorporated and registered in England and Wales on 21 December 2016 with registered number 21 December 2016 as a public company limited by shares. The Company is not authorised or regulated as a collective investment scheme by the FCA, however it is subject to the Listing Rules and the Disclosure Guidance and Transparency Rules. The principal legislation under which the Company operates is the Companies Act 2006. The Directors intend, at all times, to continue to conduct the affairs of the Company to enable to continue to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder).
Our governance model is designed to manage investment risk and operational risk.
The Company at all times invests and manages its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not at any time conduct any trading activity which is significant in the context of the business of the Company as a whole .
The Investment Advisor endeavours to follow best practice recommendations as established by EPRA and assesses operational risk on a continuous basis and reports regularly to the Company’s Board.
The Company’s Investment Advisor, LXI REIT Advisors Limited, is the owner of this policy. It shall be subject to annual review. The Investment Advisor, in consultation with the Board of Directors of the Company, shall have authority to vary this policy whenever necessary or appropriate.