Schroder European Real Estate | ESG

The Board and Schroder Real Estate Investment Management Limited (‘SREIM’) believe that corporate social responsibility is key to long term future business success and that a successful, sustainable investment programme should deliver enhanced returns to investors, improved business performance to tenants and tangible positive impacts to local communities, the environment and wider society.

The importance of environmental and social changes are investment factors that the Board and SREIM must understand to protect Company assets from depreciation and optimise the portfolio’s value potential.

Offering occupiers resource-efficient and flexible space is critical to ensure our investments are fit for purpose and sustain their value over the long term. As a landlord, we have the opportunity to help reduce running costs for our occupiers, increase employee productivity and wellbeing, and contribute to the prosperity of a location through building design and public realm. Ignoring these issues when considering asset management and investments would risk the erosion of income and value as well as missing opportunities to enhance investment returns.

Through its construction, use and demolition, the built environment accounts for more than one-third of global energy use and is the single largest source of greenhouse gas emissions in many countries.

The industry’s potential to cost-efficiently reduce emissions and the consumption of depleting resources, combined with the political imperative to tackle issues such as climate change, means the property sector will remain a prime target for policy action. This presents new challenges and opportunities for the real estate industry with profound implications for both owners and occupiers.

In recognition of these responsibilities SREIM joined other members of the Better Buildings Partnership (‘BBP’) in September 2019 to sign the Member Climate Change Commitment. The first stage of this commitment is for all signatories to determine a pathway to Net Zero Carbon during 2020. The full wording of the Commitment is at https://www. betterbuildingspartnership.co.uk/node/877.

SREIM is evolving its investment philosophy to incorporate ‘positive impact’ investing, this aims to proactively take action to improve social and environment outcomes. Its four Pillars of Impact: people, place, planet and prosperity are referenced to the UN Sustainable Development Goals and used to consider impacts for funds and assets.

A good investment strategy must incorporate environmental, social and governance factors alongside traditional economic considerations. The Board and SREIM believe a complete approach should be rewarded by improved investment decisions and performance.

Further information on SREIM’s Sustainable Investment Real Estate with Impact approach and its Sustainability Policy can be found at https://www.schroders.com/en/uk/realestate/ products--services/sustainability/.

SREIM, led by its Head of Sustainability and Impact Investment, and supported by sustainability and energy management consultancy Evora Global operates an Environmental Management System (‘EMS’). The EMS is aligned with the internationally recognised standard ISO 14001. The EMS provides the framework for how sustainability principles (environmental and social) are managed throughout all stages of its investment process including acquisition due diligence, asset management, property management provided by third parties, refurbishments and developments. SREIM reviews its Sustainability Policy annually which is approved by the Investment Committee. Key aspects of the Policy, performance against 2019’s objectives and targets, as well as objectives and targets for the year ahead, are set out below.

SREIM’s process requires annual fund strategy statements and business plans to include sustainability considerations and an Impact and Sustainability Action Plan to be prepared for all acquisitions.

Property managers play an integral role in supporting the sustainability programme. SREIM has established a set of Sustainability Requirements for Property Managers to adhere to in the course of delivering their property management services. This includes a set of key performance indicators to help improve the property managers sustainability related services to the Company and which are assessed on a six-monthly and annual basis. SREIM is pleased to report that CBRE and Apleona, two of its principal property managers, have been assessed and performed well against key indicators.

Objectives and targets

Impact assessment SREIM in evolving its investment philosophy to incorporate ‘positive impact’ investing, with the aim to proactively take action to improve social and environment outcomes, established four Pillars of Impact; people, place, planet and prosperity with key performance indicators for each pillar. The pillars are referenced to the UN Sustainable Development Goals 8 Decent work and economic growth, 11 Sustainable Cities and Communities and 13 Climate Action.

SREIM has developed an impact measurement framework to assess impacts within portfolios. This framework supports analysis of social aspects of which examples include tenant satisfaction, selection of suppliers, enhancements to amenities at and around buildings and community support and involvement together with environmental aspects for example energy reduction and use of renewables. An impact baselining exercise supports improvement opportunities across SREIM’s sustainability programme and for the Company supports impact aims and targets for 2020. This initial baselining exercise has been completed and the results reviewed to identify risks and opportunities in order to set improvement targets for 2020.

Energy and GHG emissions

Energy and GHG emissions Active management of energy consumption and greenhouse gas emissions is a key component of responsible asset and building management. Improving energy efficiency and reducing energy consumption will benefit tenants’ occupational costs and may support tenant retention and attraction, in addition to mitigating environmental impacts and helping to future-proof the portfolio against future legislation. Therefore, where the landlord retains operational control responsibilities, SREIM monitors the Company’s energy usage and efficiency on a quarterly basis. SREIM has set an energy and greenhouse gas emissions reduction target of 3% for its German portfolio for the three years to 2020/21 against a 2017/18 baseline, and which includes the assets of the Company. SREIM is in the process of establishing targets for the Company’s other assets and countries, where relevant (i.e. where there are landlord energy management responsibilities).

In support of achieving these targets and improving the efficiency of the portfolio, SREIM has continued to work with sustainability consultants Evora Global and the property managers to identify and deliver energy and greenhouse gas emissions reductions on a cost-effective basis. The programme involves identifying and implementing improvement initiatives, where viable.

SREIM can report a 9% reduction in like-for-like landlord procured energy for the Company between the reporting years 2018/19 and 2019/20. Energy performance improvement initiatives are considered for directly managed assets. Energy performance improvement initiatives undertaken during the financial year which have contributed to energy and GHG reductions include LED upgrades and replacement of defective window systems.

For detailed energy performance data covering the reporting period and the prior year, please see the EPRA Sustainability Reporting Performance Measures.

Energy Performance Certificates (‘EPCs’) for the operational portfolio are regularly reviewed. The EPC profile for the portfolio is set out within the EPRA Sustainability Reporting Performance Measures. SREIM has an objective to procure 100% renewable electricity for landlord-controlled supplies. At 31 March 2020, 19% of the electricity procured on behalf of the Company was procured through a renewable tariff.

Net Zero Carbon Pathway

SREIM joined other members of the BBP in September 2019 to sign the Member Climate Change Commitment. The first stage of this commitment is for all signatories to determine a pathway to Net Zero Carbon during 2020. The commitment also includes developing climate change resilience strategies for portfolios and to determine consistent industry disclosure on climate change risks in line with industry standards, including the TCFD. The BBP commitment is an extension to SREIM’s sustainability programme and the BBP will be supporting members through development of their pathways and all aspects of the commitment over the course of 2020 and beyond.

Water

Fresh water is a finite resource of increasing importance for the environment and society and reductions in consumption can deliver operational cost efficiencies. SREIM monitors water consumption where the landlord has supply responsibilities and encourages active management of asset-level consumption. Where the Company had such responsibilities, a 27% reduction in like-for-like water consumption is reported for the year 2019/20 compared to 2018/19. This reduction is driven by one asset (Paris Saint-Cloud) where significant improvements have been made to the operation of air conditioning equipment.

Waste

Effective waste management decreases pollution and resource consumption, as well as improving operational efficiency and associated costs. To this end, waste should be minimised and disposal should be as sustainable as possible. SREIM therefore has an objective to send zero waste direct to landfill and to achieve optimal recycling. During 2019/20, the Company sent zero waste direct to landfill, 29% of waste was recycled or composted and 71% incinerated with energy recovery.

SREIM seeks to deliver developments and refurbishments to sustainable standards and deliver good performance against building certifications, including EPCs and BREEAM (the Building Research Establishment Environmental Assessment Methodology: an environmental assessment method and rating system for buildings). Standards required are set for each project in context for the asset and SREIM’s guiding principles for projects of minimum D rated EPCs and BREEAM Very Good.

During 2019/20 SREIM completed BREEAM In Use assessments including one for the Company to consider the contribution of the scheme to enhancing asset sustainability credentials. BREEAM In Use is a third-party assessment and certification of a building’s operational performance against nine environmental categories: Energy, Water, Transport, Management, Waste, Pollution, Health & Well-Being, Land Use & Ecology and Materials. The framework supports the overall sustainability programme for the Company with improvement actions integrated into the responsibilities of SREIM property managers.

The real estate industry has a good appreciation of the importance of the built environment on human health, wellbeing and productivity. There has been considerable development on what building aspects matter and certification schemes, including the Well Building and Fitwel Certifications, support landlords and tenants to address these. SREIM is working to embed this aspect into its investment process, especially in relation to refurbishments and developments.

SREIM seeks active engagement with tenants to ensure a good occupational experience to help retain and attract tenants. As the day-to-day relationship is with the property manager, the Property Manager Sustainability Requirements include a key performance indicator on tenant engagement.

SREIM believes in the importance of understanding a building’s relationship with the community and its contribution to the well‑being of society. Positively impacting on local communities helps create successful places that foster community relationships, contribute to local prosperity, attract building users and ultimately, lead to better, more resilient investments. SREIM looks to understand and develop the community relationship to ensure investments provide sustainable social solutions for the long term.

Streamlined Energy and Carbon Reporting (‘SECR’)

An Energy and Carbon Report for the Company aligned with the UK Streamlined Energy and Carbon Reporting regulations is included in the Directors’ Report.

SREIM and its advisers continue to monitor requirements and guidance in relation to managing and reporting environmental matters and developments in legislation.

EPRA sustainability reporting performance measures

The Company Report includes environmental performance indicator data for the portfolio. The disclosures are aligned with EPRA Best Practices Recommendations on Sustainability Reporting 2017 and are included in the Company EPRA Performance Measures Report.

Global Real Estate Sustainability Benchmark

The Company participated in the annual Global Real Estate Sustainability Benchmark (‘GRESB’) survey for the Company in 2019 achieving a Green Star. GRESB is the dominant global standard for assessing Environmental, Social and Governance performance for real estate funds and companies.

SREIM participated in the survey for the Company in 2020 and improved its star rating from two to a three star rating. The Company also continued to maintain its Green Star status; this is awarded on the two dimensions of Management and Performance which have to score at least 50%. The fund was awarded an overall GRESB score of 69, with SEREIT coming third out of 11 participants within its peer group.

Industry participation

SREIM is a member of a number of industry bodies including the European Public Real Estate Association (‘EPRA’), INREV (European Association for Investors in Non-Listed Real Estate Vehicles), British Council for Offices and the British Property Federation. It was a founding member of the UK Green Building Council in 2007 and in 2017 became a member of the Better Buildings Partnership and a Fund Manager Member of GRESB.

Employees

The Company is an externally managed real estate investment trust and had one part-time direct employee at 31 March 2020; the relevant date for this reporting period. SREIM is part of Schroders PLC which has responsibility for the employees that support the Company. Schroders believes diversity of thought and an inclusive workplace are key to creating a positive environment for their people. SREIM’s real estate team have a sustainability objective within their annual objectives.

Further information on Schroders’ principles in relation to people including diversity, gender pay gap, values, employee satisfaction survey, wellbeing and retention can be found from page 28 of Schroders Annual Report and Accounts 2019: https://www.schroders.com/ en/sysglobalassets/annual-report/ documents/Schroders_2019AnnualReport.pdf

Corporate responsibility

Schroders’ commitment to corporate responsibility is to ensure that its commitment to act responsibly, support clients, deliver value to shareholders and make a wider contribution to society is embedded across its business in all that it does.

Full information on Schroders Corporate Responsibility approach including its economic contribution, environmental impacts and community involvement, can be found at http://www.schroders.com/en/about-us/ corporate-responsibility/.

Slavery and human trafficking statement

The Company is not required to produce a statement on slavery and human trafficking pursuant to the Modern Slavery Act 2015 as it does not satisfy all the relevant triggers under that Act that required such a statement.

SREIM is part of Schroders PLC and whose statement on Slavery and Human Trafficking has been published in accordance with the Modern Slavery Act 2015 (the ‘Act’). It sets out the steps that Schroders has made during 2019 and plans for 2020 towards combatting modern slavery in its business and supply chains. SREIM is part of the Schroders Group.

Schroders’ statement can be found at http:// www.schroders.com/en/about-us/corporateresponsibility/slavery-and-human….

The Task Force on Climate-Related Financial Disclosure aims to mainstream reporting on climate-related risks and opportunities in organisations’ annual financial filings. The TCFD framework is applicable to all sectors and is currently a voluntary framework, however, it is anticipated that the framework may soon become mandatory.

The TCFD recommendations are comprehensive and as a result it is widely acknowledged that full alignment takes time. The recommendations are structured around four sections: Governance, Strategy, Risk Management, and Metrics and Targets. SREIM has reviewed its current policies and practices against these criteria and provided this summary. Building on our well-established consideration of sustainability within the investment process, it will be important to further integrate the assessment of climaterelated issues into existing reporting and decision-making processes in order to increase our alignment with TCFD recommendations.

Governance

In investing for the long term, we recognise the increasing importance of both forwardlooking assessment of the potential impacts of climate change and the likely action necessary to ensure the assets and cities in which we invest remain resilient as we transition to a low-carbon economy. In line with our Investing with Impact approach, we are also seeking to promote a fair and socially conscious low-carbon transition, that supports social, as well as economic and physical resilience within local communities.

Climate change is an established component of our sustainability programme, over which SREIM has oversight and ultimate responsibility. Climate change is therefore already considered within our investment process; however, as it grows in importance it will be necessary to further its integration. We are reviewing our approach to ensure we cover the full range and depth of climaterelated issues. Evolving the approach in this way will be key to ensuring continued oversight and management of exposure to material risks, together with identifying opportunities, across the asset life cycle and delivering resilient long-term returns.

The Board is focused on ensuring that the Company delivers on its strategic objectives, while taking into account the impact on its stakeholders as a whole. It is our firm belief that prioritising positive stakeholder relationships is central to delivering long-term, sustainable returns. The environment is one of the five identified stakeholder groups, alongside our occupiers, our communities, our service providers and shareholders.

Strategy

Our investment philosophy and process is underpinned by fundamental research and an analytical approach that considers economic, demographic and structural influences on the market. We are considering how climate change may impact on these factors over time, as well as how governmental policies may enable mitigation of and adaption to climate change. This will enable incorporation of climate resilience into our Winning Cities investment strategy.

Through our approach of actively managing and improving the quality of our investments we are well placed to ensure assets remain fit for purpose in the transition to a low carbon economy and resilient to physical risks. We have a strong track record in reducing portfolio and asset-level energy consumption and greenhouse gas (‘GHG’) emissions at assets where we retain operational control. As signatories of the BBP Member Climate Change Commitment, we have also recently voluntarily committed to achieving Net Zero Carbon by 2050 at the latest and the first stage of this is to determine our Net Zero Carbon pathway during 2020. The BBP is an industry association of leading UK commercial property owners committed to improving building sustainability.

Not only is this the right thing to do as a responsible landlord, delivering on our commitment to Net Zero Carbon will also enable us to better manage potential risks posed by climate change, such as an evolving regulatory landscape and carbon pricing, and therefore protect the long-term value of assets.

We are currently reviewing our acquisition and asset business planning processes to identify areas to deepen the consideration of energy and GHG efficiency, as well as physical risks (e.g. flooding).

Risk Management

The existing portfolio-wide sustainability programme covers the life cycle of assets and enables systematic and continual appraisal of potentially material climate-related risks. Risk criteria assessed within due diligence inform our acquisition decisions (e.g. Energy Performance Certificates and Flood Risk), as well as business and sustainability plans during asset management.

For existing investments, potential climate-related risks are also tracked and managed through ongoing performance monitoring (e.g. energy and greenhouse gas emissions trends), action plans (e.g. energy efficiency improvement measures) and certification programmes (e.g. Energy Performance Certificates). Related key performance indicators for suppliers (e.g. property managers) also support climate risk management.

However, our understanding of the future potential impacts and risks from climate change is constantly evolving. Therefore, we are seeking to further embed the forward-looking identification and assessment of climate-related issues into our research process, as this will allow ongoing monitoring of emerging risks. This may also identify possible enhancements to core components of our investment process, such as our risk assessment and management framework.

Metrics and Targets

On pages 80 to 86 of the 2020 report and accounts, we report detailed performance trend data, efficiency ratios and assessment methodologies covering energy consumption, GHG emissions, water consumption and waste generation. Measuring energy consumption and GHG emissions across the portfolio supports our assessment and management of risks from transitioning to a low carbon economy, where for example, there may be increased regulation on building efficiency and carbon pricing. Measuring water consumption supports our understanding of exposure to potential future risks from certain physical climate change risks, such as water scarcity.

As also mentioned on pages 90 to 92 of the 2020 report and accounts, we have an ambitious energy and GHG emissions reduction target against which we have made good progress. These targets are a driving force behind our energy and GHG reduction programmes and are under constant review to ensure they are sufficiently ambitious and effective in managing future transition risk.

We note that historically we have focused on monitoring and targeting reductions where we have had most operational control – i.e. landlord-procured energy consumption only (so called ‘Scope 1 and 2’ GHG emissions). As the transition to a low carbon economy presents risks and opportunities for entire assets – i.e. landlord and tenant-controlled areas – we are reviewing the reach of our energy and GHG management programmes and considering how we may also support performance improvement in tenantcontrolled areas (so called ‘Scope 3’ GHG emissions). Similarly, we are exploring opportunities to reduce GHG emissions associated with building materials consumed during construction and fit-out (so called ‘embodied’ ‘Scope 3’ GHG emissions). Lastly, we are investigating where financial measures of climate-related risks and opportunities may support better decision-making within the investment process.

Our sustainability consultants, Evora Global, have prepared an Assurance Statement in relation to the sustainability matters reported on pages 80 to 92 of the 2020 report and accounts. The full statement can be found on the following link: https://www.schroders.com/en/ sysglobalassets/investment-trusts/sereit/ sereit-epra-assurance-statement_ fv3_1602587_v1.pdf.