TR Property Investment Trust | ESG

T R Property – Responsible Investment Policy

Introduction

The Board recognises the importance of considering Environmental, Social and Governance ('ESG') factors when making investments and in acting as a responsible steward of capital. This covers the Company's own responsibilities on governance and reporting and, the most material way in which the Company can have an impact, through responsible ownership of the investments that are made on its behalf by its Manager.

The Company's own approach to Corporate Governance and Reporting

Maintaining a high level of Governance and disclosure in the Company’s own operations and reporting is extremely important. Our Fund Managers are encouraging and supporting this from the companies in which we invest and we cannot fall short of these standards ourselves.

The Company’s compliance with the AIC Code of Corporate Governance is detailed in the Corporate Governance Report within our annual report.

Under Section 414 of the Companies Act 2006 there is a requirement to detail information about employee and human rights, including information about any policies in relation to these matters and the effectiveness of these policies. As the Company has no employees, this requirement does not apply. The Company is not within the scope of the UK Modern Slavery Act 2015 because it has not exceeded the turnover threshold and is therefore not obliged to make a slavery and human trafficking statement. The Directors are satisfied that, to the best of their knowledge, the Company’s principal suppliers comply with the provisions of the UK Modern Slavery Act 2015. These are principally professional advisers and service providers in the financial services industry, consequently the Board considers the Company to be low risk in relation to this matter.

The Board currently comprises two male Directors and three female Directors. The Board also meets the FCA's rules for diversity and inclusion, following the recommendations of the Parker Review. The activities of the Nomination Committee in relation to Board changes are referred to in the Nomination Committee Report within our annual report.

The Board’s diversity policy is outlined in more detail in the Corporate Governance Report.

The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors’ Reports Regulations 2013). Investment trust companies are currently exempt from reporting against the Task Force on Climate-Related Financial Disclosures ('TCFD'), however, the Financial Conduct Authority ('FCA') has now published regulations that require the Company’s Manager, as its Alternative Investment Fund Manager (‘AIFM’), to report against TCFD at both the AIFM and product level by June 2024. This means that there will be a TCFD disclosure specific to the Company’s portfolio available in the future, which will be published on the Manager’s website. The Manager has produced a report on its overall climate change approach, which is structured using the TCFD categories and is available on its website.

Our Portfolio Manager’s Approach to ESG

Our Portfolio Manager’s primary duty is to invest in property and property related companies with the objective of exceeding the returns of our benchmark. The Company has not set out its stall to be an ESG focused fund, however, as a long-term investor, governance and sustainability considerations have always been embedded in our Manager’s investment process. ESG risk assessments and considerations are factors which feed into the investment decisions. This reflects the belief that strong governance combined with a responsible approach to social obligations and the commitment to protect our environment will enhance shareholder returns in the long term.

In the part of the portfolio that is invested directly into commercial real estate we endeavour to "practice what we preach".

LISTED EQUITY PORTFOLIO

As a dedicated investor in the property sector our Manager is not having to consider some of the more controversial areas of what is ethical investment. However we are investing in buildings where construction and ongoing management have a direct impact on the environment. All property is in some way delivering a social purpose. Modern building practices are very much more focused on reducing energy consumption and on efficiency than in the past. Properties have varying lifespans but are built for the long term. Older buildings which are less energy efficient than their modern counterparts are a fact of life, their replacement has wider environmental and social repercussions as well as huge cost implications. They are going to form part of the investible universe for the foreseeable future and their efficient improvement and management is just as important as ensuring new developments follow the highest possible environmental standards. Although older buildings will most likely show inferior "scores" to their more modern counterparts on a number of environmental measures, we are looking for demonstration of best efforts to improve these measures, recognising that there will be limitations on what can be achieved but wanting to see a positive direction of travel.

There are two fundamental considerations to investment in property companies: the assets themselves and their management. The Manager seeks to invest in long-term assets which are managed by quality teams in a well governed corporate structure. As a result, there has been a long-standing and strong culture of stewardship in the Manager’s investment approach. The Manager believes that engaging with companies is best in the first instance, rather than simply divesting or excluding investment opportunities. However, there are instances where governance matters have driven a decision not to invest in a company. As one of the largest teams investing in pan-European real estate equities, our Manager meets with a significant number of management teams of investee and potential investee companies each year and has a robust record of engagement, with an agenda of reducing risk, improving performance and encouraging best practice. This is augmented by the strength of Columbia Threadneedle's Responsible Investment team and its broader engagement. Over the course of the 2022-23 financial year, our management team participated in 227 individual or group meetings with companies and their management teams.

The Manager is committed to responsible investment and is actively developing new procedures and ways in which information is gathered and used to support their engagement with companies on ESG matters.

Corporate Governance disclosure requirements have increased transparency enormously in recent years and enabled closer scrutiny and engagement on governance issues for some years. Environmental measures are now rapidly coming to the fore and, with wider disclosure requirements being placed upon our investee companies, the Manager is increasingly able to scrutinise other measures such as climate change and sustainability policies and outcomes.

However, the Board and Manager are still of the view that the ESG rating industry and its approach and processes has significant limitations, making it difficult to draw true comparisons and make fully informed decisions. The assessments from the various data providers reach different conclusions as they do not all score in a consistent way. Some of the assessments are subjective and different data providers have different definitions and criteria.

This may eventually converge into some form of consensus or standardisation but it still has a way to go. Conceptually, making ESG comparisons between companies and portfolios appears simple, but it is actually rather complex and it is important to ensure that valid comparisons are being made. As the shortcomings are being uncovered and the different approaches highlighted we hope that this will put pressure on the data providers to improve the quality and clarify the basis of their analysis. The data services are subscribed to so have to be fit for purpose.

Having noted the shortfalls above with the data collected from the different providers, our Manager is enhancing the way in which ESG date is collected and compared. Their own company database covers financial and operational information together with extensive modelling. ESG data is being collated alongside this, allowing comparisons to be made more easily between the various data sources for a single company and interrogated rather than relying on high level “scores”. Interactions with companies on ESG matters are noted and progress, or otherwise, can be tracked more efficiently.

The Manager is therefore dedicating direct resource to the analysis of the information available and also has the benefit of input from its award-winning Responsible Investment Team. This is work in progress and a significant investment in resource but it will improve the Manager’s ability to engage with our investee companies on environmental matters and play out our responsible investment aims.

It is crucial to disaggregate between quality companies which also have strong ESG credentials and companies which may appear to have strong ESG credentials (on the surface at least) but will make poor investments. One example of this approach is Home REIT. On the face of it Home REIT’s ESG credentials appeared strong given the company’s business model is focused on the provision of accommodation to help tackle homelessness in the UK. In addition, its leases are 100% “green”, meaning Home and its tenants agree to identify and implement appropriate strategies for the improvement of the properties’ environmental performance. However, we elected not to participate in the company’s IPO, and the fund has never owned the shares subsequently, as we had reservations about the overall economics of the business. We were concerned about the covenant quality of the tenants (often newly-formed charities) and believed that the long lease structures put in place by Home REIT risked overstating a realistic value of the underlying assets. This approach proved correct – short seller Viceroy published a report on Home REIT in November 2022 which highlighted numerous concerns with the business and the company has been investigated by regulatory bodies on a number of items in recent months.

An example of a large holding where we believe the ESG credentials complement the investment case is Landsec. As well as adhering to the governance standards we would expect from a leading listed company, the company also has a clearly outlined sustainability framework. This includes long-term targets, progress against which is regularly monitored and presented back to investors, such as operational carbon emissions reduction of 70% by 2030 (with a 2013/14 baseline) and average embodied carbon reduction of 50% compared with a typical building by 2030. The company’s newest developments, which in our view contribute positively to the investment case given their ability to contribute to both earnings and net tangible asset value over time, are also all net zero buildings, which we believe will contribute to an improved rental growth tone when the assets are let. As such there is a symbiotic relationship between the company’s strong ESG credentials and its underlying economic performance.

Governance

Governance covers matters such as board structure; effectiveness, diversity and independence, executive pay and criteria, shareholder rights and financial and governance reporting and standards.

Exercise of Voting Power and engagement

The Manager has a corporate governance voting policy which, in its opinion, accords with current best practice whilst maintaining a primary focus on financial returns. The exercise of voting rights attached to the portfolio has been delegated to the Manager. Where practicable, all shareholdings were voted at all company meetings in the last financial year in accordance with Columbia Threadneedle’s own corporate governance policies. This ensures that a strong, consistent approach is taken to proxy voting which backs up and reinforces engagement, takes a robust line on key governance issues such as executive pay and integrates environmental, social & diversity issues and sustainability practices into the voting process.

Columbia Threadneedle’s Stewardship Report 2022 provides more information on its firm-level stewardship policies, as well as how these comply with the expectations of the UK Stewardship Code 2020 to which the Manager is a signatory. Its statement of compliance can be found on the website at https://www.columbiathreadneedle.com/en/.

During the financial year, the Manager voted against at least one management proposal at 52% of shareholder meetings. This represents 13% of total items voted. For the year, the Manager engaged with 24 companies directly on a range of ESG related matters. These engagements were conducted at both the board and senior executive level as well as directly with investor relations. The Manager tracks the milestones of the engagement strategy and has seen progress this year on a number of matters. Examples include the publication of sustainability reports and board accountability on human rights risk management.

Social

All buildings have a social function to some extent, providing places to live, work, eat, shop, store etc. Management of buildings needs to ensure any social obligations to the occupants are met in terms of Health & Safety, employee management and wellbeing and commitment to communities. Most of these obligations are the responsibility of the tenant but our investee companies are obliged to report on matters affecting their own employees and such statements are considered.

Environmental

Environmental policies in the property sector focus largely on sustainability and climate change. Climate change is one of the defining challenges of modern times.

The management team have sourced data and research from several providers, including the Columbia Threadneedle Responsible Investment team, MSCI and Global ESG Benchmark for Real Assets ('GRESB').

The quantity and depth of data available in our sector varies greatly; the larger companies now have teams dedicated to providing environmental impact data and reporting. However many of our companies are small and do not currently have the resources to contribute data to the organisations providing analysis to the investor community. As a consequence, we see strong correlations between company size, maturity and overall scores. Since our investment strategy leads us to own focused mid-sized companies in preference to some of the larger diversified ones, the portfolio's overall ESG score might tend to be unflattering compared to the wider benchmark. The rigour of our process ensures that these companies receive scrutiny by the team.

GRESB

GRESB is a mission-driven and investor-led organisation providing standardised and validated ESG data to the capital markets. Established in 2009, GRESB now covers over USD 5 trillion in real estate assets, publishing i) an annual real estate assessment score for participating companies, and ii) a public disclosure score for all listed real estate companies. The real estate assessment score ranks ESG metrics based on data contributed directly from participating companies, whilst the public disclosure score evaluates the level of ESG disclosure by listed property companies and REITs.

Further detail on GRESB can be found at www.gresb.com

For 2023 there is increased GRESB Real Estate Assessment coverage of the Company's equity portfolio (66% from 50%).

German residential companies representing 11.6% of the index do not submit data to GRESB due to the requirement to submit data at the asset or building level and concerns around fair comparisons of data aggregation. We continue to engage with GRESB, encouraging them to modify the requirements to encourage wider participation.

MSCI

MSCI ESG research covers a wide range of environmental impact measures including CO2 and greenhouse gas emissions, energy and water usage, in addition to wider corporate governance scores. Further detail can be found at www.msci.com/our-solutions/esg-investing/esg-ratings

Coverage of our sector reduced from 99% to 96% and the Company’s portfolio increased from 89% to 96%. Where coverage is based on public data, a significant proportion is included, whereas where specific data has to be submitted by companies the coverage is currently much thinner.

We continue to collect data on emissions and compare to prior years with the emphasis being more on direction of travel than the absolute measures themselves. This is also an area where we expect to see further change which is also explained.

Portfolio-weighted carbon intensity

For the year ended 31 March 2022, we disclosed, as best we were able to, the portfolio-weighted carbon intensity of the total portfolio for the first time.

Carbon Risk measures exposure to carbon intensive companies. MSCI’s definition and calculation, with data based on MSCI CarbonMetrics, is the portfolio- weighted average of issuer carbon intensity. At the issuer level, carbon intensity is the ratio of annual scope 1 and 2 carbon emissions to annual revenue. Carbon Risk is categorized as Very Low (0 to <15), Low (15 to<70), Moderate (70 to <250), High (250 to <525), and Very High (>=525). The Carbon Risk of the equity portfolio measured at the financial year end, was 43.6 T CO2E/$M Sales (2022: 63.3 T CO2E/$M Sales),

falling within the low risk MSCI category. The Company’s portfolio-weighted carbon intensity was lower than that of the benchmark of 49.8 T CO2E/$M Sales.

Comparing against the results from last year shows a headline c.31% decrease in carbon intensity for both our own equity portfolio and -18% for the index. There are a number of reasons for this. Whilst the ratio is a snapshot taken at each financial year end, reflecting the change in equity holdings over the period, there is also wider coverage of data at the 2023 financial year end (98% for the current year fund holdings versus 89% for the prior year). The latest emissions data for each company is captured by MSCI on publication of their data; each company is not releasing their data at the same point so timing differences will arise. The ratio will also be impacted by the changing value of $ Sales, including the impact of FX rates. However, within these limitations, we can be reasonably confident that the Carbon Risk of the portfolio is improving and currently better than the benchmark.

In order to attempt to give a picture of the direction of travel, we have looked at the individual companies the Company holds to assess which have improving or deteriorating carbon intensity metrics over three and five year periods.

This analysis depends upon the integrity of the underlying data and breadth of data coverage, so we would caution that this is a work in progress, but it indicates a positive trend as awareness improves and companies are obliged to disclose data.

For the property sector, the focus is currently on the energy efficiency of buildings once they are occupied, but we expect in time more attention will be paid to the carbon emitted in getting them built and eventually dismantled which accounts for a large proportion of a building’s emissions over its lifespan.

DIRECT PROPERTY PORTFOLIO

Sustainability is core to the strategy of the direct property portfolio which we invest in, hold and manage on behalf of shareholders and this has been a key focus for the management team in their asset management approach.

Central to the year’s approach was energy consumption. As the primary source of carbon emissions within the portfolio, a priority over the last twelve months has been to gain a clear understanding of the consumption intensity across the portfolio, establishing a benchmark from which we can map the strategy to manage the environmental impact of these assets through energy saving interventions. This data collection allows us to fix the base year from which to set out future targets as well as a clear path toward a net zero carbon portfolio. Alongside this we have also worked hard to future-proof the portfolio against the forthcoming Minimum Energy Efficiency Standards.

We also recognise that the built environment plays a fundamental role in the life of local communities. As a landlord the Company continues to enhance its social engagement with the local community stakeholders at our assets. We also strive to work with local supply chain partners to deliver a best-in-class service for our occupiers, whilst also supporting the local economies surrounding our assets. This helps us demonstrate the social value we bring to communities, occupiers and shareholders.

The final strand to our approach is governance. This forms the foundation for how we manage our properties. The manager operates a Sustainability and Social Responsibility Committee which focuses on the implementation and delivery of all ESG initiatives and provides full transparency on our proactive hands-on approach. From this we can execute our environmental and social responsibilities. We are only able to achieve our goals through a joined-up approach with our property manager, energy consultant and other key partners with whom we work.

In the previous year’s annual report we identified the three key pillars to establish the foundation for the delivery of our ESG strategy. These three pillars, namely Asset Energy Performance (Environment), Occupier Engagement (Social) and Operational Performance (Governance) continue to navigate the Management Team towards the successful realisation of our ESG strategy.

Whilst the significant progress made over the 12 months to 31 March 2023 reinforces our commitment to achieve net zero carbon by 2050, our ultimate goal is to ambitiously improve on this 2050 target. To that end, we have instructed net zero audits across the portfolio to facilitate us in identifying exactly how we can bring this target forward from 2050. This strategic framework will be driven by science-based targets in a cost-efficient manner and we will be articulating our improved pathway over the forthcoming year.

Environmental

Accurate data collection and transparent reporting are integral to our goal of reducing carbon emissions across our portfolio. We have put in place a number of initiatives to this end which are outlined below.

Data Management

Reliable and accurate data collection is the cornerstone to understanding the carbon intensity of our assets. This gives us the ability to set ambitious targets to reduce the carbon intensity and Scope 1 and 2 emissions for both ourselves and our occupiers. To this end we have been working in collaboration with our stakeholders to implement a programme to install automatic meter readers (‘AMRs’) across the portfolio to enable the accurate measurement and monitoring of each asset’s energy consumption. This consumption data is now being collated and analysed by the property industry-recognised SIERA+ platform. This means we can measure energy consumption and access live data which we can analyse and then use to shape our building operation decisions. The AMRs have also provided the dataset which will form part of the Company’s inaugural GRESB submission currently underway, setting the benchmark for future ESG performance. With ongoing access to this fully transparent and live dataset we can take control of our carbon emissions with integrity and pinpoint exactly where further improvements can be achieved.

GRESB

As outlined in the previous annual report, a key objective for the Company was to commence its first GRESB submission. Now that we have an accurate dataset of carbon consumption, we have been able to begin the first GRESB submission for 2022/23. The results of this submission will be available in October 2023 and from this we will be able to identify further sustainability opportunities and enhance our strategy towards net zero. This is a significant milestone for the Company and GRESB will enable us to measure our ESG performance within a uniform and globally established platform.

Green Lease Clauses

Another key element to managing the carbon intensity of the portfolio is through the implementation of Green Leases Clauses across the portfolio. It has enabled us to embed our net zero commitments into the formal structure within which we lease our assets, setting out a mutual agreement between landlord and occupier to strive to improve energy efficiencies and reduce carbon emissions generated by the assets. They also provide a formal framework for the Company to work with occupiers on our data collection workstream in instances where we are not in control of the utility supply. This in turn strengthens our ability to enforce carbon intensity targets and gain further control of Scope 1 and 2 emissions.

Renewable Energy Sources

Further control of carbon emissions has been achieved through the successful transition of all energy across landlord areas for the whole portfolio to renewable sources. This is a portfolio-wide initiative and 100% of landlord electricity and gas supplies are now contracted on certified green tariffs, backed by the Ofgem regulated Renewable Energy Guarantees of Origin (REGO) scheme.

Energy Performance Certificate (EPC) and Minimum Energy Efficient Standards (‘MEES’)

From 1 April 2023 all commercial rental properties were required to have an EPC of E or better. The direct property portfolio currently meets these standards and, overall, the portfolio’s EPC profile is well placed for the short-term requirements and improved ratings have been achieved over the previous 12 months.

Two significant achievements of note are the improvement of the two EPC G ratings within the portfolio to B and C ratings and increasing the percentage of assets now qualifying for EPC ratings by over 20%. This has been accomplished through detailed operational analysis of our assets and the implementation of energy saving enhancements.

It is important to note that the increase in E rating is due to changes in the assessment criteria and the majority of the E and D ratings are at Wandsworth where the strategy is to either complete a comprehensive refurbishment or a full-scale redevelopment in the mid term. Work on this project will complete prior to the 2030 MEES standard which will require a minimum EPC of B. Once this project has been delivered the percentage of the portfolio by ERV achieving 2030 compliance will increase to 88%. This is before any other enhancements are implemented.

Further to this, the Company has now raised the target of achieving a minimum EPC rating to the minimum of a B for all planned refurbishments and upgrade works to the portfolio. This forms part of the wider ESG-focused refurbishment checklist.

Social

The management team has continued actively to engage with occupiers to support and potentially invest in their ESG objectives. Communication and collaboration plays a central role in achieving ESG goals.

A quarterly ESG newsletter is now published and circulated with occupiers to encourage engagement. Key content for the newsletter includes inviting occupiers to participate in the AMR installation programme, community engagement initiatives and raising biodiversity awareness across the portfolio which include the installation of bird boxes and bug hotels at Gloucester.

At Wandsworth we have successfully managed to integrate a critical local community partner into Ferrier Street through the letting of Unit 16 to the Wandsworth Foodbank. By letting the unit at nil rent we have enabled them to continue to support people and families facing severe hardship across Wandsworth Borough. In the year to 31 March 2023 over 11,0000 emergency food parcels were provided to local households in severe hardship. With a larger facility at Ferrier St they have been able to increase their emergency food provision by 71% throughout the borough and deliver directly to those households who cannot access their Welcome Centres.

The Colonnades is also central to the community landscape of the Bayswater area and it is vital that it is fully integrated into this environment. We have continued to work with our local community partners at the Colonnades to help alleviate the challenges of rough sleepers in the Bayswater area.

Governance

In order to deliver our ESG targets it is essential that our internal management structure is fully aligned with our strategy. The Sustainability and Social Responsibility Committee meets on a bimonthly basis to ensure that we are on track with our Sustainability Roadmap objectives through the thorough review of current initiatives and implementation. The Committee works in partnership with our managing agents (Stiles Harrold Williams) to ensure we maintain a sustainable supply chain which complements our net zero carbon goals. This is demonstrated through objectives set to ensure 100% of waste material under landlord control is not sent to landfill. The accreditation of our managing agent to Safe Contractor also demonstrates our commitment to paying all directly employed staff on our assets a real Living Wage. In addition, the management team attend regular ESG training events and seminars, continuing our internal education around ESG and making sure that all avenues are being explored to achieve positive outcomes across the portfolio.

Net Zero Carbon Pathway

This significant progress over the last twelve months demonstrates our firm commitment to bring forward our net zero carbon 2050 strategy. Through our thorough carbon consumption data management, GRESB submission and MEES improvements we will be able to clearly set out our key objectives for the year to 31 March 2024.

We will continue to expand our AMR programme to maximise our comprehensive dataset on Sierra+. This will provide further insight into how we can identify and implement energy saving measures, targeting Scope 1 and 2 emissions.

In October 2023 we will have the Company’s inaugural GRESB rating. From this we will be able analyse the results to formulate a robust strategy to strengthen this rating and target an increase of at least one star for the next submission.

In order to further future-proof the portfolio against MEES we will continue to track our exposure to inefficient assets through regular EPC analysis. By reducing the portfolio’s reliance on fossil fuels and implementing further renewable energy sources through solar PV, we will continue to drive down the higher EPC rated assets.

Over the next twelve months we will strengthen our management of Scope 3 emissions. We will continue to collaborate with our suppliers and occupiers to adopt more sustainable practices, reduce their reliance on fossil fuels and deliver best in class asset management to improve our pathway to net zero carbon through carefully planned and delivered interventions.

By successfully achieving these objectives over the forthcoming year we expect to be able to declare an ambitious improvement on our net zero carbon commitment, bringing it forward from 2050.