Environmental, Social and Governance ("ESG")
The Board and Investment Manager views ESG as a fundamental part of its business and investment and management process. Whilst real estate investment provides valuable economic benefits and returns for investors it has, by its nature, the potential to affect environmental and social outcomes, both positively and negatively.
The Investment Manager’s approach is underpinned by the following three principles:
- Transparency, Integrity and Reporting: being transparent in the ways in which we communicate and discuss our strategy, approach and performance with our investors and stakeholders.
- Capability and Collaboration: drawing together and harnessing the capabilities of our ESG platform, with the insights and experiences of our property consultants and industry best practice.
- Investment Process and Asset Management: integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.
A key element of our approach is the employment of our ESG Impact Dial, a proprietary research framework in support of investment strategies and asset management approach. We have identified four major forces for change:
- Environment and Climate
- Governance and Engagement
- Demographics and Technology
These forces together form the basis of the ESG Impact Dial and guide the assessment of materiality and integration of ESG factors within the Company’s portfolio and provide the framework for our ESG objectives.
In the last year the Company produced a brochure highlighting its ESG commitments and. Its brochure, “Dialling up the Integration of ESG”, can be found on the Company website, www.ukcpreit.com.
Over the year the Company maintained an EPRA sBPR Gold Award rating which ranks the quality of ESG reporting.
Despite being placed second of eight within its peer group, UKCM received a GRESB 2 star rating with a score of 67/100 (0.01 short of 3 stars). GRESB changed its scoring system during 2020, with greater weight given to the recording of energy data. This is harder to extract, particularly it seems in the UK, from single let standalone properties which the Company has a material number of from its high weighting to the industrial logistics warehouse market. One solution involves the automation of energy data collection, much like residential ‘smart meters’, which the Company is investigating with the aim to improve this rating in 2021.
Specific examples of our ESG Strategy in action include:
- 100% of the electricity sourced by the Company now comes from renewable sources.
- 100% of the waste produced at our managed assets is diverted from landfill.
- Ensuring our new developments at Exeter and Edinburgh rate highly. At both assets we will look to incorporate the provision of sustainably sourced electricity and encourage recycling whilst diverting 100% of waste from landfill. Specifically, Exeter will be constructed to a BREEAM Very Good standard and as a planning condition will be built to a carbon neutral construction program and we have reserved the right to incorporate further ESG features to the development such as photovoltaic panels on the roof. Edinburgh will have a BREEAM rating of Good or equivalent, predominantly due to the mixed nature of the project using the existing historic structure as part of the development. However this means that we will be saving on new materials on this element as we are using the existing structure (carbon saving). We will also incorporate a Ground Source Heat Pump System to sustainably heat the development.
In many ways the “E” (environmental) and “G” (governance) are the simpler of the ESG strands to understand and apply, particularly with corporate governance around a REIT; however perhaps the greatest ESG activity of 2020 related to the “S” (social) element in the form of enhanced interaction between our asset management team and our tenants as the COVID-19 pandemic and consequent lockdown impacted on business in March 2020. We had conversations with 55 of our tenants who were requesting assistance as businesses were closed or severely disrupted. Through these conversations we agreed a multitude of rent deferrals, monthly rent payment plans and commercial regears (improvements to landlord lease terms), for example by extending the duration of a lease or removing a tenant break option in return for an element of rent free period. We believe this activity has a strong social benefit helping businesses and jobs whilst also building long term relationships with our stakeholders.
Two examples of this positive social interaction, and from different sectors, include an early approach in Spring 2020 from the principal of a popular and successful children’s crèche in a leisure asset and from a supplier of beauty and hair products based at one of our London industrial estates.
The principal of a children’s crèche approached us early in Spring 2020 to explain they were unable to trade. From our initial discussions we established they had furloughed staff and applied for a government loan to pay the property service charge. In response to their trading difficulties, we agreed to provide a rent free period and extended the term of their lease. When the business could gradually open, only limited numbers of children, staff and parents were allowed into the unit, but nonetheless the creche started paying its rent again. With the most recent early 2021 lock down, and despite the business closing again, the crèche continues to pay its property service charge from its government loan. However, with no operational income it cannot meet its rental obligations during lockdown. In this case we do not expect to charge rent until the business is permitted to re-open when we hope to welcome them back.
Our first call for help during the pandemic came in March 2020 from a supplier of beauty and hair products to retail hair salons. During the initial lockdown their turnover stopped overnight. We had many discussions with them offering help, but our tenant was too distracted with concerns about the duration and severity of the pandemic to reach an agreement.
However, with the initial reopening of salons and shops in July 2020 this tenant experienced a positive spike in trade and they resumed paying rent. As might be expected, the second lock-down early in 2021 impacted them again but this time we are having some success in engaging with them to help put what would normally be a thriving but small business back on a sustainable footing.
Specific ongoing ESG projects for 2021 include:
- An aim to define the Company’s net zero pathway in line with the Investment Manager’s approach. This will involve benchmarking the carbon and energy intensity of each asset in the portfolio against net zero trajectories and understanding the nature of required improvements over time to meet net zero commitments.
- Feasibility studies and negotiations with tenants to install photovoltaic roofs to large format retail and industrial assets which allow the production of clean electricity that can then be sold to the tenants. We are also looking to include photovoltaics in the refurbishment specification at some of our industrial assets.
- Investigating the potential to enhance biodiversity at our assets including the creation of green spaces and incorporating bee hives on the roofs of assets.
- Encouraging community activities at our large format retail and leisure assets once it is deemed to be safe with examples including charity collections and children’s entertainment.
- We continue to enhance facilities for cyclists at our office assets and in Birmingham are looking to improve the provision of showers, bike storage and lockers.