First Sentier gets serious about carbon reduction in real estate

We decided to launch the fund to meet the growing investor demand for an environmentally responsible listed real estate fund. We believed that the funds at the time of creation had not done the extensive research required to truly estimate the environmental impact of listed real estate and therefore strived to develop our own methodologies that are capable of assessing the controlled and non-controlled carbon emissions of the sector.

We also believe that time is of the essence for the real estate sector in order to meet the net zero targets set in 2050. Approximately 40 percent of global greenhouse gas emissions come from the real estate sector. Thirty percent of that is from operational carbon from building occupation and 10 per cent from embodied carbon associated with development. If we are to meet net zero carbon emission targets by 2050 and limit global warming to 1.5 degrees, the real estate sector needs to greatly reduce its carbon emissions from today.

We believe that alignment to ESG and to the decarbonisation of the real estate sector will be beneficial for investors' long term. Which is why we decided to launch the fund which comprises of an independently assured carbon overlay, RIAA accreditation and is also competitively priced to attract those environmentally conscious investors.

Our research was comprehensive and ranged from detailed analysis of academic papers, industry and governing body reports and our own company level due diligence.

Our findings were that the level of disclosures from listed property companies varied, with some companies conducting their own proprietary analysis and others lacking the information or resources to properly calculate their non controlled emissions.

This is because the World Business Council for Sustainable Development GHG Protocol Definitions of Scope 1 and 2 and the Task Force on Climate Related Financial Disclosures guidelines do not account for all owned real estate and do not provide for full landlord accountability. This has meant that the level of urgency in the sector that we believe is required is below where it should be to achieve Net Zero by 2050.

We believed this was an opportunity for us to implement our own carbon analysis to the listed real estate markets to gain further clarity on future investment opportunities whilst pushing companies that aren't meeting our own benchmarks to improve.

The challenges that we faced when conducting our carbon research stemmed from the fact that although we sourced numerous studies that detailed non-controlled carbon calculations, the level of disclosures from companies in the sector were not sufficient enough to conduct thorough market analysis.

The areas that we consistently struggled to find sufficient data were the below:

Minority Ownership. It is often difficult to get detailed information on minority interests. Where disclosures are poor and the information is unavailable we make high level assumptions often guided by the company. We derive forecasts based on a gross total assets under management basis.

Tenant Control of Energy. Where tenants have direct control of the procurement of power, which is typical under triple net lease contracts, the tenant typically has no obligation to disclosure energy use to the landlord. Whilst some tenants do volunteer this information, many don't. Under these circumstances where the information is unavailable and the company is unable to provide guidance, we make high level assumptions on "non-controlled" energy based on FSI generated benchmarking.

1)The fund is competitively priced and offers both a hedged and unhedged share class.

2)The fund is RIAA accredited.

3)We undertake high level analysis on all embodied carbon associated with development, redevelopment, and maintenance capital expenditure programmes. The analysis is based on FSI's proprietary research and benchmarking and has been independently assured by Ernst & Young.

In the last few years, the world has gone through rapid change, particularly in the way we work, live and play which we believe has had a lasting effect on the underlying value of certain property types.

The rise of E-commerce has had a lasting effect on the purpose of shopping malls and a variety of retail type tenants as they are slowly replaced by online alternatives or no longer need the space that they once occupied. This theme has been evident for larger department stores which typically occupied "big-box" space in shopping malls. Growth in E-commerce has particularly affected these stores to the point where big box spaces are being repurposed to try and attract new tenants.

Similarly, increases in flexible working arrangements have led to a lower dependency on CBD office space for corporates. Offices with larger floor plates in sub-prime CBD locations may experience decreases in tenant demand in the future. Current data, suggests that the same theme is not present in prime locations, with assets offering modern and sustainable spaces for flexible work.

We are also noticing that Hong Kong and China are currently facing a number of headwinds that we expect will impact exposures to real estate in the region. The most notable of these headwinds are the sustained lockdowns in major Chinese cities, the reluctance to open borders for international travel and Hong Kong security laws.