Sustainability and ESG in Real Estate

Session 1

Sustainability: capacity of human society to continue indefinitely within earth’s natural

cycles. It meets the needs of the present without compromising the ability of future
generation to meet their own needs

Sustainability circle: people, profit, planet

17 UN SDG (sustainability challenges):

Partnerships for the goals

Economy: decent work and

economic growth; industry,
innovation and infrastructure;
reduced inequalities; responsible
consumption and production

Society: no poverty, zero hunger,

good health and well-being,
quality education, gender
equality; affordable and clean
energy; peace, justice and strong
institutions; sustainable cities and
communities

Biosphere: life below water, life

on land, climate action, clean
water and sanitation
 The triple bottom line (Joh, Elkington)

Anthropocene: new geological epoch characterized by the significant impact of human

activities on the Earth. It is often considered to start with the industrial revolution (late 18th)

Planetary boundaries (Rock Strom, 2009): defines the environmental security limits within
which humanity can operate safely. Beyond these limits, there is an increased risk of sudden
and irreversible environmental. There are 9 planetary boundaries:
• Climate change
• Ocean acidification
• Use of fresh water
• Integrity of the biosphere (biodiversity and extinction of species)
• Disruption of the nitrogen and phosphorus cycle
• Chemical pollution and release of new entities
• Atmospheric aerosols (impacts on climate and human health)
• Stratospheric ozone depletion
• Land use change (for agriculture, urbanization, etc.)

Planetary boundaries
 200 years that changed the world

Sustainability in RE industry depends on a cause-effect relationship

Phases of RE development

Development Designing Economic Tender & Construction Handover Payments Exploitation

& Planning Assessment Negotiation for for the
Operations work

There are around 8 billion people in the world. Each billion is divided into the four regions
of the world according to PIN code: 1 1 1 5 (from left to right). By 2025, we expect the new
PIN code to be 1125 (as Africa's population exceeds 1.5 billion).

Poverty is equal to $10 to $30 per person per day. Less than 10% of the world’s
population live in extreme poverty. Only 1% of the population in high-income countries
lives in extreme poverty (with less than 2$/day).

Around 70% people in the world have access to safe drinking water in their home or close
by. Another 20% have access to a well or a tap within a 15-minute walk from their home.
But many people are still killed from contaminated drinking water.

Of all energy used in the world, around 82% comes from natural gas, coal and oil. Almost
10% comes from burning plants (wood, charcoal and waste). Nuclear adds 5% and water
and wind/solar only contribute around 2-3% each.

In 1990, 58% of the world population lived in low-income countries, nowadays it is

around 9%. The majority of the world’s population moved their country average by
becoming richer: from low-income countries to middle-income countries.

Around 8% of the world’s population lives in megacities (33 cities with at least 10M
people). In many countries, there are more people living in medium sized cities.

70% of the total amount of raw materials are used across the world annually since 2000.
The richest countries’ material use has remained stable over the past 20 years, around 25
metric tons per person (roughly 13 times more than in low-income countries). The global
rise in material consumption is largely due to people becoming wealthier, leading to
higher consumption levels, rather than population growth.
 Session 2

Stakeholder: any group or individual who can affect / be affected by the activities of the
organization

Stakeholder theory (Freeman, 1984): brought a more pluralistic point of view where not
only the owners / investors are important (shareholder) but that other groups matter
(stakeholder).

Any company willing to be sustainable must identify the actors impacted and assess the
impacts generated

Shareholder Governance Stakeholder Governance

The firm is an economic institution which The firm is an economic and social
belongs to the shareholder and exists to institution. Shareholders need to consider
maximize shareholder profits within the all stakeholders demands (employees, clients,
limits of law. suppliers…) to maintain the firm’s legitimacy.

Friedman (1962); Jensen & Meckling Freeman (1984); Donaldson & Preston
(1976) (1995)
 Stakeholder analysis: monitor, inform, keep satisfied and manage closely

Least Important: inform via

general communications
(newsletters, website, mail shots)
aim to move right hand box

Show consideration: make use

of interest through involvement in
low risks areas, keep informed &
consult on interest area, potential
supporter / goodwill ambassador

Meet their need: engage and

consult on interest area, try to
increase level of interest
aim to move into right hand box

Key Player: focus effort on this

group, involve in governance/
decision making bodies, engage
& consult regularly

Materiality: process of identification, prioritization and validation that allows the

classification of relevant aspects for the company. It helps defining the challenges (what, for
whom and how) in the industry by giving information on relevant issues

Materiality should help defining the challenges in the industry

Materiality Matrix
 Session 3

KPI to measure social impact / well-being:

• Human Development Index (HDI): statistic used to rank countries according to

their level of "human development". It encompasses 3 dimensions of human well-
being: health (life expectancy), education (number of years) and standards of living
(GNI per capita)

• New Zealand’s Living Standards Framework: provides a comprehensive picture of

well-being. It includes 3 levels: individual and collective well-being, the role of
institutions and governance, and the overall wealth of New Zealand (natural and
human capital).

• Bhutan’s Gross Happiness Index: measure of well-being to promote sustainable

development. It is composed of 9 domains: psychological well-being, health,
education, time use, cultural diversity and resilience, good governance, community
vitality, ecological diversity and resilience, living standards

• Genuine Progress Indicator (Daly): alternative economic measure to GDP that

provides a more accurate picture of a nation's economic well-being and sustainable
development by considering the welfare of the society and the sustainability of the
economy. GPI takes into account the social and environmental costs of economic
activity (pollution and resource depletion, volunteer work and household labor) that
GDP does not include.

Circles of sustainability (UN): method used for cities and urban settlements. It uses a 4-
domain model (each with 7 subdomains): economics, ecology, politics and culture.

Circles of sustainability
 Doughnut Economy

Social impact management :

• Stakeholder analysis : GIS’s methodology

It identificates and prioritize the stakholders through resilience tool. The identification is made jointly with the project social
responsible.Stakeholders are then parameterized according to: level of interest (x), power/influence (y) and vulnerability (z).
next, the tool resturns us the prioritization of the stakeholders and a network of relationships between them (identifying
possible interactions and influences)

• Social risk characterisation : study of the degree of the project’s social risk by
characterising the social risk from the desig, and tender phase
• Social evaluation of the project (risks): analysis of the sociodemohgraphics of the
population in the project’s area of influence, identification and assesment of the
positive or negative social impacts and preparation of a proposal of social measures
• Proposals and dialogue; line of communication or dialogues are set up with the local
communities and other stakeholders in order to inform them about the project, its
main impacts. Social measures are defined
• Implementation and monitoring of measures: launch of the measures identified to
prevent and mitigate any negative social impacts and to bolster the positive impacts

Human Rights: Rights inherent to all human beings, regardless of race, sex, nationality,
ethnicity, language, religion, or any other status. Human rights include the right to life and
liberty, freedom from slavery and torture, freedom of opinion and expression, the right to
work and education, and many more. Everyone is entitled to these rights, without
discrimination.

HR Characteristics: universal, inalienable, interdepend and indivisible, equal & non-

discriminatory

Shared responsibility: protect, respect, prevent, remedy

RE sector is high risk for forced labour

Common modern slavery practices in property and construction: forced or unpaid work,
unsafe conditions, bonded and child labour, inadequate accommodation, passport
confiscation, human trafficking, casualties and accidents, minimum salaries

• QATAR’S WORLD CUP 2022

• RANA PLAZA COLLAPSE

The Article 25 of the Universal Declaration of Human Rights recognizes the right to
housing as part of the right to an adequate standard of living: Everyone has the right to a standard
of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical
care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood,
old age or other lack of livelihood in circumstances beyond his control.

There are 3 obligations to the right of housing:

• Obligation to protect
• Obligation to respect
• Obligation to fulfil
Anyone involved in a RE process may not conduct their business in ways that discriminate
against people for any of these reasons

Sustainability culture

Alignment Mission-Vision-Values

The 3 elements must be consistent, reinforce each other

Mission Vision Values

Objective to achieve Strategy to achieve Ethics, convictions, culture

Rationale objectives

The golden circle by Simon Sinek

Corporate culture: system of shared meanings and common beliefs held by organizational
members that determines, in a large degree, how they act towards each other.

Organizational culture: customer service, performance, people-centred, teamwork,

transparency, integrity, innovation

Strong culture Weak culture

Deeply and widely held values Undefined values

• Coherent messages • Contradictory messages

• Recognition • Unconnected set of values
• Identification • Indifference
• Widely shared • Limited knowledge (top management)

Strong corporate culture is important for performance and commitment

Corporate Culture :

• Stories : significant narratives (inspiration, belonging), people, customers, events

• Rituals / practices : repetitive sequences of activities that express and reinforce the
values of the organization (training, volunteering programs..), attitude

• Material symbols : physical assets distinguishing the organisation (dress code,

offices & facilities, lifestyle, brand)

• Language : accronyms and jargon of terms, phrases and word meanings specific to an
organization, advertising, philosphy

• Managerial examples: actions the organization recognizes as proper or inproper on

its behalf; whatever organizational activities the organization values and encourages

• HR management : recruiting (picking the most appropriate), career development

(providing opportunities), motivation

Shein’s iceberg: metaphorical representation of the underlying issues and aspects associated
with Shein. It captures the idea that while the surface benefits of cheap, trendy clothing
are visible and appealing, there are deeper, more complex issues associated with the
brand (ethical & labour concerns, environmental impact, sustainability, quality & durability,
intellectual property and consumerism and culture)

Session 4

Gen Z and millenials are more active than older generations addressing climate change

Overconsumption in the natural ressources available

1940 2020 (80+ years)

• 2.3B world population • 7.8B world population (x3,3)

• 280 parts per million carbon in • 415 parts per million carbon in
atmosphere atmosphere (x1.5)
• 66% remaining wilderness • 35% remaining wilderness (x0.5)

CO2 system wide transformation

A global commitment is required to achieve the biggest system-wide transformation in human history
 Countries Annual CO2 emissions

2000s : decrease of US CO2 annual emissions / increase of China CO2 annual emissions
(growth)
2020: significant global annual emission drop due to Covid-19, followed by a rebound
afterwards
Nowadays: decrease of US & EU annual CO2 emissions but not fast enough while China &
India are increasing theirs.

Investment opportunity with impact returns for investors

In order to change, there is a huge (and profitable) investment opportunity with impact
returns for investors that could be implemeneted
However, it is far to get a fully alignment of all the parties involved:

• Enlightened capital: capital is not fully supporting low and neutral carbon assets
• Market demand signals: lack of demand due to the tech costs, low education and
mixed incentives
• Rapid tech development: lack of fully (and globally) government support and
demand
• Strong policy signals: lag of policies
• Common standards: outdated inadequate or misaligned standards

Public & private funding accelerate the energy transition

Market Plush Public & Private Market Size

• $4.7B raised by Blackrock for • $3.7T / year expected total capital

climate focused infrastructure
fund
• $4.4B raised by Blackstone for
energy transition
• $440B of green bonds issued
globally in 2022
investment required to meet the global
carbon reduction goals
• $370B allocated to mitigate climate
change by the US IRA
• €1T public & private funds from the
EU Green Deal

RE building industry changes : off track for net zero by 2050

40% of the GHC emissions are driven by the building industry: 75% account for
operational carbon and 25% for embodied carbon.
  By 2030: 100% carbon-lifecycle-neutrality for new developments and 50%
reduction of the carbon-lifecycle footprint on existing buildings

 By 2050: all buildings must be carbon neutral throughout their entire life cycle

Carbon neutrality by 2050 : worlwide policies and regulations

Regulation is ahead of the energy transition and will drive the decision making during the
next years

• COP (Conference of Parties): decision-making body responsible for monitoring and

reviewing the implementation of the UNFCCC (United Nations Framework
Convention on Climate Change), to combat climate change and its impacts.
o Highest Level of decision-making
o 1979: first climate change conference in Geneva
o 32 COPs since 95 Berlin meeting: COP 3 in Kyoto in 1997 outlined the
reduction od the greenhouse gases obligation & COP21 in Paris in 2015 with
the “Paris agreement” aiming limit the temperature ro +1.5°C above pre-
industrial levels, foster climate resilience and low greenhouse gas emissions
and ensure financing flows to provide low greenhouse gas emissions and
climate-resilient development

• UN SDG (Sustainable Development Goals): universal call to action to end poverty,

protect the planet, and ensure that all people enjoy peace and prosperity by 2030.
o 17 goals of the 2030 Agenda for Sustainable Development.

• EU Taxonomy : classification system to facilitate sustainable investment. It aims

to provide a clear, detailed list of environmentally sustainable economic activities,
helping to create a common language and set of criteria that investors, companies,
issuers, and project promoters can use to determine whether an economic activity is
environmentally sustainable.

The COP and SDGs define the objective whilst the EU taxonomy define how

Session 5 : Impact & Risk Assesment

Risk Assesment is a 6 steps process: identification, analysis, evaluation, mitigation,

monitoring, documentation. There are 3 Risk Assessment methodologies :

SWOT Anlysis
 5x5 Risk Matrix

DD-flag-coloured-style table

ESG (Environmental Social & Governance) : framework used to asses a company’s

business practices and performance

ESG Risks in RE industry

ESG is becoming a growing concern to investors (directly & indirectly):

• 67% (55% in 2023) of the RE investors are concerned by the environmental

sustainability / decarbonisation requirements

• 79% & 67% of the RE investors are concerned by the construction costs and CapEx
requirements

• 54% (38% in 2023) of the RE investors are concerned by the asset obsolescence

• 9 out of 10 think that running an environmentally and socially sustainable

business is the most important factor for a sucessful organisational
transformation within the RE industry by 2050

Drivers of RE investment decision making & strategic planning:

• ESG
• Changing customers demand / preferences
• Demographic shifts
• Affordable housing
• Decarbonisation

Factors affecting ESG implementation:

• Pressure from instituional investors to raise equity

• Pressure from banks/lender to raise debt
• Pressure from tenants/occupiers to achieve high occupancy rates
• Continued high energy prices to reduce NOI

In case of non compliance with the ESG criteria, assets will loose value and become
obsolete. To mitigate risks, the obsolete assets should be identified and an investment
return analysis should be runned :
 • ESG KPIs data collection
• Data crossmatch
• Risk assessment analysis
• Risk mitigation startegies preparation

Climate Risk Premium : increased financial costs and risks associated with the effects of
climate change. This concept is becoming increasingly important in RE due to the potential
impact climate change can have on property values, operating costs, insurance
premiums, and overall investment viability.

AEW Climate Risk Report: determine a unified premium risk for AEW's assets (€83.1
billion), encompassing both climate transition and physical risks using an empirical data
combined with multiple greenhouse gas (GHG) scenarios and the CRREM tool to assess
carbon risk in RE. The findings are the followings: Combined Premium Risk (0.194% per
annum across 196 European market), Transition Risk (0.15%), River Flood Risk (0.039%),
Sea Level Risk (0.004%), Valuation Impact (€8 per sqm annually)

Session 6

Climate Stress Test (CST): method to assess the resilience of financial entities / investments
against climate-related risks, including physical damages from extreme weather and
economic shifts towards a low-carbon economy. It uses scenario analysis to understand
potential financial impacts and guide strategic planning and adaptation.

➢ CST Framework: financial risk assessment, combining market & credit risk
simulation
➢ CST Findings: significant overall impact established, corporate bonds identified as
primary risk factor, transition risks prevalent in specific sectors; physical risks
localized in particular areas.

Corporate bonds are the main risks contributors for climate change:
 • Exposure to carbon-intensive industries: bonds are issued by companies. Carbon
emissions depend on companies’ activity. i.e. Invest in Total (Petrol Company) bond

• Physical risks : companies’ activities (including the whole supply chain) may be
based on certain locations in risk of climate change. i.e. Invest in Morgan Stanley
bonds. MS has properties in Miami
• Transition risks. Companies may depend on fossil fuels or may, directly or
indirectly, harm the environment whilst exercising their activities. i.e. Invest in
Lafarge

• Market sentiment & reputation. Climate change is a major trend these days. i.e.
Invest in Lafarge

• Regulatory changes. New regulations and policies may (and will) arise in the future
in relation to climate change and transition. i.e. Invest in a development company that
is not prepared to become carbon neutral

• Investor scrutiny. Investors are becoming more attentive to ESG factors. Capital
increase &/ (re)finance might be extremely difficult. i.e. Invest in a European REIT
with a large office & residential portfolio in need of refinancing

European Central Bank (ECB) was the first institution who did a CST. It recognises that
climate change and the transition to net zero carbon emissions pose risks to households
and firms, and therefore the financial sector. Its objective is to assess banks' readiness to
handle climate risk both qualitatively and quantitatively from various perspectives. However,
it does not provide information on capital depletion.

➢ Methodology/Questions: maturity of banks' climate risk stress-testing frameworks,

banks' ability to generate climate risk factors, banks' capability to project climate risk
stress test outcomes, identification of transition and physical risks confronting banks

FED Stress Test: annual assessment for large U.S. banks (JP Morgan, Bank of America,
Wells Fargo, Goldman Sachs, Morgan Stanley, Citigroup) to evaluate if they have enough
capital to withstand a severe economic downturn, prevent financial crises and ensure the
stability of the financial system. This test is a key part of post-2008 financial regulations,
ensuring banks can sustain operations during economic stress.

1. Banks detail their capital management strategies for a potential global recession
2. The Fed reviews financial figures and risk management practices
3. Failing banks are restricted in payouts and must improve capital strength

FED Climate Stress Test: assess and improve the climate risk management strategies of
large banks and the FED. It focuses on understanding challenges in managing climate-related
financial risks and enhancing the capabilities of banks and the FED in risk identification,
measurement, monitoring, and management. There are 2 module-based methodology:

• Physical Risk Module: examining damage to people and property from climate-related events
• Transition Risk Module: analyzes stresses from transitioning to a low-carbon economy
How loan balances and emissions broke down by bank
 Loan-balance breakdown
is based on bank’s public
disclosures for fiscal year
2022. Emission data
includes scope 1 and 2
financed emissions for each
loan segment (quality score
of 5) and was calculated
using the MSCI Total
Portfolio Foot printing
solution, which follows the
Partnership for Carbon
Accounting Financials
(PCAF) principles. Data as
of May 24, 2023.

95% default: average corporate-loan portfolio under a 2050 net-zero scenario

Net zero: state where the amount of greenhouse gases emitted into the atmosphere is equal to
the amount removed. It's achieved through reducing emissions via renewable energy and
efficiency, and balancing any remaining emissions with carbon removal methods like
reforestation or carbon capture technologies. This concept is key to addressing climate
change, aiming to prevent global temperatures from rising significantly.

Net Zero framework steps: define the targets and interim milestones, implement & gauge impact, track progress and
reassess milestones over time

❑ PIMCO’s Net Zero Framework to decarbonize bond portfolio’s:

• Reduce carbon intensity (allocate away from laggards in high-carbon-intensive issuers toward improvers
and lower-carbon-intensive issuers across diversified sectors)
• Invest in climate leaders (invest in issuers that lead in mitigating carbon emissions or that have committed to
becoming Paris aligned)
• Influence change (increase the exposure to companies engaged on net zero strategies or targets)
• Support climate solutions (identify issuers and bonds aligned to low carbon products and services)

o 2022: define the commitment and scope, set data sources and measures, determine milestones
o 2023: begin reducing emissions by focusing on corporates and other asset classes where high quality
data is available
o 2025: reduce total carbon emission by 25% (hypothetical reduction)
o 2030: reduce total carbon emissions by 50% (hypothetical reduction), look to other asset classes as
consistent approaches develop
o 2050: 100% of assets managed in line with net zero

❑ AXA Net Zero Pillars (by 2050): decarbonization (assets that promote energy efficiency, renewables and natural
solutions and reducing carbon footprint of existing assets), resilience (assets that can withstand the impact of
climate change and transitional risks and changes that add sustainable value to their assets) and building
tomorrow (capital for the greatest impact)
Min 4-star GRESB rating by 2022, 50% tenants & partners engaged by 2021, 75% of assets (AUM) certified by
2030, 50% of Paris assets on 1.5°-2° trajectory by 2050, 75% of assets covered by ESG rating

The Pyramid Principle by Barbara Minto is a communication technique that suggests

structuring information in a pyramid format. It helps in organizing thoughts in a coherent and
logical structure, making complex subjects easier to understand and communicate effectively.

➢ Start with the conclusion, support arguments (follow the conclusion with logically grouped supporting
arguments), MECE (Mutually Exclusive, Collectively Exhaustive) principle (ensure arguments are
mutually exclusive and collectively exhaustive), logical structure (use deductive or inductive reasoning
to structure arguments and details), application (ideal for clear, concise business communication