Speaker 1:
This is the Real Pulse, a podcast series where RBC Capital Markets experts share their insights on the latest trends and opportunities in commercial real estate.
Nurit:
Welcome to the Real Pulse. I'm your host Nurit Altman. When ESG first became a part of the conversation in real estate, it felt like a sidebar to the day-to-day operations of a real estate company. But now ESG is not just part of the conversation, it's leading the conversation. And we see it driving strategy across our industry. Today I'm joined by Lindsay Patrick, head strategic initiatives and ESG at RBC capital markets. And we're here to talk about ESG and how real estate owners and operators can capitalize on the opportunities it presents. Lindsay, thanks for joining us today,
Lindsay :
Nurit, thank you very much for having me.
Nurit:
Lindsay, you shared something with me that I think will surprise most on the call. In Canada the building sector is the third highest source of emissions at 11%, meaning that it offers a substantial opportunity for our industry to be part of the climate change solution. In fact, a recent report by Queen spotlighted real estate as the only sector where the reduction of carbon emissions is actually less expensive than maintaining them. For real estate owners who want to help mitigate climate change and are beginning down the path to net zero, what recommendations would you have for them?
Lindsay :
It's a great question Nurit and I think quite frankly it's not all that different necessarily than other business owners we see and I would frame it across three key areas. So first and foremost is the governance question. Who across the company is responsible for climate related initiatives and environmental impacts? And ideally we'd like to see responsibilities reside within the board itself, within the management team and then within the operations itself. And perhaps all the way down into the suppliers to truly grasp and to truly articulate the climate impacts, both positive and negative of the company's operations. The second piece I would highlight is around measurement. And in order to understand the path to net zero, you really need to get a perspective on where you are today. And that's creating a baseline around emissions, around waste, around energy efficiency today to set those targets for the future.
Lindsay :
And then the third piece of advice I would offer is consider what pathways might exist that are specific to your company. And whether there are opportunities to invest in renewables, either onsite or through a purchase power agreement, different businesses that you can collaborate with in order to combine and scale environmental solutions. Or are there ways for real estate companies to change behaviors and something very simple such as giving premium parking and subsidize electric charging for electric vehicles to reside at the property. So a variety of different initiatives but framing along first the governance second, creating a measurement and third understanding the pathways available.
Nurit:
Amongst all the other benefits I know one of the reasons that real estate companies are focused on this is because it is driving capital availability to some degree. And I know that RBC has set a goal to achieve net zero emissions in lending by 2050. Can you speak to how that's impacting lending decisions within the bank today and going forward?
Lindsay :
Absolutely. So RBC to date has issued two green bonds. And our green bond portfolio is comprised of many real estate companies or properties that align to our own green taxonomy and have that green certification. So it's no question that across financial institutions, whether it be lenders or investors, we are looking to better understand the impact we can have through our financing decisions. So we're measuring that and it's through understanding the ESG factors and the influence they have overall on the company's strategy. But also about the companies and the real estate companies and the properties that we lend to understanding their financed emissions or their emissions because we at the end of the day we finance those emissions. And we have a goal to get to net zero in our lending book by 2050, this is a broad societal goal. Canada's committed to that goal, most European companies have committed to that goal.
Lindsay :
And so it's really about working with our clients to align their businesses, which were supporting the financing of to an overall global economic context. And with working with clients to understand what their pathways are to get to net zero, we might have some more information in terms of how we're analyzing their emissions. Our companies equally have some very good views our clients on the pathways for them. We can make sure that we're financing the right businesses and providing the right support to ensure that we get to a net zero emissions economy by 2050. Our clients achieve their goals and in turn we then achieve our own.
Nurit:
I know in real estate and I'm sure in many other industries up until the pandemic the environment was frequently front and center in conversations around ESG. Now we've seen the emergence of the S, the social factor which has continued to garner attention from investors, governments and the corporate sector. Similar to the environmental pillar, real estate can have a really meaningful, positive, social impact through its role in the creation of diverse and equitable communities. I'm thinking about the creation of affordable housing and safe public spaces. We know that often times there are economic trade-offs though to these kinds of investments. As a for-profit business how do you think real estate owners can think about this balance?
Lindsay :
I think first it's important to understand what the social factors are within real estate and as you mentioned Nurit, there's no question that the social pillar within ESG has risen throughout the course of the pandemic. And in fact even through financing decisions, we've seen tremendous amount of capital support, social bonds or sustainability bonds which are inclusive of green and social impacts. As investors want to support the social pillar at the same time that they are also supporting the environmental pillar. So for the real estate sector we can now quantify some of these social impacts that I think were previously very quantifiable. And really important factors to keep in mind even before social impact our health and safety considerations within the business, within the building itself. The human capital within the real estate sector, the real estate sector is very much based on human capital and innovation and making sure that you're bringing the right ideas in terms of new solutions, new structures, new building materials, new supply chains.
Lindsay :
It's a really important social factor. And then last as you mentioned, there is considerable more attention to how can we crowd in capital to create more inclusive communities. And whether that be through education, whether that be through healthcare, whether that be through public spaces. And I think now that we have a taxonomy that's emerged for positive social factors and RBC includes these social factors in our own sustainable financing taxonomy, we can really articulate what some of those benefits are. So I think going forward I'm hopeful that articulating the social impact of real estate will not be seen as value destructive but will be seen as value creative. And I do think as we evolve the financing structures to be more inclusive of these social factors, we will start to see better availability of capital and hopefully some more attractive financing rates as well.
Nurit:
I want to touch on another part of the S, diversity and inclusion. With our roots in the construction industry, real estate has historically not been a very diverse business and our industry is making great strides in this space. But it's taking time to make change, particularly in the senior ranks. Are there specific strategies that real estate firms can take to help ensure that there are diverse voices at the decision making table?
Lindsay :
It's really important Nurit to think about why diversity and inclusion is important. And I think for the real estate sector we need to think beyond just diverse representation, be a gender representation or minority representation. And more broadly to the skills that are required to build a successful real estate company in the future. And I hear a very similar argument from some of my clients in the energy sector for example or in the mining sector that there is a limited pool of diverse candidates. And I think oftentimes that's because we're defining the pool in a very narrow perspective. Candidates that might have real estate exposure or they might real estate experience, or they might have already led a firm. Whereas when I think more broadly at creating a real estate business for the future, there are probably a variety of different skillsets around energy efficiency for example around as we talked about building inclusive communities around incorporating ESG factors.
Lindsay :
And that's so I think when you broaden the skillset beyond just looking for sector specific experience and define the skills instead of perhaps the resume, you will see that there are more diverse candidates that actually could add a lot of value in terms of how we think about building the next generation real estate company. And that's really the advice that I would give is think more openly about the skill sets, think more openly about your supply chain and think more openly about bringing in different perspectives that can be additive to your overall corporate strategy.
Nurit:
I think that's really good advice. I wanted to move on to talk about regulation in this space. I've heard it said that the reason that green solutions are economically feasible today is because there's a system in place to price carbon emissions. And while I think that we all believe that green solutions are a positive, they've come about partially as a result of regulation. And I'm not sure we'd all agree that more regulation is positive. What's your view on this?
Lindsay :
Yeah, there certainly is a lot of attention from a regulatory perspective on all things ESG right now. And there's no question that some of the perhaps subsidies that have been in place when you think of Europe or when you think of the US have served to grow and make some of the renewable energy industry, solar and wind for example, economical that it is today. And I do think for a variety of innovative solutions we do need some of those positive incentives. And it depends on whether you want to say a price for carbon is a positive incentive or a penalty. But at the very early stage of industry growth and particularly where there is a very clear societal benefit, we do need both the carrot and the stick to grow the industry. However, one of the things I am concerned about within an ESG context and now that there is a wide variety of regulators across the world paying more attention here is that we could create taxonomies or rules or constraints that would really constrict the growth of what I think is an industry at the very early stages of evolution.
Lindsay :
And so I think while it's really important for governments, for financial regulators, for security regulators to create those guard rails for ESG related disclosures for example, for ESG related frameworks. We need to ensure that we don't overregulate this new and growing industry so that it constricts the innovation that we need to see in order to ensure that we get the a hundred plus trillion dollars of capital that's required to get to net zero emissions by 2050. I would sum it up Nurit by saying policy stability is really important and perhaps even more so important for the real estate industry where you're making long-term investment decisions and so that stability is really critical. But to overregulate and change the rules of the game midway through could lead to capital fleeing potentially what could be very positive impacted decisions.
Nurit:
Lindsay, one of the greatest challenges that I hear our clients speak about with regards to ESG is measuring success. What tools are other industries using to measure ESG objectives and achievements?
Lindsay :
In ESG world this is a bit known as an alphabet soup. And so I understand some of the challenges and the frustrations Nurit that your clients speak to. But I do think it is becoming clearer. So currently right now across all sectors many of our institutional investor clients and many of our corporate clients are relying on the SASB. That's the Sustainability Accounting Standard Board, standard for ESG reporting. And it's based on industry material factors. So it's not a laundry list of items to report on, but only those factors that are deemed to be financially material to the operations of your business. The second thing I would point to would be the TCFD or the Task force for Climate related Financial Disclosures. That's not a standard, but it's a framework and it's a framework many of our clients across a variety of different sectors are utilizing in order to articulate their climate governance and their path forward to get to net zero. Within the real estate industry there are ESG metrics associated with GRESB.
Lindsay :
And I think we see many of our clients rely on that very specific industry standard that can allow for compare ability and very good compare ability within the sector itself. I do think we are going to see some very good advancements in this space. There is discussions underway to launch an international sustainability standards board which will make not only the metrics to disclose very, very clear, but also the approach to calculating the metrics. And so my advice there would be don't let some of these challenges get in your way. It's important to come out with measurable ESG data today. And once you embark on that journey you will set yourself up well for the time when these standards are actually mandated and required from a variety of different market participants. And we actually get international standards that are globally excepted.
Nurit:
Well, this has been a fascinating discussion. And I've asked you for a lot of advice, but I'm going to wrap up by asking you for one more piece. For a real estate firm who's just getting started on their ESG journey what advice would you have for them?
Lindsay :
So very similar taking us back to the first part of our conversation Nurit. Think about the governance within your firm who's responsible for climate. The second piece of advice I would give them is to really start benchmarking where you are today and to don't be shy and to work with industry partners, work with your investment bank. We provide them a lot of advice, helping companies map out what the material factors are. We help companies with peer benchmarking, industry standards, a variety navigating through third-party rating agencies. But start to get that benchmark in place so you can measure your performance today.
Lindsay :
And once you've measured your performance, that will allow you to set targets for yourself. And once you've got those pieces in place that really serves as the foundation to access the sustainable finance market. Whether it be through green bonds if you've got LEED certified buildings that fit within that framework. Or whether it be through sustainability link loans, where you're looking to tie in some of your emissions reduction targets within the loan structure itself. So start with the governance, then go through the framework and work with your industry partners including your financial partners and be part of the ecosystem.
Nurit:
Well, there are certainly big opportunities ahead for our industry in this space. Lindsay, thanks for being on the call.
Lindsay :
Nurit, thank you so much for having me. The real estate sector plays a really important role in getting to a net zero emissions economy and it's our pleasure to partner with you and your team.
Nurit:
I'm Nurit Altman, and this is the Real Pulse.
Speaker 1:
This has been an RBC capital markets production. You can subscribe to the real pulse on Apple podcast, Spotify, Google podcast, Stitcher, SoundCloud, or Amazon. Or visit our website, RBCcm.com/therealpulse. This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.