The Swedish construction and property industries account for almost 40% of energy use in Sweden and for about 20% of the country’s carbon dioxide emissions. Translating a major political focus on climate into more regulations and tougher climate-related requirements places high demands on the industry to reduce its climate impact and find ways to maintain its appeal to investors in future. As is always the case when a sector or industry undergoes rapid change, there are big profits to be made for those who act quickly and intelligently.
I note that most property companies have made great improvements in terms of energy use; most have completely or partly switched to climate-neutral heating and electricity supply. Wallenstam is an example: it builds its own wind turbines and solar parks to supply its properties with electricity. In this context, it is important to understand that the rapid change we are seeing is largely linked to the increases in profitability it generates. Compared to other types of companies, property companies’ investments in energy-efficient improvements can mean a more immediate and felt impact in the form of increased profitability and stronger cash flow. This is one of the reasons why the property industry accounts for a significant proportion of the green bonds being issued, with the proceeds being used for various types of environmental projects. This may include, for example, the expansion of wind turbines, environmentally certified new-build and rebuild projects, or other climate-related adaptations to properties.
Energy management of the property portfolio is a real priority in itself, but it needs to be supplemented by sustainability assessments at supplier level and life-cycle analyses of buildings.Emelie Aulik, Senior Portfolio Manager
But with these initiatives comes an increased creativity in terms of reporting. Many companies wish to excel, and new ESG data points are quickly emerging and being presented in a nice-looking and appealing way. However, the overall picture quickly becomes rather fragmented and somewhat chaotic: in an attempt to appear to be sustainability champions, companies not only lose sight of the opportunity to make relevant comparisons across the industry; other, more complicated, difficult-to-access areas, important to us as investors, are left out.
The industry’s focus on sustainability is largely a focus on energy use and certification of existing properties. Energy management of the property portfolio is a real priority in itself, but it needs to be supplemented by sustainability assessments at supplier level and life-cycle analyses of buildings. An interesting fact in this context is that, in the annual surveys of different industries’ sustainability insights conducted by SB Insights, the property industry ends up at the bottom year after year. Here, most attention is paid to a lack of focus on sustainability in connection with purchases. Few of the property companies we have analysed have any substantial understanding of their suppliers, nor are they interested in the life-cycle perspective; instead, they exclusively focus on keeping costs down. A lot of the talk around sustainability suddenly seems empty and hollow, which is a problem, not least in the longer term.
Building materials such as cement and concrete account for most of the industry’s emissions, and so we believe that construction itself will be the biggest sustainability challenge for property companies in the future. Most emissions thus fall into what is called Scope 3, i.e. emissions resulting from companies’ construction activities, with actual emissions occurring on other parties’ sites. In light of the increased regulation, both today and in the future, we believe that companies exercise no control or even have a grasp of this particular area, which will grow in importance. Using more sustainable materials in construction will, we believe, increasingly pay off and we generally think that companies should start this transition process as soon as possible.
Looking at the situation from a broader perspective, it is of interest to note how property companies, while reporting and, in some cases, over-reporting on their sustainability efforts, continue to overlook basic areas that we investors consider relevant. For example, only Vasakronan has estimates for emissions within Scope 3. Property companies have complicated value chains, at least if you look at the rear end of the chain, where several thousand subcontractors are often found. We understand that it is generally difficult to keep track of everyone but we firmly believe that this will be required.
It is of interest to note how property companies, while reporting and, in some cases, over-reporting on their sustainability efforts, continue to overlook basic areas that we investors consider relevant.Emelie Aulik, Senior Portfolio Manager
Property companies must take the entire value chain into account – at present, it seems that they are not doing so. Any company that comes up with sound and efficient solutions in this area will soon, we believe, be able to stand out from the competition. Essentially, such companies will meet future expectations of both the market and legislation. Reporting relevant data and making it available to us as investors is an important part of this mapping exercise. Here, we will be looking for substance and relevant data points and we will highlight the need to obtain these when talking to companies.
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You can learn more about how our investment teams work with sustainability matters in our latest annual report ‘Our Sustainable Investment Journey’.