ESG Integration in Real Estate The European investors’ view UC Berkeley, 2 December 2010 Hans Op ‘t Veld Head of Listed Real Estate PGGM

2 Responsible Investing at PGGM All investment activities in which environmental, social and corporate governance (ESG) issues are consciously taken into account All investment activities in which environmental, social and corporate governance (ESG) issues are consciously taken into account Responsible investment is one of our core Investments Beliefs: it is a necessity Responsible investment is one of our core Investments Beliefs: it is a necessity We want to integrate ESG factors in all asset classes and investment decisions

3 Integral approach towards Responsible Investing ESG Integration in investment decisions ESG factors in all investments Exclusions Based on our identity: weapons and human rights Engagement & Voting Active ownership: engagements to improve ESG performance of companies/markets Informed voting on all equities Accountability Inform stakeholders what we have done and why Annual RI report; quarterly engagement reports Transparency in holdings RI Policy Core themes Climate Change Governance Health care Weapons Human rights Integration RI in all asset classes

4 Sustainability is wonderful…

5 …but other factors need to be taken into account too Performance Prologis vs. FTSE EPRA/NAREIT Global Index in US$, 31/12/2007 = 100 Performance of property companies is dependent on a lot of factors i.e. availabilty of financing Independent of sustainability scores, companies face issues In this case: Logistics companies like Prologis are hit particularly hard by credit crisis by drop in global trade Comments ESG is only one factor in the investment decision and should be evaluated as such

6 Sustainability: focus on risk and return Return Risk Element Improve portfolio total return Through better leases Through lower vacancies Through higher value Reduce risk of vacancies and soaring costs Regulation Building codes Taxation Tenant’ demands Objective Integration in investment process is the real challenge

7 We engage with companies to improve ESG standards Environmental Governance ActionsExample Query companies on environ- mental factors –Energy –CO2 Measure environmental performance of companies and portfolio Engage with companies to improve governance structure Discuss issues with financial authorities where needed Liaise with trade organisations to improve self-regulation What are sensible metrics to engage on? for illustration

8 PGGM Real Estate has commissioned the Maastricht University to research sustainability of portfolio Maastricht University commissioned by PGGM, APG and USS to initiate an environmental real estate survey Focused on the main environmental aspects –energy –water –waste –CO2 Data is collected to provide overview of entire portfolio: –Complete indirect property sector: listed and non-listed –Covering the main sectors: retail, office, residential and industrial Partnership with other investors and associations (EPRA, INREV and ACSI) Focus of environmental study Goal is to measure and to monitor the environmental performance of the real estate portfolio

9 To measure is to know: are companies practicing what they are preaching? Do companies work with a policy regarding environmental aspects? What are the elements of such a policy? Do companies look at environmental aspects in portfolio decisions (i.e. in buying – holding and selling assets)? Are companies measuring the output? CO2 emissions Water use Waste Is the output externally verified? There are several rating standards Are ambitions formulated to drive down the environmental impact? ImplementationPolicy Promises, promises Walking the talk!

10 Focus on existing stock: 98% of portfolio The most sustainable real estate is no real estate Is adding new green real estate sustainable? Not just real estate in isolation: but also environment to take into account Or should we focus on improving existing stock? Different metrics Cost / benefit analysis of retrofitting Since only 2% of stock is added yearly, focus should be on existing stock Considerations