Bouwend Nederland feels a responsibility to aim for and encourage a social return as well as a financial one - especially as many of its members are actively involved in social responsibility
Pension investing in the Dutch construction industry
Much more than just achieving a financial return
By: Joba van den Berg-Jansen, director social affairs & member services Bouwend Nederland and Kees Scheepens, policy advisor at Bouwend Nederland and chairman of the Asset Management and Balance Sheet Management Committee at bpfBOUW.
Bouwend Nederland (the biggest Dutch employers’ organisation in the construction and infrastructure industries) and bpfBOUW (the Dutch construction pension fund) believe in the added value of a long-term focus. Organisations that include ESG-aspects have a superior and more resistant perspective and therefore on average perform better and at lower risks.
Bouwend Nederland and pension fund bpfBOUW are demonstrating that real estate investing can result in not just financial returns, but can also create ESG advances. How are they integrating sustainability into their building and investment activities?
Building sustainability and saving energy combine with a good return
Pension fund bpfBOUW is responsible for the pension payments of a quarter of a million former construction industry workers. Only about 25% of the sum of these pension payments is financed from premiums. In fact around 75% comes from investments. The financial return on investment is therefore extremely important for employing organisations in the construction industry (members of Bouwend Nederland) as they pay high premiums.
Despite the importance of such financial returns, Bouwend Nederland and bpfBOUW believe that investing involves more than just achieving a financial return; their stance is that the way that return is achieved is relevant for every investment. Because Bouwend Nederland stands for corporate social responsibility, it carefully selects the employer’s representatives who sit on the bpfBouw board.
BpfBOUW has entrusted implementation of its investment policy to Bouwinvest (for real estate) and APG (for equities, bonds and other investments). These asset managers investigate to what extent there is attention paid to environmental, social and governance considerations – so called ESG criteria - for every investment of bpfBOUW. ESG criteria are taken into account for all asset classes.
Some investors believe that using ESG criteria - in other words choosing for socially responsible investing – comes at the cost of the potential financial return that could be achieved.
Bouwend Nederland and bpfBOUW do not share this opinion. The experience of these organisations indicates that including ESG criteria in the selection of investments can and does generate extra financial return.
Concrete Returns from ESG
This article will elaborate some examples of bpfBOUW’s ESG policy in the real estate asset class. The main focus will be the way in which building sustainably and saving energy can go hand-in-hand with a good return for bpfBOUW’s participants in real estate investments.
Real estate is an important part of bpfBOUW’s total investment portfolio. BpfBOUW invests approximately 15% of its portfolio, just over 7 billion euros, in real estate. Various sustainability labels and performance indicators are available on the market for assessing the sustainability of real estate. GRESB and BREEAM are examples that are known worldwide and widely accepted.
Bouwend Nederland and bpfBOUW believe that investing involves more than just achieving a financial return; their stance is that the way that return is achieved is relevant for every investment
GRESB, BREEAM and beyond
The three Dutch sector funds (housing, shops and offices) in which bpfBOUW invests at Bouwinvest have received the highest score in the Global Real Estate Sustainability Benchmark (GRESB) for the third year running.
GRESB is an independent benchmark that assesses the sustainability policy of real estate funds and portfolios worldwide. GRESB was set up in 2009 by APG and other parties in order to be able to assess the sustainability of real estate investments. GRESB was taken over by the US-based Green Building Certificate Institute (GBCI) in 2014. This company will continue to carry out the GRESB measurements independently each year.
The following energy reductions were realised within these funds in 2015:
Reduction in 2015
Reduction since 2012
Receiving the GRESB Green Star label is recognition for the Dutch real estate funds of the high sustainability value of these investments of bpfBOUW. The High Sustainable Investments (HSI) designated as Green Star consequently increased in 2015 from 5.7 billion to 6.9 billion euros (13% of our portfolio).
On behalf of bpfBOUW, Bouwinvest weighs the ESG criteria before making any investment. Issues such as sustainability performance are then measured, compared and, where possible, improved further.
While GRESB is a benchmark for real estate funds, BREEAM is a label for sustainability on the building level. BREEAM stands for Building Research Establishment Environmental Assessment Methodology. A BREEAM certificate can be attained for existing real estate as well as for the design and construction of new buildings.
Bouwinvest works with tenants, property managers, developers and builders to reduce energy and water consumption and separate and recycle waste flows. The BREEAM sustainability classification consists of 5 categories, ranging from “pass” (1 star, better than the level stipulated by law in the Buildings Decree) to “outstanding” (5 stars).
In addition to GRESB and BREEAM designations, there are a variety of other concrete examples which contribute to sustainable building and energy-saving measures and are therefore important for bpfBouw:
Bewuste Bouwers [Conscious Builders]
Bewuste Bouwers is an independent foundation that issues an ESG quality mark to contractors who are willing and able to comply with a code of conduct during construction: there must be attention to limiting and separating waste, reducing energy and water consumption, safety at the construction site and preventing any inconvenience for the neighbourhood. A Bewuste Bouwers Quality Mark yields points in the BREEAM system.
Bouwinvest’s standard contracting agreement includes participation in Bewuste Bouwers as a requirement.
In 2014, Bouwinvest launched the roll-out and installation of solar panels at an initial selection of Dutch single-family homes in the portfolio, creating value in a variety of respects. The panels are financed by the fund, but repaid by the tenants through a small rent increase. On balance, the tenant’s living expenses decrease as the energy costs decline. The value of the home also increases, thanks to a better energy label. CO2 emissions are also reduced, and solar panels contribute to the Dutch government's target of having the percentage of sustainable energy increase to 14% by 2020.
This means there are gains on multiple fronts: gains for the environment, gains for the tenant and gains for the investor.
Zeer Energiezuinige Nieuwbouw (Extremely Energy-Efficient New Construction)
With the Extremely Energy-Efficient New Construction (ZEN) platform, the four sector associations involved in the Spring Accord (Aedes, Bouwend Nederland, NEPROM and NVB) hope to encourage a turnaround on the housing market: one in which making energy no longer a cost item but a unique buying point for the consumer. ZEN puts the focus on the resident and their personal preferences in relation to comfort, health, indoor climate and affordability. At the same time ZEN is contributing to the realization of the EU’s goal of nearly energy-neutral new-build housing (BENG) by 2021.
As housing investor for bpfBOUW, Bouwinvest is one of the 40 companies participating in ZEN. The intention is that in the coming years 200 ZEN houses will be constructed as part of the Rijswijk Buiten project. The first 43 ZEN homes wereadded to Bouwinvest’s Housing Fund portfolio in the summer of 2016. Residents don’t pay for heating or the use of hot water; instead the homes have been equipped with a geothermal loop, PV panels, a sophisticated ventilation system and triple glazing. These homes have an EPC (energy performance coefficient) of 0. In other words calculated over a year, no fossil fuel needs to be supplied for the building’s energy use.
Expansion of the use of energy dashboards in existing offices
For an investor, making new construction sustainable is tough enough; but making existing construction more sustainable is an even greater challenge. Nonetheless for a direct real estate investor like bpfBOUW there is always the opportunity to make progress. So in existing office buildings, Bouwinvest has been using smart meters to monitor electricity since 2011. This allows Bouwinvest, the building manager and the tenants to closely monitor energy consumption and costs – an approach that is bearing fruit. Since 2011, energy consumption in these offices has decreased by more than 10%.
Dialogue with the tenant
At the end of the day, energy saving is a shared interest: the tenant’s costs decrease, the value of the landlord’s building increases and last but not least, the environment profits.
To encourage this dialogue, Bouwinvest developed the DUO label for offices in cooperation with the engineering firm Search. The DUO label supplements the regular energy label (the EPA custom advice) with tenant-related energy-saving measures. Energy saving simply works best if the landlord and tenant together look into what (additional) measures can be taken.
ESG policy and social responsibility
Good governance, attention to sustainability, and socially responsible investing contribute to society and to a sustainable world. Bouwend Nederland feels a responsibility to aim for and encourage a social return as well as a financial one - especially as many of its members are actively involved in social responsibility (see the Bouwend Nederland website for more information BouwendNederland/social-return. The condition does apply, however, that this social return should not have any detrimental effect on the financial return and/or risk for the fund.
ESG policy is of course broader than building sustainably and saving energy. ESG policy is fleshed out by making active use of voting rights in shareholder meetings. Further, bpfBouw engages in dialogue with companies about better governance, a conscious remuneration policy, better environmental practices and decent working conditions.In addition to dialogue and the use of voting rights, bpfBouw also excludes certain investments – the so called ‘sin investments’. It does not invest in companies that are involved in the production of cluster munitions, anti-personnel (land) mines, and chemical and biological weapons. Companies manufacturing nuclear weapons are excluded if they do so in contravention of the Nuclear Non-Proliferation Treaty.
If companies in the portfolio are suspected of being involved in violating the rules of the UN Global Compact, bpfBouw engages in dialogue with them aimed at improving their behaviour. If this does not have the desired effect, bpfBouw can exclude these investments.
It is also possible to exclude certain government bonds. That is the case if the UN Security Council has announced an arms embargo for the particular country.
The current ESG policy is described in further detail in the Annual Responsible Investing Report of bpfBouw - and it continues to develop. For example: in recent years, bpfBouw’s Asset Management and Balance Sheet Management Committee has put the ESG policy on the agenda more explicitly and frequently and advises the board of bpfBouw on how to reach specific ESG targets.
After the UN climate summit in New York in 2014, bpfBouw began to explicitly seek out investments with lower CO2 emissions. In the meantime, they have made some progress in this respect. The climate accord of Paris has tightened up society’s targets and will certainly have consequences for the further search for investments with low CO2 emissions.
ESG even more important in the future
Bouwend Nederland fully supports the vision and strategy of bpfBouw regarding Environmental, Social Responsibility and Governance policy as conditions to select assets and investments. Viewing political developments and discussions we think that ESG will become even more important in the future.
BREEAM (example in Amsterdam)
Nieuwendijk 196 in Amsterdam is an example in the portfolio of the Shops fund. Numerous sustainability measures have been integrated into the design of this 5,100-m2 retail space. For example solar panels are being installed on the roof and mainly LED lighting is being used. Energy-efficient escalators and elevators were selected. Beyond that, most of the existing structure (pilings, foundation, ground floor and external walls) is being maintained. The design received the BREEAM-NL Design Certificate “Very Good” (3 stars). After the retail space has been furnished and is active, the tenant can also implement a broad range of sustainability measures. This could include water-saving toilets, energy-efficient lighting, etc. The BREEAM completion certificate is only issued once the tenants have occupied the building and submitted all the supporting evidence required for the BREEAM certificate. This is took place in the spring of 2016.
Another example in the Shops portfolio is the redevelopment of Damrak 70 and 80, a sustainable retail space of almost 27,000 m² at a unique A1 location in Amsterdam. The BREEAM design and completion certificate was achieved for this project by the end of 2016.
Bouwend Nederland is by far the largest employer’s organisation for the Dutch construction industry with 4300 member companies; more than 90% of the members are SME’s. Over 60% of the employees under the collective agreement work for Bouwend Nederland members.
BpfBouw is the pension fund for construction. It controls euro 55 billion invested assets and is one of the four largest pension funds in The Netherlands. The coverage ratio is 105.5% (end of September 2016). The annual report of bpfBOUW is stated that by the end of 2015 there were around 800,000 people - pension participants, deferred members and pensioners - involved with bpfBOUW.