Abstract
Commercial Real Estate Governance in an Era of Climate Change and Biodiversity Rising Issues : Interview with Nathalie Palladitcheff, President and Chief Executive Officer, Ivanhoé Cambridge.
Keywords
Ivanhoé Cambridge, the real estate subsidiary of Caisse de dépôt et placement du Québec, develops and invests in high-quality real estate properties, projects and companies that are shaping the urban fabric in dynamic cities around the world. It does so responsibly, with a view to generate long-term performance to benefit our depositors, namely the 8 million Quebecers for whom we invest for. Ivanhoé Cambridge is committed to creating living spaces that foster the wellbeing of people and communities, while reducing its environmental footprint.
Through subsidiaries and partnerships, the company holds interest in more than 1200 buildings, primarily in the industrial and logistics, office, residential and retail sectors. Ivanhoé Cambridge held C$69 billion in real assets as of 31 December 2021.
Even if our mission hasn’t changed, over the past 5 years, the business has undergone a series of changes and initiatives designed to bring the company onto a truly global stage and to respond to what tenants, occupiers and communities need. Historically, the business has focused on office and retail assets, with a predominant presence on the North American market. However, we’ve since shifted our focus away from these sectors to diversify our portfolio, as well as re-orientating our business model towards an international stage through multi-market investment.
A key component of this has been the strategic repositioning of our portfolio across promising real estate markets and the subsequent de-prioritisation of our Canadian and United States retail portfolio. This has shifted our role away from investor-operators toward investors only, focussed on diversification, value creation and long-term performance on a global stage.
Meanwhile, of course, there have also been external circumstances which have expedited a lot of these changes, including the COVID-19 pandemic which has seen us diversify our assets even more. ESG has also become a priority frontier for the business. While we had corporate CSR initiatives implemented since 2012, we formally integrated ESG into our business strategy in 2019 and have since then reinforced ESG through the investment lifecycle and commitments on key ESG themes such as decarbonisation, for which we have set ambitious targets, including achieving a 35% reduction in our carbon intensity by 2025 compared to 2017, with the goal to achieve net zero across our global portfolio by 2040.
The journey that has led me to my role as CEO of Ivanhoé Cambridge has been an interesting one, and there have been many years of learning along the way. Starting my career in finance, my interest in real estate investment was realised during my time at Société Foncière Lyonnaise and later as Managing Director of Dolmea Real Estate.
Throughout my career I’ve faced multiple challenges that have forced me to adapt to new managerial skills and company cultures. While not specifically a milestone, the wealth of perspectives I’ve gained throughout has made me a confident and empathetic leader, and, with that, the environments I have been able to create along the way have become platforms for creativity and vision, where change is welcomed.
The rapidly changing real estate environment has created space for new and unexpected career milestones. The digital revolution has certainly been a pivotal time for the industry, requiring updated approaches that can incorporate technology innovation into our investment strategies. Meanwhile, the industry’s response to the sustainability challenge has been a critical issue for some time and presenting Ivanhoé Cambridge’s sustainability strategy and commitments has certainly felt like an incredibly significant moment in my career. We can’t change the industry alone, and it is my opinion that the global race to net zero requires a community-minded approach and collaboration. This ‘co-opetition’ and solution-sharing in the name of sustainability are something I continue to champion and even had the honour of presenting at The World Economic Forum in early 2022.
Of course, I can’t talk about my career without talking about myself as a female CEO in an historically male-dominated industry. I recognise the role I can play in improving access to career opportunities, and I’m proud to say that things are changing. Central to change of this nature is culture, and I’ve been able to create open-door policies that nurture confidence and creativity, establishing a forum that can encourage professional growth for all – regardless of gender, race and nationality.
Even before the pandemic, urbanisation, demand for space and digital connectivity were priority areas for Ivanhoé Cambridge, and the pandemic accelerated the demand for these trends on the global stage.
As with many industries, the pandemic was a pivotal time for Ivanhoé Cambridge and the wider property sector. Office space, a strategic focus of ours for years, rapidly became challenged by hybrid and remote work and by new wellness expectations from occupiers, and retail space faced serious uncertainties. Meanwhile, the digitalisation of the economy rapidly altered shopping habits and contributed to the boom of e-commerce which put an enormous strain on supply chain and the logistics sector in particular.
During these changing times, we concentrated on diversifying our portfolio to deliver for our investors and support communities at a local level, while addressing the trends which we knew were going to dictate our focus for the next number of years. This approach included focusing on mixed-use spaces, life sciences, alternative sectors (such as coliving, student houses, etc.) and last-mile logistics, where we could use our integrated expertise to invest in projects that would have a positive impact on the community and support inter-regional infrastructure dynamics.
As part of our strategic vision, we are investing in innovation through PropTech investments. For example, our partnership with Fifth Wall, the largest specialised fund in real estate technology, has helped us visualise a future that can address these key trends, where our investment is actively supporting the technologies that can deliver contactless buildings, health and wellness technologies as well as decarbonisation. Through our partnership with Fifth Wall, we have invested US$85 million in their Climate Technology Fund, and we are a leading investor in this fund.
Of course, now we have emerged from the pandemic, we face the challenges of a shifting global economy and a strenuous geo-political climate. In addition to these factors, we are also driven to meet our ESG commitments – thus presenting a unique and complex goal. While there is no one-size-fits-all response to the various contexts we operate in, we are confident in our business strategy that is designed to deliver for our Quebec pension-holders, while also ensuring our impact is positive, no matter where we invest.
We have made sustainable investment a priority and an integral part of our vision and mission. As a long-term investor, we systematically take ESG criteria into account throughout our investment process, from strategy and acquisition through to development, asset management and disposition. This approach enables us to make better investment decisions.
The social component of ESG is by its nature at the heart of our mission: through our mandate, we contribute to the financial security of our depositors.
Real estate has a critical role to play in the global race to net zero, with 40% of greenhouse gas emissions globally. The challenge is twofold: on the one hand, a significant amount of stock is outdated and may not be fit for purpose in the context of today; and on the other we need to reduce the environmental and social burden that the built environment has historically presented.
Firstly, by their very nature, buildings are immovable in a world that is changing rapidly around them – in fact, 85% of the buildings we see today will still be here in 2050. 1 Consequently, our strategy isn’t limited to only choosing the dark green assets with the best emissions data, but seeing the merit in those brown assets which have lower performance, and transforming them into future-proof buildings that measure up to the standards of today, as well as tomorrow.
Our investment in Haleco in Montreal illustrates just that. We’ve invested in urban regeneration to provide a best-in-class mixed-use asset on a brownfield site that would have otherwise sat empty – bringing together a range of ESG factors including an urban farm, pollinator garden, to deliver leading technologies and innovations that can serve as inspiration for future projects.
Meanwhile, our emphasis on social impact is rooted in our commitment to have a significant, meaningful impact on the communities we serve. We strive to create healthy, resilient living environments that have a positive impact. It is critical therefore that we integrate all factors of ESG into our investment analysis, evaluating both human and environmental factors including health and safety, wellness, access to services and public transit, as well as carbon-impact and emissions data.
Technology plays an integral role in helping us track our performance across our portfolio, helping us to set targets and measure our success. However, the real estate industry still has some work to do in terms of digitalisation. While Ivanhoé Cambridge is actively investing in technology innovation to help us map our emissions and improve building experience, the diversity of our portfolio presents a challenge – where limitations in some markets, and in some sub-sectors, still very much exist.
It is for this reason that we are actively seeking digitalisation through our investments, working with multiple PropTech funds and innovators from across the industry to achieve real change, including MetaProp, Round Hill Ventures, Green Point Partners, Taronga Ventures or Fifth Wall, as well as investing. In these investments, we are not simply a stakeholder but also a future user of the technologies being created. We’ve already worked with Fifth Wall to test some interesting innovation across our portfolio, including most recently a pilot project with Turntide Technologies at two of our Canadian shopping centres, designed to experiment the technology of new HVAC systems design to reduce utility demands significantly while enabling intelligent control systems. The pilot resulted in a reduction of energy consumption by more than 35% in the mechanical units that were upgraded.
Another aspect of digitalisation is standardised data collection that can capture the full picture and measure the impact of our portfolio. Of course, throughout all of this, the quality of data is key. You cannot manage or improve what you do not measure. To develop smart cities, efficient management, and so on, it is essential to be able to measure the current situation, hence the need to keep modernising data collection and infrastructures management to become standardised. However, to capture this adequately, it is fundamental that every party involved in the asset’s lifecycle consents to sharing such data. We usually observe that data is increasingly being shared by multiple parties. For example, we have succeeded in increasing our emissions data coverage thanks to tenants who are increasingly willing to share their energy consumption data, to allow the building owner to manage energy consumption more effectively.
It was a privilege to participate at COP 26. The discussion was rich and demonstrated the urgency of the challenge ahead, with a clear consensus around the necessity to go faster. Decarbonising our economy and mitigating the imminent threats of climate change and its negative impacts on the planet, and the obsolescence of our assets, is a priority for our industry. Being the largest asset class globally, we need to develop sustainable properties and build a resilient business model.
Speaking at the event, I focused on the critical need to address obsolete buildings, and the value erosion that naturally will take its course if we don’t act quickly. In order to invigorate change, a collective alignment of interest much be reached, and this primarily falls to valuation and economics.
Green investments should have a positive impact on valuation, and at COP26 I called on our industry peers to address ESG performance in the value chain - from not only how we can take responsibility for our own ESG and carbon goals, but also how our partners can do the same too. As such, I introduced Ivanhoé Cambridge’s Green Financing commitments, which involved, making an agreement with 12 of our lenders to adjust upwards and downwards the cost of our lines of credit depending on our progress in defined areas of ESG. We applied a similar approach internally and established an employee incentive plan tied to carbon targets. To create better alignment of interest across the value chain, we’ve piloted ‘Green Promotes’, also known as ‘impact-linked carry’, for our asset managers, a plan which rewards our partners based on operational efficiency targets, including carbon and green certifications levels. To achieve this transition to a low-carbon economy we need to align the economic interests of all players of the value chain. We must garner deep alignment on purpose, value chain redefinition, valuation philosophies, risk mitigation practices and tolerance, and finally carbon pricing and financial levers.
If there was anything I wanted our peers and partners to take away from my attendance at the event, it was that, to achieve something as monumental as the race to net zero, we must all work together. We must cooperate, not compete, to change the status-quo.
We are not hiding from the fact that there are areas we still need to work on. Embodied carbon associated with construction is one example of this. A key challenge, not just the property industry, but for industries everywhere, will be how to remove carbon from embedded supply chains that have been doing business the same way for decades, if not centuries.
A crucial solution to this will be through establishing clear policies and incentives to our partners, collaborators and peers – setting a standard that our competitors can take on-board too. By setting out intentions and working with partners to realise them, we can move from words to action.
For us, the first step is through integrating value into ESG performance. This approach is something we’ve already piloted in our ‘Green promotes’ scheme which, for our asset and property managers, applies incentive clauses based on ESG and carbon performance. Most recently, we put this into practice at our life sciences investment, M_Park, in Sydney, Australia. Such a structure includes ESG and carbon targets alongside financial ones, thus creating a positive correlation between ESG and financial performance objectives. To encourage the achievement of sustainability goals, we have introduced a sustainability-linked promote (or ‘green promote’) that is tied to ESG targets to ensure alignment of interest over sustainability KPIs, incentivizing outperformance against base case sustainability goals.
We’re seeing this being implemented in national policy, too. For example, the Italian government’s density bonus, triggered if contractors exceed certain renewable energy targets for major renovation projects, is a valuable incentive to move towards low-carbon projects. A similar approach can be applied across the property sector.
But that’s only part of the task and there remains a need to create solutions on a global level. With buildings accounting for 60% of carbon emissions in cities, and 50–85% urban building stock considered to be obsolete by today’s emissions standards, 2 achieving Net Zero requires more urgent action. In order to meet this goal, the industry must increase the retrofitting rates to above 3% per year – significantly higher than the current global retrofitting rate of just 1.2%.
Against this already complex landscape, valuation models do not generally account for future carbon costs, nor financial benefits derived from Green CAPEX investments beyond energy savings, and zero-carbon auditing at an asset level is yet to be seen.
The good news is that as more policies are being integrated, standards in the industry are evolving and market forces are starting to align, designed to hold the sector accountable for the suitability and quality of their buildings. That doesn’t mean simply buying the greenest assets, but instead performing carbon audits to better understand where the building is today, and where it could be after refurbishment.
Integrating carbon efficiency into human behaviour and habit also has a role to play here. If we were to replace building infrastructure like heating systems and appliances to the zero-carbon ready technologies that are already available and ready to be deployed, we would see a drop in energy demand of the built environment to 30% by 2030 and to just 2% by 2050.
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This is something very much front-of-mind when we review our assets and future investments – we know that there is work to be done, but there are resources and policies that exist to help us resolve these issues.
Contrary to some fears, there doesn’t have to be a trade-off between achieving ESG and losing competitive footing. This is a race we all want to win, and in an industry where the challenge is universal, it is important that we can work together to find the right solutions. Collective industry action, through initiatives like the Urban Land Institute and Carbon Risk Real Estate Monitor (CRREM) create a forum where we can share best practice and accelerate the transition. We’re proud to be members of these industry groups which can hold us and our peers accountable on an international stage.
Being open to innovation and change is something that will help us continue to generate value and instigate change in the years to come.
In Europe, alongside other real estate players, we have contributed to the launch of a pan-European low-carbon label with BBCA (Association Bâtiment Bas Carbone) for real estate, called Low-Carbon Building Initiative. The main mission is to promote the reduction of the carbon footprint of buildings over their entire lifecycle. This label is covering all the main real estate asset classes (office, hotel, residential, as a first step). Currently, there are two versions of the label: one for new-builds and one for renovations. This label is compatible with ‘low carbon/decarbonization national strategies’ and European low-carbon targets. This initiative brings independent scientific clarity on low-carbon constructions and/or renovations and complements operation focused labels which do not consider the impact of construction works and use of bio sources materials.
We are also supporters of GRESB (Global Real Estate Sustainability Benchmark), an international reference ranking that evaluates the performance and CSR policies of company in the real estate sector each year. Ivanhoé Cambridge was one of the first real estate companies to comply with GRESB standards. On an annual basis, we measure our global portfolio’s ESG performance using the GRESB survey framework. This helps us rate our properties from an ESG perspective and monitor improvements overtime. We leveraged this involvement to expand our CSR efforts over the years and better gauge how to improve our performance. Furthermore, we have representation on the Foundation Board and on the Standards Committee, to ensure that we are pushing for adequate and meaningful evolution of the GRESB survey, but also demonstrating our commitment and leadership on these issues at a global scale.
Biodiversity is often referred to as the other side of the same coin as climate change. It is a serious issue that’s been accidently ranked as an issue less critical than decarbonisation. However, if you look at the figures, it is just as urgent, and just as critical as the race to net zero. Firstly, the pace of soil artificialization and urban sprawl has been twice that of demographic changes and population growth. In short, that means that, on an inhabitant basis, we take over twice the amount of space that we use, and cause twice the amount of damage in our path.
The impact of this can be devastating, where loss of agriculture and changing genetic-diversities within plants and animals means that up to 1 million species face extinction in the years to come. 4 As such, we need to think seriously about the impact of real estate on biodiversity. The question we must ask ourselves is how we can put more nature into cities, buildings and spaces we occupy. The S in ESG can also play a role here too – where social factors such as wellness naturally intertwine with environmental improvements.
For example, biophilic design, which introduced nature to buildings, can not only improve the atmosphere and air quality within a building but it has proven positive effects on mental health that can play a constructive role on business outcomes. This is something we are activating across our portfolio. The Haleco project in Montreal has been designed to celebrate the coexistence of nature and community, focusing on the natural synergies between sustainability and wellbeing. Biodiversity will be core to the project, with common green spaces, a vegetable garden and a pollinator garden open to the general public which will contribute to regenerating the area’s vegetation. The project includes an urban farm and a ‘Fab Lab’ – a centre for upcycling and repair that can set an example of how circular and local economy can coexist within an urban environment.
The main obstacles we face in integrating ESG across our portfolio lie in collaboration, not just within real estate, but also among regulators – who have a really key role to play in setting the precedent for the transition.
Currently, with different jurisdictions taking on different rules, some regions make it easier, and others make it harder when thinking about integrating sustainable criteria across a building’s life cycle. Regulations vary from country to country. The low-carbon transition is a global issue, but we have to provide responses or solutions that are mainly local at this stage. It is imperative to ensure global consistency while continuously adjusting to local and/or national specificities and regulations.
A one-size-fits-all approach will never be how we operate. Our organisation must reflect the reality of our society and our activities. Historically, we had a centralised team in Montreal, but we evolved our structure towards a hybrid model where we have a regional presence (Asia, North America, Europe) with local experts and a strong global consistency.
Sometimes local regulations can prevent us from making improvements. For example, we can mention our Arboretum project in the Greater Paris Area, developed with our partners Icamap and WO2. After completion, Arboretum will be the largest low-carbon office campus in Europe, with 126,000 square meters, to be built out of wood and will cover up to 80% of heating and cooling needs through the use of geothermal energy. As part of this project, we faced stringent building codes and insurance rules that made it more difficult to incorporate sustainable design. We need to push for impactful regulatory frameworks with regional stakeholders. We need an educated workforce including engineers, designers, and constructors to be able to push for innovative design solutions that might be new or unknown to local building codes.
What we’ve learned is that the industry still has the need to upskill and expand resources that can appropriately educate leadership at a policy level. Everyone must work together to achieve the change, and governments will play a pivotal role in this.
To get governmental ‘buy in’, there is also the need for greater scientific knowledge and understanding of the impact of buildings through the lifecycle of a property. There is some data on this, but it remains limited. Greater depth of research can illustrate the urgency of the issue, making a stronger case for updated regulations and codes that can bring real estate into the 21st Century.
The convergence of expectations from the industry, governments, tenants and occupiers will be the driving force for real change in the years to come. Because real estate is a tangible asset, and by nature exposed to longer-term trends and challenges, the appetite and talent available for evolution are enormous. We’ve already faced the challenges of economic downturn and COVID-19 and now we can use that momentum and power in the face of adversity to the climate emergency.
There is an education gap in sustainability. It is not surprising that ESG emerged and is growing as an important topic in our industries. While there has been a small community of ESG professionals in the industry for several years, it is now very much mainstream and perhaps one of the most important topics in real estate. And as a result, there’s a gap in the amount of expertise required to make meaningful change at the pace required. While some universities offer structured ESG programs, there is a need for the education sector to expand ESG education to all sectors. Some institutions, such as Université du Québec à Montréal (UQAM), have a role to play in this ESG integration. We currently see various ESG training programs popping up, and we’re evaluating the fit with our own operations. It is essential that any training is not just theoretical but applies to real life situations and connects ESG performance with financial performance considerations. ESG is no longer an add-on – it is very much central to our core mission and therefore must integrate into all of the decisions we make. That requires expertise, learning, teaching and being a leading voice towards that much needed transition.
Within all of this, however, we know that skills must be developed, and the industry must be educated. The skills we need today didn’t exist a decade ago, or even 5 years ago, and there’s much to be done to fill this skills gap. What we need now is tangible action.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
