Talking Property | ESG in Retail Real Estate

Featuring Sameer Chopra, Alicia Maynard, Melissa Schulz & Michael Hobday
Thursday 3 March 2022

SC:
Welcome to ‘Talking Property with CBRE’, a podcast where industry-leading experts share insights into the way we live, work and invest through the lens of commercial real estate.

Hello, my name is Sameer Chopra – I’m CBRE’s Head of Research and ESG in the pacific. In this episode, we explore the latest trends, innovations and requirements in ESG for the retail real estate sector.

In this episode, I’m joined by Alicia Maynard, General Manager of Sustainability and Technical Services at ISPT. Melissa Schulz, general manager of Sustainability at QIC. And Michael Hobday. Michael leads the Network Strategy and Portfolio Optimization for 7-Eleven Australia.

We hope you enjoy the conversation as much as we did.

Let me start with you, Alicia. Alicia, can you please give us a quick introduction to ISPT's real estate assets?

AM:
So ISPT is a national, diversified property company. We have assets in residential, retail, industrial, office, healthcare and education sectors, and we are fully funded by industry superannuation.

SC:
Alicia, just thinking about ESG risk and opportunity from an ISPT perspective, do you see scope for a bigger opportunity in office, retail, or industrial?

AM: 
Yeah. There's an evolution that we have seen over the past couple of decades, but definitely, a revolution to come. In the office sector, it's been largely driven by commercial building disclosure and legislation for mandatory disclosure. Retail hasn't had that. What we have seen in retail, however, is the way that our retail shopping centres, particularly in regional areas, has served as the heart of the community, particularly with the flooding or bush fires and people needing to rely on those essential services that they have access to through our shopping centres.

SC:
And Alicia, where you don't have operational control of an asset, how do you influence the sustainability agenda?

AM: 
So we don't have operational control in some of our joint venture retail properties. And similarly with our industrial facilities where the tenant or our customer then is responsible for managing their own electricity or utility costs.

So with retail, we have the opportunity to speak with our joint venture partner and understand and align our targets. And that way, we can use those properties as a testbed where we jointly share risk and cost to advance a particular initiative, share the learnings, and then roll them out across our broader portfolio.

In terms of industrial, we work very closely with our customers, particularly on technology and understanding things like robotics and how we can support them in their sustainability strategies from a base building perspective.

SC:
Great, thanks. Melissa, we might shift to you. Can you give us a quick introduction to QIC's assets?

MS: 
Yeah, sure. So QIC is obviously made up of a number of different investment management teams, but in the global real estate part of the business, which is where I work, we own and manage a $22 billion portfolio of about 40 mixed-use retail and commercial assets. So, the vast majority of them are retail and Australian based, located predominantly on the Eastern seaboard.

SC: 
Okay. So we wanted to dive into retail and shopping centres. So how do you tailor your ESG approach for retail assets?

MS: 
I think each property type is a little bit different, but having said that, our recent ESG strategy refresh for the real estate part of the business really sets out to achieve a common set of focus areas and long-term sustainability objectives right across that property portfolio. And we do have a small office portfolio in Brisbane as well. Retail's probably traditionally been a slower mover in the sustainability space compared to other property types, but I think we've seen this shift in the past few years. And I think the interesting thing about retail is that you not only have that direct access to your main customer being the retailer, but you also have direct access to your customer's customer, the consumer, as well as all of those other local groups that have touchpoints with the centre. So I think that gives you a unique stakeholder base and, in many ways, a unique advantage to do some great stuff in the ESG space.

So, if you think about environmental sustainability, for example, shopping centers have really large roof spaces that are screaming for solar panels. And that can be a really highly visible sign of sustainability and action to those local communities. I think that there's also lots of opportunities in the social sustainability space. Many of our shopping centres are the only town centres in the local communities where people come to shop, socialise and be entertained. And we play a really important role in those local communities. So I guess with that comes a high level of expectation that we're supporting relevant local community causes. So I think for retail, it's really about leveraging these unique opportunities and stakeholder touchpoints that we've got access to, but in order to keep driving value across those strategic focus areas that we've identified for that broader property portfolio.

SC:
And Melissa, is data availability and benchmarking just as easy in retail compared to, say, your office holdings?

MS: 
I think for our direct footprint... When I say that, I mean common area, performance data, the bit that we've got operational control over. I think, yes, it's easy. But I think if you look at how stakeholder expectations have evolved in terms of reporting boundaries, we're now starting to see increased interest, particularly from the investment community and that whole of building performance. And that, of course, includes our tenant’s performance data. So I think that's where the ease of data collection for benchmarking purposes starts to diverge. For an office building, availability of tenant data is typically pretty straightforward. There's usually fewer tenants than a shopping centre and a metering setup that more easily enables that data collection.

But in the retail environment, it's a bit more complicated, particularly in large centres, which can have hundreds of individual tenants. So we do have embedded networks in some of those shopping centres where tenants are individually metered, and that can make things easier. But I think where that isn't the case. We’ve then got to connect with each individual retailer to collect their data. That includes majors, major tenants, like supermarkets who typically procure their own services in all of our shopping centres, and that is services like electricity and waste manage services. So it's about connecting with the tenant to collect their data often in the retail space. So it's definitely possible to get that whole of building performance snapshot for retail. It just requires a bit more effort than with the office portfolio.

SC:
Great. Thanks, Melissa. Michael, I might pull you into this as well. Could you please walk us through 7-Eleven's footprint? Roughly how many stores and employees are there?

MH:
Yeah, so we're a footprint of about 720 stores, 7-Eleven stores. There's about 9,000 employees, and they're primarily on the Eastern seaboard. We've got a footprint in Perth or WA as well, but yeah, Victoria, ACT, New South Wales and Queensland is where the majority, the lion’s share of those stores, are. And it's a mixture of leased small-time developer type arrangements. And there's some majors as well in there as far as landlords go.

SC:
As someone who's got a very large franchise network, is the demand for sustainability, does that come from head office from 7-Eleven or from the franchisees themselves?

MH:
It's primarily the customer that drives it for us. There's not many weeks that go by when we're not getting a letter from a school kid or a customer saying, what are we doing around sustainability? But for us, sustainability energy is a big part of it, but waste and other elements of sustainability that we're often being pushed on by our customers.

SC:
Thank you, Michael. You talked about energy, and maybe we'll shift to climate change and net-zero. Alicia, ISPT is a hundred per cent carbon neutral for base buildings. What does this practically involve when you think about neighbourhood centres?

AM:
So for the last 15 years or so, we've been upgrading our properties and investing in really efficient technology on the ground. So, we've been looking at our lighting and air conditioning to make sure that it's performing at its optimum. Then what we've done is we've rolled out a national rooftop solar program, and we're also sharing that solar with our retailers. So, we've been able to increase the footprint of our solar much bigger than if we were just fully focused on the base building. And we're able to cover off the additional load with retailers as well. In terms of the overall carbon-neutral pathway, once we've been able to look at what we're able to do to minimise emissions on the building, we then look to procure solar energy or renewable energy from the grid, and then we've offset the remaining residual emissions. And it's not a linear process. It’s circular. So, we've gone back to look at some of those existing building technologies to make further improvements and to make sure that we're focused as much as possible for the impact that we have on the building, rather than looking to external reductions or offsets.

SC:
It's a good approach. Just thinking about the building itself. And Alicia, any colour you can share about the economics of achieving net-zero. There is significant savings in the utilities expense.

AM:
There are significant savings. So, I'll give an example of one of our shopping centres where we have an embedded network, and we're sharing that renewable power with our retailers. So, the payback on that particular property for a full rooftop scale system is around about five years. But what we've been able to do is share the power with our retailers. And it's not just the reduction in electricity that we have been able to demonstrate the return on investment, it's the income we've also generated from selling the solar power, which on this particular property equates to about $300,000 of annual increased net operating income.

SC:
Some big, big numbers. Melissa, QIC's committed to net-zero by 2028 across the Australian retail portfolio. So, when you look at strategies involving purchasing renewables solar energy efficiency, which one of these do you think is the biggest mover of the dial in the next decade?

MS:
I think in the retail space definitely rooftop solar. Alicia touched on that previously, but shopping centers have really big roof spaces, which are perfect for the installation of large scale onsite solar systems. They also operate during the day when the sun's shining. So, it means that we don't need to wait for batteries to become commercially viable broadly for these solar systems to make a significant impact on our energy use right now. And I guess on that point about batteries, you asked what's going to be the biggest mover of the dial in the next decade. Obviously, solar is already moving the dial. But I think it's probably going to be batteries coupled with onsite solar because it's going to enable more precise sizing of onsite solar systems, where batteries can help with energy supply during peak demand periods during the day, but equally assist with supplying energy to shopping centres at night.

And this is important, I think, in the context of that trend towards longer trading hours, but also mixed-use precincts where centres are increasingly having that night time dining and entertainment offering. Energy efficiency obviously plays a crucial role as well in centres achieving net zero carbon targets. And I think this combined with onsite solar and in the near future batteries. That really means that net zero can be achieved with very little need for the purchase of offsets in the retail space.

SC:
I'm hearing similar that batteries are the next big leap. Alicia, I might move back to you. What are you seeing from tenants in their desire to participate in net-zero? Is this confined to large format retailers? Are you also seeing it from the specialist stores?

AM:
Really what we're seeing is there's an opportunity to align with everyone who wants to make an impact. And with ISPT's carbon certification, the emissions that we have offset and the reductions that we've achieved from our direct contribution to those emissions coupled with some of our what we call scope three or indirect emissions. If our customer wants to certify carbon neutral, what ISPT has offset actually contributes to a saving from their indirect emissions. So, there's a natural scale of economy that we create by ISPT taking that decision to certify carbon-neutral now. And I think a saving is a saving. We've seen the challenges of the pandemic in terms of costs and income strains, and where we're able to demonstrate that we can still lead in this. We know that there is a climate crisis unfolding at the moment, and we must take direct and immediate action. So, being able to do that, save those emissions, but also share the savings with our retailers has been really important for us.

SC:
Michael, just pulling you back into this as well. When fitting out a new store, what are some of the initiatives that incorporate sustainable materials in the design?

MH:
So, some of the initiatives that we are looking at in particularly new stores, but also in the stores that we are refurbishing around different types of energy-efficient equipment but also solar and the conversation, I guess, goes beyond our fit-out, but also the developers that we work with and asking them to support those initiatives as well. Certainly, the number of new materials that we can incorporate is changing; technologies are changing and so on. What we are finding is it's about a 20 per cent increase in capital costs. We hope to be able to bring that down over time once we've tested and learned particular materials and particular pieces of equipment through scale and economies of scale. But at the moment, it's a fairly significant increase in cost.

SC:
That's handy to know that 20 per cent uplift in Capex. Alicia and Melissa, what role does data collection play in monitoring emissions? Do you use a standardised platform across your assets? Maybe we'll start with you, Alicia.

AM: 
We do. So, data is critical. Data gives us insights into performance, customer experience, customer satisfaction, and utilisation. So, having a national platform gives us an insight into what's happening within our shopping centres, particularly our remote and regional shopping centres, where we don't necessarily have onsite personnel. If we've got a fan or a pump that's operating outside of usual operating hours, we're able to remotely detect that and then go and have a look and see what's happening. So, it gives us a fabulous insight in terms of preventative maintenance and proactive management of our properties, as well as some fantastic social and environmental outcomes from having a techno-solution underpinned across the portfolio.

MS:
Look, I couldn't agree more. You can't manage what you're not measuring. So, I absolutely echo Alicia's thoughts there. We use a couple of platforms across our asset portfolio to collect data and manage our performance. At an operations level, our centre management teams use the CIM platform, and that's really on a daily basis to monitor centre and individual plant and equipment performance. So, it tracks that performance in real-time. So, it's a really helpful tool for the centre management teams to use at our centres to make sure they're running as efficiently as possible. As picking up on a comment Alicia made, something's not running when it's not supposed to be. At that less granular level, we've recently deployed the Envizi platform to collect centre performance data. And that really allows us to understand performance over longer time horizons like weekly, monthly, six-monthly, annual, and so on.

MS: 
And it's getting that view, I guess, of performance over those slightly longer time horizons and the real-time that really allows us to monitor performance against our annual carbon reduction targets. And in turn, we monitor our performance against our longer-term objectives, like our net-zero carbon by 2028 targets. So, we use Envizi to collect internal reports on performance, as well as external reports like our annual sustainability report and really leverage the data coming out of the CIM platform to manage day-to-day operations. But also, we use it to check the data in the Envizi platform to ensure we've got an accurate data set and that cross-checking forms part of our six-monthly third-party assurance process. So the two platforms work very much hand in hand.

SC:
What are some of the benefits that you get from some of the benchmarking that's done by Green Star, GRESB, NABERS? What's the benefit you get?

MS:
Yeah. So, they each operate slightly differently, so they serve different purposes. So they have value in different places. So, Green Star and NABERS are great asset level benchmarking tools and their strength, I think, lies in their high levels of transparency. So it means that you can really easily marry action with outcomes. So that means that you can set future targets in terms of Green Star or NABERS ratings you intend to achieve by a certain point in time and then map out a program of work to get you there. And they're both great tools in terms of seeing where your great and perhaps not so great performers are across the asset portfolio. And really, that enables you to learn from that assessment which programs you want to roll out on that portfolio-wide basis to improve your scores and improve your performance.

I think GRESB is obviously a really important one for property, especially with the investment community, where it's got pretty high visibility. It's different from the other tools, though, in that it scores and ranks property portfolios based on their ownership. So while your scores and rankings are dependent, absolutely, on your own performance, they're also dependent on how other property portfolios within your peer group performed over the same reporting period. So it makes it slightly more tricky to marry that direct action with outcomes, but that's not really its intended purpose. It's more about providing the investment community with that snapshot of portfolio performance and comparing it to other similar property portfolios. And I think to that purpose, it serves it very well.

SC:
Alicia, your thoughts on the benchmarking exercises by the rating agencies?

AM:
As Melissa said, absolutely critical. I think corporates are being held to account for the commitments and targets that they're making. And the independent third-party verification is a mechanism to hold ourselves accountable, as well as give some evidence to justify that you have made progress. Equally, with investors, they are looking to investment managers, such as ISPT, we have $20 billion worth of property. And as I mentioned at the start, we are fully funded by superannuation. So more than 50% of working Australians have their superannuation invested in our portfolio. And it's not just good enough for us to say, trust us, we're going to do the right thing. Using GRESB in particular, we're able to actually show the outcomes that we've created and how we compare to other investment managers, globally.

SC:
Good. Michael, I'm just moving to you. When you think about your properties, what ESG data is collected and maybe if you can share some colour around how you obtain it? Is it coming to you from landlords, from utility bills? Do you have onsite monitoring?

MH:
Yeah, sure. We have an external partner who provides a service to us around our billing, and they produce a lot of reporting for us, and they also have a whole bunch of external data that they help us with for benchmarking and so on. I think it's also really important to have a direct relationship with the energy provider. So we do work with our energy providers across the country, and particularly around what they're doing, how they're sourcing and producing energy across the country is definitely changing. And they're pushing innovation in that space also.

And the challenge for us, and I think Melissa and Alicia have touched on it as well, is embedded networks, as a retailer. It's great to hear some of the initiatives that is ISPT and QIC have put in place. It's not necessarily the case across the board. And we do have a bit of a gap in our data across those embedded networks. We either don't have access to the data and probably don't necessarily think there's enough incentives there for landlords to really source it as cheaply as possible, and then pass that onto the retailers, and therefore, the consumers as well.

SC: 
Very, very helpful. Thanks, Michael. Might shift gears and move to packaging and waste. Alicia, maybe I'll start with you how is organic waste treated at your properties and what actions can be taken to help the tenants reduce organic waste?

AM:
Waste is a very complex issue, believe it or not. So to really look at waste, you need to look at the whole ecosystem of consumer to waste treatment, including the municipal recycling systems, the infrastructure that you have on-site, and then the behaviour that's really driving the customer or our retailer before the waste actually gets into the bin. So ISPT's approach has been to work at the source with our customers and to understand how we can champion behaviour change activities or changes to supply chain processes, such that we are not actually getting the waste hitting the bin. And the thing with organics, it is one of the most intensive sources of greenhouse gas emissions. So if we're able to avoid it at the source, then we are also controlling issues and minimising our impacting in terms of climate change and greenhouse gas emission as well.

SC:
Right. And Melissa, are tenants keen to participate in packaging and food waste recycling? What have you been doing to help increase the engagement across your tenancy?

MS:
Yeah, it's a great question and an important one in the retail property space, where about 95% of all waste generated that we, as a landlord, manage comes from our retailer’s back of house. So that's essentially the food waste that Alicia was talking about and packaging materials from products being sold in our retailers' stores. So our role in this equation is to provide as many different recycling streams at the back of house as possible for retailers. And that's to ensure as little as possible waste gets sent to landfill.

But it is a little bit more complex than that, and I echo what Alicia just said. Because in order for that to be successful, we need to ensure that our retailers are aware of what goes in which bin at the back of house. And we do this through signage and regular education campaigns with those retailers. So having retailers that are highly engaged and keen to participate in that waste recycling is really important. And it's something that we are getting more and more traction with as each year goes by. And that's evidenced by our year on year increases in recycling rates across the portfolio.

SC:
Great. And look, regional centres can play a very active role in promoting Indigenous employment. So maybe, Alicia, and then Melissa, can you provide some examples of engagement with your organisations to promote Indigenous employment?

AM:
So ISPT is just commencing, formally, our reconciliation journey. And in early 2022, we will have our first Reflect Reconciliation action plan. But across our national portfolio, we have been working very closely with our local communities, including the First Nations people. And we've been looking at opportunities to celebrate art and culture through our properties. Our Reflect Reconciliation action plan now will open up the opportunity to start tracking the effectiveness of our plans, as well as looking at local employment opportunities.

As I mentioned earlier, we know that our retail shopping centres, particularly in those remote and regional areas, form the heart of the community. And we are looking locally for people to come and work in our centres and for ISPT, now it's just about putting some ringer behind our reporting and understanding the impact that we are creating from those activities and creating a national and consistent approach to how we are generating those really rich social, cultural outcomes.

SC:
Melissa, your thoughts?

MS:
Yeah. And you touched on regional centres. I actually think all centres can play an active role here. I think something that often goes unseen is that we do, in fact, have large Indigenous populations in our major cities across Australia as well. So there's a way in which you can play a role in Indigenous employment opportunities, really no matter where your assets are located. So for QIC, we launched our Innovate Wrap about a year ago, and the Wrap applies right across the various investment teams across the business. So within the real estate part of the business, there's some significant opportunities to bring that Wrap to life. And we've recently mapped out a plan of activities to drive that value and really contribute to the QIC reconciliation journey. The plan is very much focused on Indigenous procurement, as well as educating the local communities in which we operate on Indigenous heritage and culture. And that's happening in partnership with the local Indigenous elders. On the procurement piece, Kinaway is the Victorian Indigenous Chamber of Commerce. And we've been in recent conversations with them to figure out how we might be able to work together on the Indigenous procurement piece. And we learned from them that more than 80% of Indigenous businesses registered with Kinaway are sole traders. So it means that they're often not equipped to jump straight into a national contract with a company like ours to provide a particular good or service that we might need to run our centre portfolio.

MS:
But what we've realised is that there is definitely an opportunity for us to work with Indigenous businesses wanting to grow their business, and we can help them do that over time, leveraging the reach of our shopping centre portfolio. We're still very much in the early days of this journey, but given at Indigenous businesses are more likely to employ Indigenous people, we see this as a way in which we could really genuinely help to create more job opportunities for Indigenous peoples.

SC:
Michael, when you think about 7-Eleven, and its 9,000 odd staff that work there, what does 7-Eleven do in terms of diversity?

MH:
Well, diversity for us is a number of different things. So yeah, gender diversity, but also ethnicity. It's about 22 different nationalities that are represented across our franchise network. And that's an important part of our business and who we are. There's been a concerted effort as well, particularly over the last few years, around the role in which women play across our network. So particularly in our corporate network and the leadership roles available in our business. So we are really, really proud now that about 50% of our store leaders are women. And, it's actually much more than that, it's about 75% of assistant stores. And the shift supervisors is even higher than that. So that push around, particularly leadership and availability for leadership roles across the corporate network, has been a journey, but it's still ongoing. It's still a lot more work that we all have to do, but that's something we're particularly proud of.

SC:
Thanks, Michael, and probably across the panel more broadly, which of the community engagement initiatives have you found to be most successful? Maybe we'll start with you, Alicia.

AM:
We've found the community initiatives where we've been able to bring together customers who've never worked together before, and this is in some of our precincts where we may have government departments that theoretically can't talk to each other. We've seen that aligning around a common purpose, such as fundraising for the homeless, or we've had skilled workshops and volunteering sessions, they're the events that really create a meaningful impact. And I think people rise above the boundaries that exist when we're able to focus on those community issues.

SC:
Great, Melissa?

MS:
Yeah. So more broadly, the real estate part of our business has recently developed a community investment program, and it's centred around a central community theme. And we've taken this approach because we think that success comes when you can create a significant positive impact through being quite focused and then being able to measure that impact. So we went through a pretty structured and evidence based process to arrive at our social theme. And that theme is physical health and wellbeing. And it was one that local demographics research suggested was in need of support in the local communities in which we operate. But it was also one way we felt we were well placed to support through our portfolio of shopping centres. The other benefit of supporting this theme was it allows us to respond to emerging consumer preferences around health and wellbeing. And that's also a key pillar of our consumer experience strategy.

So we've recently formed a partnership with Nutrition Australia and the YMCA to deliver our community investment program. And that will be centred around programs to increase physical activity and improve the healthy eating habits of our local communities. And our theory of change with the community investment program is that in the long term, we'll be able to reduce the burden on the public health system, given that chronic health issues often find their causes in lack of physical activity or poor diet. And that we can achieve this by introducing our community members to easy ways to get active and eat better, which could also then act as a feeder for more customers, for retailers whose offerings are focused in the health and wellbeing space, like gyms and fresh food markets and the like.

And we think that the program will be successful because it aligns really well with our business model in terms of what we're able to support and deliver. But it's also something we'll be able to measure in terms of the impact achieved right across those elements of the theory of change model and be that benefits to the recipients of the programs that we run or benefits back to our retailers and our assets.

SC:
Michael?

MC:
At 7-Eleven, we've had a 7-Eleven Good Cause program, which has a bunch of initiatives that particularly aims a corporation that we work, with a charity we work with. They work primarily with immigrants and people, new Australians that need help with education and language barriers, employment, and general settlement into the country. But also, our reach out program with youth and unemployment, which is a major problem across most of our communities, unfortunately, but particularly the major cities where we're a big part of those communities. So that work that we do around trying to help educate and provide opportunities for those people, I think is really important and recognised by the communities that we're in.

SC:
Some wonderful stories here of how real estate industries are helping Australia. Look, I'd love to thank my panel. Alicia, Melissa, Michael, thank you so much for taking time to catch up with us. 

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Until next time.