Creating positive social and environmental outcomes

The story behind Canada Life Asset Management’s social housing and educational investments and how we are driving the development of sustainable buildings, to help deliver consistent long-term investment returns for our clients.

Active since 1903, Canada Life Asset Management (CLAM) manages assets of £36.6bn[1] in fixed income, equities, multi-asset, and UK property investment solutions, along with our real estate finance offering. In doing so, we help financial advisers, discretionary wealth managers, institutional investors and corporate borrowers achieve their financial goals. A primary area of focus for us is achieving positive social and environmental outcomes in property, either through our own property investments, or through the finance we provide for property development.

A drive for change: real estate financing

Over the past year, we have made a number of financing arrangements with social housing and education providers, reflecting our ongoing appetite to provide substantial, long-term loan facilities to high-quality sponsors.

Drawing on more than 30 years’ experience as an active property lender, we have a dedicated team of investment professionals who focus solely on commercial real estate finance.

CLAM is a long-standing specialist in real estate finance for investors seeking to purchase or refinance commercial property. Drawing on more than 30 years’ experience as an active property lender, we have a dedicated team of investment professionals who focus solely on commercial real estate finance. We focus on providing long-term, fixed-rate loans secured against good-quality investment property with diversified or secure income streams backed by strong occupational demand.

These aim to offer attractive income cash flows in support of our bulk annuity business, whilst also delivering a positive social impact by making funds available to institutions, for example to improve buildings and facilities. The transactions typically involve a 40-year finance lease structured on the basis of the purchase of a long leasehold interest in property owned by the institution. On expiry of the lease, the interest in the property reverts to the borrower.

For example, in April 2022 we completed a £24 million financing agreement with a registered charity and provider of Specialist Supported Housing to people with housing and care needs. We were granted a leasehold interest in seven Specialist Supported Housing properties, located in the North of England. This portfolio provides 75 specialised supported housing units that will provide homes and care to those with a housing need. The leaseback with the Housing Association is for a term of 40 years. Upon expiry of the lease, the interest in the properties reverts back to the Housing Association.

Similarly, in February 2022 we agreed a 40-year, £30 million finance lease with the University of Central Lancashire. The transaction is structured on the basis of a purchase of a long leasehold interest in three student accommodation blocks located on the university’s main campus in Preston. On expiry of the finance lease period, the property reverts to the University of Central Lancashire. The university intends to invest the funds to deliver on its strategic plan, which will include an increase in clinical facilities for medical science courses and improvements to several university buildings, including the student accommodation.

The need for sustainability: our own property investments

As an asset class, property, from housing to commercial buildings and infrastructure, has been one of the world’s largest carbon emitters. Negative impacts associated with both existing and new buildings range from energy usage within the buildings, to construction materials, to the indirect effects of carbon emissions caused by transporting people, goods and materials to and from the assets.

Over time, the sector has become more mindful of its role in climate change and has gradually started to try to mitigate these impacts. Opportunities to do so are present from acquisition, management - which includes refurbishment/development and lease negotiations - to, ultimately, disposal.

For CLAM, the development and enhancement of sustainable buildings is therefore a vital consideration throughout the property cycle. By assessing and understanding the range of ESG factors, we believe we’ll be better-positioned to deliver consistent long-term investment returns for our clients. For this reason, we established a Real Estate ESG Steering Group to ensure the successful implementation and adoption of our ESG policy and procedures and to continually assess the effectiveness of our environmental improvement programmes. It’s responsible for considering how sustainability topics interrelate with our business strategy, and develops processes that link with the wider risk management process.

In addition, since 2021, our Net Zero Roadmap has increasingly informed our decision-making at each stage of the process. Since the beginning of 2022, we have considered potential acquisitions and their future development in the context of the roadmap and our bid to (as part of Phase 1) achieve net zero for scope 1 and 2 carbon emissions by 2030 for the assets that we manage as part of our direct UK real estate investment activity. Refurbishments should also support our objectives to be operationally net zero by 2030 through activities such as net zero operational design strategies, and enhance the health and wellbeing aspect for occupiers.

Acquisition

When we are considering whether we will be able to add value to potential assets in our portfolios, ESG considerations are now the starting point within this due diligence process. Without assurances that buildings meet, or will be able to meet, our ESG standards, we will not invest. Ensuring that potential acquisitions pass Environmental and Flood Risk Assessments and have an appropriate Energy Performance Certificate (EPC) is a long-established part of our environmental due diligence process.

Refurbishment

For us, refurbishments provide an opportunity to improve the resilience of our real estate assets, as sustainability and wellbeing building features are increasingly being sought by tenants in line with their own sustainability goals, as they strive to reduce their running costs and create an attractive environment for occupants.

To this end, in recent years we have started to seek external validation of our refurbishments/redevelopments to confirm our building designs have reached minimum wellbeing or environmental standards. These include certifications such as Fitwel, a ‘healthy building’ certification that includes design strategies and policies to optimise health and wellbeing among occupants. For example, in 2021, when we completed a £2.25m refurbishment and upgrade of a multi-tenanted property in Reading, we received a Fitwel 1-star certification.

Ways to add value to the occupier experience and attract customers to retail sites, such as e-vehicle charging points, solar panels, or even improvements to biodiversity, are now being considered much more carefully than in previous years. Rather than focusing on a specific set of amenities as a tick-box exercise, the challenge lies in choosing features that add value for the particular property. For all new developments and major refurbishment projects, we also aim to achieve a minimum rating under the Building Research Establishment Environmental Assessment Method (BREEAM) of ‘Very Good’ or higher, for incorporating sustainability into design. We must also achieve an EPC rating of ‘C’ or higher.

Asset management

ESG considerations are equally applicable to our existing assets, all of which we have a detailed asset management plan for. This plan looks at broader opportunities to add value and tracks progress towards achieving both commercial performance and ESG targets.

The use of green lease clauses in tenancy agreements demonstrates to our occupiers from day one our commitment to sustainability and sets out a framework for better occupier engagement. By encouraging better data sharing and co-operation over sustainability matters, we are able to monitor the environmental performance of our properties. We aim to work with occupiers to conserve energy and water, and divert waste from landfill, while we encourage biodiversity where possible, as well as seeking energy and water saving opportunities during routine repairs and refurbishment. We also identify, where feasible, cost-efficient improvements to protect the future quality of each asset.

Disposals

Our focus has increasingly turned how we ensure the work we start as an asset manager continues after we sell the property. We strive to be a co-operative seller and provide EPC data, building certifications and metered data, where requested, to prospective purchasers. We plan to review our disposal procedures this year to ensure that ESG factors are fully integrated into them, particularly with reference to net zero.

Monitoring

To measure and report on our performance in managing ESG risks, our reporting processes are aligned with INREV real estate best practice guidelines. We also participate in the annual global real estate sustainability benchmark (GRESB) survey. Our UK Property ACS has seen year-on-year improvement in its GRESB assessments, achieving 77/100 in 2021, including a maximum 30/30 in the ESG Management module. One of the key initiatives in 2021 was expanding our energy consumption data over the tenant-controlled areas of our portfolio.

Sustainability audits: to improve efficiency and reduce energy consumption across our real estate assets

We knew that there were certain properties in our property portfolio that weren’t as efficient as they could be either due to their age, design or operation. We therefore aimed to identify, where feasible, cost-efficient improvements to protect the future quality of each property and ensure it meets our net zero carbon target. Starting in 2019, we have sought to identify priority assets for sustainability audits, set out energy efficiency measures and identify assets which would benefit from retrofit to all-electric heating and cooling systems.

The phased completion of sustainability audits at all key properties includes a cross-section of sectors and tenant or landlord managed assets. The process has prioritised larger properties with the most energy consumption or landlord control, helping us focus on properties where changes could make the most difference. Audit findings are reviewed and circulated to our internal asset managers and external property managers with an instruction to attend to the ‘quick win’ suggestions, such as improving waste recycling, managing heating, ventilation and air conditioning operating hours and installing LED lighting. Medium to longer-term solutions include water efficiency measures, wellness opportunities, installing photovoltaic panels on some of the industrial and retail warehouse properties and upgrading mechanical plant and/or building management systems at offices.

For more information about our full suite of investment solutions, please contact us

Important information

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life and design are trademarks of The Canada Life Assurance Company. 10058126 – 0323 For more information about our investment credentials please visit canadalifeassetmanagement.co.uk The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. The value of investments may fall as well as rise and investors may not get back the amount invested. Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated below, property management and the provision of commercial mortgages are not regulated activities. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www. canadalifeassetmanagement.co.uk

 

[1] As at 31 December 2022