What ESG Initiatives Mean For Troubled Retail Assets
“Even with investment in state-of-the-art retrofitting, it will be difficult for shopping centers to reach those goals, as offsets of that magnitude would both tenants and consumers make significant changes in consumption.”
As investors increasingly focus more on ESG as a key driver of how they deploy capital, retail assets will be forced to reckon with long-term sustainability challenges. And with companies setting net zero carbon commitments as a baseline, the costs associated with offsetting and improvements will have a tangible impact on net income and valuation, according to Mark Wynne-Smith, Global CEO of Valuation Advisory, JLL.
While “climate risk equals investment risk,” companies engaged in ESG initiatives must balance reaching those goals with profitability. For retail, that may prove particularly problematic.
“Retail typically involves a physical product trading hands, leading to emissions throughout the product’s lifecycle, including manufacturing, transportation, distribution and disposal,” a new JLL report on the impact of ESG on retail valuation notes. “For occupiers, reducing the carbon footprint in these areas is more efficient than focusing on the brick and mortar space, yet only 83 of the 1,422 companies who have signed up to meet science-based sustainability targets are classified as retail.”
JLL also cites the European Union’s Carbon Risk Real Estate Monitor (CRREM) data from 2012, which shows that European shopping centers were the second-highest power user behind hospitals. To achieve Net Zero Carbon, JLL notes, retail assets must achieve reductions of between 78 and 95%.
“Even with investment in state-of-the-art retrofitting, it will be difficult for shopping centers to reach those goals, as offsets of that magnitude would both tenants and consumers make significant changes in consumption,” the report states. “Alternatively, owners could focus on Carbon Neutrality while utilizing carbon offsets and incorporating impactful sustainability into the retail asset management.”
There may also be a case that physical stores can more efficiently transport products: up to 11 times more fuel is required to deliver a single product to a customer’s house from a distribution center, according to JLL, and physical stores encourage lower amounts of returns and waste.
In addition, green building certifications, Green Box units and green clauses on leases are useful ways to position retail assets toward ESG initiatives.
“As the minimum requirements for sustainability increase and as stakeholders set ambitious, time-sensitive targets to reach Net Zero and Carbon Neutral operations, retail assets will need to incorporate sustainability in ways which are both revolutionary and impactful in order to remain an investable asset class,” the report notes. “These changes may not be immediately accretive to value but will provide protection from both value erosion and obsolescence.”