Supply chains and regulations push logistics ESG agenda

Logistics asset owners and occupiers will increasingly need to consider sustainability as a commercial imperative, reports Nicol Dynes.

ESG factors have changed the logistics sector and more is to come, experts agreed at Real Asset Media’s recent Sustainable Logistics briefing.

“We have seen the trajectory with the E of ESG and our expectation is that the same will happen with the S, the social element,” said René Buck, chief executive of consulting firm BCI Global. “There will be more directives and regulations and companies will need to look at their end-to-end value chain to make sure they comply.”

In the not-too-distant future, companies will need to prove compliance with labour laws, guarantee the health and safety of workers, demonstrate good relations with the local community and demonstrate to customers that the entire supply chain is transparent and meeting ESG obligations.

Commitment to net zero

Amazon started with The Climate Pledge, which it co-founded and was the first signatory to in 2019, committing to achieving net-zero emissions by 2040. Since then, more than 400 companies have signed up. It is trickling down, and smaller groups and organisations are coming on board.

“Establishing responsible supply chain relationships will be crucial,” said Buck. “Already, some hospitals are requiring decarbonised transport for their deliveries, for example, so if you want to supply them you need to re-examine your supply chain.”

Transport is an often overlooked but essential part of a sustainability strategy. “Only 13% of carbon emissions in I&L come from logistics assets, the rest is transport,” noted Sally Bruer, head of EMEA logistics & industrial research and insight at Cushman & Wakefield. “So if you want to reduce your emissions, supply chain location is absolutely crucial.”

‘The real value of sustainability is good governance and delivering a better building to the community and society.’

Joost Leendertse, VerusSol

This awareness of all the components does not diminish the importance of the assets and what can be done with them, she added. “If you think about the strategy from an asset performance and asset value point of view, the critical path of questioning should be: what is the asset now? What can it be? How can that be achieved? At what cost can it be achieved?

“Another crucial question is: what is the risk of non-action? Clearly occupiers will always be focused on cost, but they also value operational efficiency and tenant retention. There are a lot of risk factors to take into consideration.”

Risks of non-compliance

Reputational risk is real, as is the possibility of an occupier losing customers because of non-compliance with rules.

It works the other way round as well. “One of the roles of the investor is to choose only socially responsible tenants who are on the same page,” said Buck. “In the end, sustainability has a payback”, he added, even if it might not be immediately obvious.

“Sustainability budgets have increased enormously and every investment appraisal now has many pages devoted to sustainability features,” said Ingo Steves, managing partner for logistics at Swiss Life Asset Managers. “It is so much better to have a clear strategy from the beginning, choosing quality from the design and development stage, rather than adding it on at a later stage.”

Companies that have first-mover advantage because they are already doing the right thing will reap rewards, the panel agreed.

‘Sustainability budgets have increased enormously and every investment appraisal now has many pages devoted to sustainability features.’

Ingo Steves, Swiss Life Asset Managers

“Being ESG-compliant is also a competitive advantage. For example, it is easier to get a building permit for a development if you provide green energy to the nearby community,” said Steves.

“You shouldn’t focus on the internal rate of return when it comes to ESG,” said Joost Leendertse, Founder and chief executive of VerusSol. “The real value of sustainability is good governance and delivering a better building to the community and society.”

Putting solar panels on the roofs of logistics assets is an obvious move, which can generate greener and cheaper energy for the warehouse and beyond.

“We see that tenants are willing to pay more per square metre if they get power from renewable sources which is also cheaper,” said Leendertse.

However, quality is a real issue that must be taken into account to avoid nasty surprises, he added. “It has become a big problem because 90% of the panels that have been installed by cowboys in the past are not good. In the next year we’ll see lighter and better solar panels and insurance companies will demand them. Regulations need to start playing a role to prevent problems in the future.”

Quality is key, not just for the materials and equipment installed, but in a broader sense, stretching to the areas and communities around the asset and to a more cooperative relationship between landlords and tenants.

“Flight to quality is the answer for our industry,” said Steves. “We are moving in that direction, so I am quite optimistic.”

ESG-compliant assets command price premium

Certification has an impact on the market and sustainable logistics assets achieve higher prices and higher rents, according to new research by Cushman & Wakefield.

“Investors are placing value on sustainability, we find that often it is top of the list,” said Sally Bruer, head of EMEA logistics & industrial research and insight at Cushman & Wakefield. “We wanted to understand how sustainability impacts the ability to trade and what it means for the future of the assets.”

C&W analysed 1,500 transactions that took place in Europe in the last five years and found that buildings with a high rating sold for higher prices.

“The pricing premium was 19% on average for higher-rated assets and could be as high as 31% at the acquisition point,” said Bruer.

For assets outside super-prime locations, which have their own dynamics, the average pricing premium rose to 24%, further demonstrating the value investors place on an asset’s sustainability credentials.

The same dynamics were seen in rental values, where pricing differentials between well-rated logistics assets and poorer-quality assets varied between 10% and 30%, according to the C&W research.

Another question is what are the risks of not doing enough? Lower-rated assets are less likely to retain value and more likely to have high vacancy rates as tenants flock to sustainable assets.

Managing sustainably can make a difference: every €10 per sq m invested in sustainability improvements results in a reduction in annual emission of 2.2kg per sq m, finds the research.

Standing assets need improvement

“The challenge is that the majority of assets are standing assets that need to be improved, so we built a portfolio of potential assets to measure impact,” Bruer said. “We looked at the best asset management strategies to adopt and when it comes to making a difference, we found that solar panels have the greatest impact in reducing CO2 emissions, more than heat pumps or LED lighting.”

The payback period for investments is, on average, 7.5 years in energy cost savings, and there’s also an improvement in energy efficiency, as less energy is required to operate those buildings.

In C&W’s survey of tenants, 37% want solar panels because they know the difference they would make, and 66% are willing to work with landlords to improve the sustainability of the assets they occupy.

“This provides an opportunity to capture that collaboration and really transform logistics assets,” said Bruer.