Future
proofing

Climate Change
addressing the risks

In order to protect the long term value of our portfolio it is necessary to work towards future-proofing our assets against changes in our environment and society. This view has been influenced not only by scientific reports but also by the economic cost of inaction.

Understanding the risks of climate change
Hermes Emissions Trading Scheme
Sustainability Networks

Understanding the risks of climate change
We believe there is clear overwhelming evidence that human induced climate change is happening and this will impact the real estate sector. There is a great deal of uncertainty in the market about the scale of the impacts of climate change and how exactly the sector will be affected. In light of the assessment from the Stern Review on the Economics of Climate Change that the cost of inaction today could cost up to 20% of global GDP each year by 2050, we must do more to better understand the risks that face us.

Tackling this issue head on, we commissioned UCL Environment Institute to research the likely impacts of climate change on UK property. This led to the publication of ‘Climate Change – The Risks for Property in the UK’ in February this year.

The report details the likely affects of climate change on property across various UK regions. It identifies the vulnerability of different property types and infrastructure to particular risks including: increased risk of flooding, water shortages, heat stress and ground movement. Different regions will be facing distinct challenges and those cities in the South, such as London, Cambridge and Southampton will be most at risk. (see map of UK right).

Following the publication of this report, we have been very active in pursuing possible opportunities to further reduce our impact on the environment, adapt to the changing climate we face and improve the level of understanding in the industry.

Examples of this are covered in other sections of this report, including being the first major UK landlord to commission Energy Performance Certificates for our entire portfolio, developing our Sustainability Rating System to assess future value risks and conducting flood risk assessments on all our directly managed assets to assess their vulnerability.

In addition, we have also implemented a number of other initiatives aimed at addressing specific environmental and social impacts, with a view to mitigating these where possible and identifying possible adaptive measures. One such initiative is our Emissions Trading Scheme.

Hermes Emissions Trading Scheme
In advance of the upcoming Carbon Reduction Commitment (CRC) scheme - the Government’s statutory initiative for lowering carbon emissions in medium to large businesses – we have developed the ‘Hermes Emissions Trading Scheme’, which is the first of its kind in the property industry.

Building on our comprehensive RPM programme, we have allocated carbon emissions allowances to our portfolio on a sub-sector basis determining a quota for each participant using 2007 as the baseline and a 5% per annum target reduction. In a year’s time we will be able to trade these allowances using a cap and trade methodology where those sub-sectors that produce less carbon than their allocated quota will be able to sell credits to those that produce more.

We believe the scheme will not only help educate our own Investment Managers and Property Managers about the CRC and its implications, but it will also enable us to contribute practical feedback to the government consultation in 2008 and advise our investor clients on the risks they face and the opportunities which may arise well in advance of the introductory phase in 2010.

This scheme demonstrates a clear and strong commitment to addressing the environmental impacts of our portfolio and to having an active risk management strategy in place, ensuring we understand the risks and opportunities and stay ahead of the market in this area.

We will report on the progress of this scheme in our next Annual RPI Report.

Hermes Emissions Trading Scheme