Canadian Commercial Real Estate Sustainability Performance Report 1 | P a g e

The information herein has been obtained from sources that Jantzi-Sustainalytics believes to be reliable; however, Jantzi-Sustainalytics does not guarantee its accuracy or completeness. Copyright © 2010 Jantzi-Sustainalytics. All rights reserved. No portion of this material may be reproduced in any form without the express written permission of Jantzi-Sustainalytics. For further information contact:

Jantzi-Sustainalytics 215 Spadina Avenue, Suite 300 Toronto, Ontario, M5T 2C7 Tel: (416) 861-0403 Fax: (416) 861-0183 [email protected]

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ABOUT JANTZI -SUSTAINALYTICS Jantzi-Sustainalytics provides leading-edge analysis of environmental, social, and governance (ESG) performance of organizations. As a global firm with local expertise, Jantzi-Sustainalytics offers high-quality information on companies, institutions and countries. Through the online research platform clients can access ESG profiles and ratings on more than 2,000 listed companies worldwide. Combined the new Jantzi-Sustainalytics has helped clients become responsible investors for nearly 20 years.

ABOUT REAL PAC The Real Property Association of Canada (REALpac) is Canada’s premier industry association for investment real property leaders. Our mission is to collectively influence public policy, to educate government and the public, and to ensure stable and beneficial real estate capital and property markets in Canada. REALpac Members currently own in excess of $150 Billion CAD in real estate assets located in the major centres across Canada. Membership is comprised of the largest owners, developers and managers of commercial real estate in Canada including real estate investment trusts, publicly traded and large private companies, banks, brokerages, crown corporations, investment dealers, life companies, lenders, and pension funds. Assets include retail, office, industrial, hotel, multi- residential (apartments) and seniors housing. The Association operates in several areas including advocacy, financial best practices, research, standard setting, professional development, and networking events.

ABOUT THE AUTHOR Simon MacMahon is the director of Jantzi-Sustainalytics’ Sustainability Services division and the global lead of real estate research. In the former capacity Simon provides direction, coordination and expertise in the areas of sustainability market research, best practices and climate change mitigation and adaptation strategies. These services create the foundation upon which corporations can make informed decisions on how to proactively manage environmental and social risks, and implement programs that deliver both shareholder and stakeholder value. As the global lead of real estate research, Simon oversees the analysis of the ESG performances of all real estate corporations on major indices internationally.

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TABLE OF CONTENTS

INTRODUCTION ...... 5 SUSTAINABILITY DRIVERS & COMMERCIAL REAL ESTATE ...... 6

CORPORATE RESPONSIBILITY & SUSTAINABILITY ...... 7 GREEN BUILDING ...... 8 INVESTORS AND SUSTAINABILITY ...... 11 METHODOLOGY ...... 13

REPORT METHODOLOGY ...... 13 BENCHMARK METHODOLOGY ...... 14 OVERALL FINDINGS ...... 16

ENVIRONMENTAL PERFORMANCE ...... 18 Operations ...... 18 Supply Chain ...... 21 Green Building ...... 22 SOCIAL PERFORMANCE ...... 25 Employees ...... 25 Social Supply Chain ...... 26 Tenants ...... 26 Communities and Philanthropy ...... 27 SUSTAINABILITY GOVERNANCE PERFORMANCE ...... 28 Business Ethics ...... 28 Reporting, Transparency, and Oversight ...... 30 Public Policy ...... 31 CONCLUSIONS ...... 32

LEVERAGING THE SUSTAINABILITY DRIVERS ...... 32 ENVIRONMENT PERFORMANCE IS LAGGING ...... 33 SOCIAL PERFORMANCE IS COMPETITIVE ...... 34 SUSTAINABILITY GOVERNANCE PERFORMANCE IS LIMITED ...... 35 BROAD RECOMMENDATIONS ...... 36 ESG METRICS FOR COMMERCIAL REAL ESTATE IN CANADA ...... 37 JANTZI-SUSTAINALYTICS ...... 38

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INTRODUCTION

Across Canada and around the world, owners, managers, developers, occupiers and regulators are raising the bar on what constitutes best practices in the commercial real estate sector. Concurrently, standards of corporate accountability are becoming more stringent as stakeholders, such as employees, tenants and investors, are demanding more from the companies operating in their communities. In short, the imperative to address sustainability issues in the real estate sector has never been stronger.

The Jantzi-Sustainalytics Sustainability Performance Assessment Initiative provides a detailed picture of how the sector in Canada is facing up to the challenge of developing, owning and managing commercial space in a sustainable way.

Our goal in producing this report was three-fold:

1) To explore the drivers for sustainability in real estate
To gain a better understanding of the business case for the three interrelated main components of responsible commercial real estate, namely corporate responsibility & sustainability (CR&S), responsible property investing (RPI) and green building 2) To enhance and share our robust evaluation methodology of commercial real estate companies’ environmental, social and governance (ESG) performance
To provide companies with a better understanding of which CR&S indicators should be considered when developing a company-wide sustainability (reporting) framework 3) To assess the ESG performances of Canadian real estate companies at the company and industry levels, and to compare them with international (best) practices
To determine the degree to which Canadian companies are leading or lagging
To extract and highlight best practices from the companies surveyed

This initiative brings together the opinions of a number of participants and sources. With the help of the Real Property Association of Canada (REALpac) we identified 23 companies to be included in the benchmark, 18 of which are the largest Canadian commercial real estate companies and five of which are international companies chosen for their strong ESG performance. Participating companies provided disclosure of their sustainability policies, programs and results and in return received comprehensive assessments of their sustainability performance relative to domestic peers and global best practices.

This evaluation methodology has been informed by surveys of the evaluation methodologies of responsible investment ratings agencies; the Global Reporting Initiative (GRI); the Carbon Disclosure Project (CDP); national Property Councils in Canada, the United States and Australia; and a review of international CR&S reporting in the Real Estate Sector.

This benchmark report provides a detailed look at the degree to which commercial real estate companies are meeting the sustainability challenges of today and tomorrow; in doing so it acknowledges the progress that has been made to date by highlighting best practices, but also draws attention to the practical challenges ahead.

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SUSTAINABILITY DRIVERS & COMMERCIAL REAL ESTATE

While some sustainability factors are common to all industries, such as good governance, transparency and environmental management systems, Jantzi- Sustainalytics appreciates that sustainability drivers and impacts are industry-specific. For example, corporate responsibility within the transportation sector differs from that of the finance or retail sectors. Therefore, in developing our ESG evaluation framework, we incorporate core CR&S metrics that apply to all companies generally, but also include FIGURE 1 - SUSTAINABILITY DRIVERS & REAL ESTATE metrics which are regionally and industry- specific.

Evaluating the real estate sector is somewhat unique in that real estate companies own and manage large investable assets, which have their own significant environmental and social footprints and have their own stakeholders. An accurate assessment of a real estate company, consequently, not only examines the company’s ESG profile, but also the ESG profile of its real estate portfolio. Therefore, in evaluating real estate companies’ responses to sustainability challenges it is useful to examine not only standard CR&S (top circle in Figure 1) but also two additional drivers related to green buildings as investable assets (the bottom two circles in Figure 1). Each of these drivers has the potential to create value through improved relationships with different stakeholders.

Corporate responsibility and sustainability (CR&S) , aligning corporate values with the normative expectations of employees and local communities
Green building , proactively managing (minimizing) the environmental impacts of real estate buildings throughout their life cycle in order to create benefits for owners, tenants and the public at large
Responsible property investing (RPI) , evaluating portfolios based on green building/environmental factors as well as social and cultural factors, economic considerations and urban planning/transportation issues. Incorporating these factors into portfolio management allows real estate investors to better address the full range of risks and opportunities for long-term value creation

This framework can be useful in evaluating the corporate sustainability strategies of commercial real estate companies. Ideally, a company with a strong portfolio of sustainability initiatives that individually or collectively addresses each of the three drivers mentioned above would be positioned in the centre of the above diagram, the area that intersects all three circles, and the area that creates the most value. Our analysis indicates that for asset owners and asset managers, balancing these three key drivers will best position them to create value out of the sustainability challenges that lie ahead.

Our evaluation methodology for commercial real estate companies includes metrics that measure activities related to each of these three opportunities and weights them appropriately. The potential benefits of addressing each of these three drivers are outlined below.

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CORPORATE RESPONSIBILITY & SUSTAINABILITY Public concern about the impact of human activities on the environment – and the roles that businesses play in that impact – has reached a tipping point. Climate change has emerged as a mainstream policy concern and businesses are finding that sustainability is rapidly transforming from a fringe, feel-good issue into an exigent, agenda item requiring focused, top-level attention as market forces compelling action outpace regulatory requirements.

Real estate companies must respond to worsening global sustainability issues, such as climate change, or risk being perceived as part of the problem instead of as part of a solution. At the same time, as standards of corporate accountability are becoming more stringent, stakeholders and other constituencies are demanding more from the companies that operate in their communities. Awareness of issues such as human rights, the treatment of employees, a company’s societal obligation to the communities in which it operates, philanthropy, and globalization has been growing for many years. Real estate c ompanies that are perceived – rightly or wrongly – to have negative impacts on workers or on communities risk facing negative consequences ranging from protests to negative media attention to vacancies. On the other hand, companies that are perceived to be managing their footprint responsibly may appeal to socially and environmentally conscious tenants, have stronger employee retention and recruitment rates, and benefit from stronger brand equity and competitive differentiation.

A growing body of evidence suggests that investments in well-managed corporate responsibility programs are, at worst, net present value (NPV) neutral, and when successful they have the potential to not only improve reputations but also may cut costs, open new markets, lower company risk (cost of capital) and/or improve overall management.

A November 2008 State Street report 1 found numerous positive relationships between the proactive management of ESG factors and superior investment performance. The report revealed that companies with strong ESG governance in Canada and Asia-Pacific outperformed their peer group and that in Australia, Japan and Canada, companies with poor sustainability governance have on average poor investment performance.

These findings are supported by our experience at Jantzi- Index Annualized Sustainalytics. We have been tracking the ESG performance of Return Canadian companies for over 15 years. In January 2000, Jantzi JSI 5.68% Research launched the Jantzi Social Index (JSI) with partners Dow S&P/TSX Composite 5.61 % Jones Indexes and Montreal-based State Street Global Advisors. The JSI is a stock index modeled on the S&P/TSX 60 and consists of 60 S&P/TSX 60 5.55 % Canadian companies that pass a set of broadly based ESG rating FIGURE 2 - JSI RETURNS, AS OF JANUARY 1, 2010 criteria.

Since inception, the JSI has outperformed the indices it is benchmarked against, producing an annualized return of 4.72 per cent, while the S&P/TSX Composite and the S&P/TSX 60 had annualized returns of 4.37 per cent and 4.64 per cent respectively, over the same period.

1 State Street Global Advisors. A Comprehensive Analysis of the Relationship between ESG and Investment Returns. November 2008.

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GREEN BUILDING

THE BUSINESS CASE FOR GREEN BUILDING Real estate companies are increasingly being held accountable for the sustainability performance of their buildings and as a result, green building certifications and standards are rapidly becoming the expectation rather than the exception.

Green buildings are those that, throughout their entire lifecycle (construction, operation and demolition), support the health and well being of the local, regional and global environment, and of the people residing in and around them. What has changed over the past few years is that investors and asset managers increasingly accept the proposition that green buildings and green property development generate FIGURE 3 - LEED CERTIFICATIONS BY BUILDING TYPE benefits to both owners and tenants, which in turn, can have a positive impact on net asset values.

This evolving understanding, combined with increasing regulatory pressures, has encouraged a rapid increase in certified green buildings. As of October 2009, there were just over 180 Leadership in Energy and Environmental Design (LEED) certified green buildings in Canada and there were 1030 buildings certified under the Building Owners and Managers Association (BOMA) BESt standard. But even beyond certifications, growing concern over resource efficiency and corporate reputations (both of real estate companies and their tenants) have led to greener practices and a growing market for green building products, such as energy or water- efficient fixtures.

The business case for green building is supported by a number of factors, each of which has the potential to impact costs, revenue or risk premiums, and thereby impact net asset values.

BENEFITS TO OWNERS Owners benefit from green building efforts primarily through cost savings and by attracting potential tenants; other benefits relate to risk management and branding.

1. COST SAVING THROUGH RESOURCE EFFICIENCY McGraw Hill Construction’s recent survey of a representative section of the construction industry – architects, engineering firms, contractors and owners – revealed an industry wide opinion that that green buildings decrease operating costs by an average of 13.6 per cent 2. According to the International Energy Agency (IEA), the energy waste in buildings used for heating, cooling, ventilation and hot water can be cut by 75 per cent

2 Commercial and Institutional Green Building: Green Trends Driving Market Change, SmartMarket Report. McGraw Hill Construction. 2008

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globally. 3 In many cases, it is this newfound pursuit of energy efficiency cost savings that has been driving green building improvements.

2. TENANT DEMAND According to the third annual CoreNet Global and Jones Lang LaSalle sustainability survey released in December 2009 4, 70 per cent of 231 commercial real estate executives responsible for real estate portfolios across the globe said that they consider sustainability a “critical business issue today”. Seventy four per cent of the respondents said they were willing to pay a premium to retrofit owned space, up from 53 per cent in 2008. The majority (51 per cent) were willing to pay 1–5 per cent more, up from 33 per cent last year, while 24 per cent would consider a premium of 5 per cent or more, up from 20 per cent who said this in 2008.

3. FUTURE PROOFING AGAINST COMPETITION In some markets, a tipping point has already been reached and the premium for green buildings has conceptually disappeared to be replaced by a discount for obsolete, non-green construction. Particularly in the most desirable markets for tenants and investors, the tipping point between ‘green premiums’ and ‘non-green discounts’ may be well within the traditional ten-year institutional holding period for investment real estate.

4. FUTURE PROOFING AGAINST PENDING REGULATIONS Commercial buildings account for 14 per cent of end-use energy consumption and 13 per cent of Canada’s carbon emissions; and between 1990 and 2005 the energy use from the commercial and institutional building sector increased by 25 per cent 5. Real estate’s carbon contributions have not gone unnoticed. A number of prestigious national and international bodies 6 have placed specific expectations upon the real estate sector in regards to its contribution to mitigating climate change. Already in many jurisdictions, we are seeing mandatory green building certification for municipal buildings, changes to building codes, talk of mandatory energy labels for buildings, and subsidies for green building retrofits or products. All of this is in addition to carbon regulations, which will make energy efficiency an increasingly important factor in leasing decisions.

5. ELIGIBILITY FOR RESPONSIBLE INVESTMENT Asset managers are increasingly incorporating ESG factors into their investment decisions. These responsible investors, some of whom are the largest institutional investors in the world, understand that the management

3 International Energy Agency (October 10 2009). Energy waste in buildings can be cut by 75%. Retrieved December 1, 2009). http://www.rockwool.com/files/rockwool.com/Energy%20Efficiency/News%20and%20material%20for%20the%20press/Press%20release%20IE A%202009-10-10%20Jens%20Laustsen.pdf

4 Jones Lang LaSalle. Perspectives on Sustainability: Results of the 2009 CoreNet Global and Jones Lang LaSalle global survey on Corporate Real Estate and sustainability. Accessed January 10th, 2009. http://www.joneslanglasalle.co.uk/ResearchLevel1/JLL_Perspectives_on_Sustainability_CRE_2009_Final.pdf

5 Sustainable Development Technology Canada and the National Round Table on the Environment and the Economy. Geared for Change: Energy Efficiency in Canada’s Commercial Real Estate Sector. 2009

6 Organizations that have highlighted the role that real estate should play in abating climate change include The Government of Canada, The Commission for Environmental Cooperation (CEC), The Council of Energy Ministers, The Intergovernmental Panel on Climate Change (IPCC) and The World Business Council for Sustainable Development (WBCSD)

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of issues such as corporate responsibility, climate change risk and energy efficiency can have an impact on returns, and corporations that are lagging in their CR&S performance may not be eligible investments.

6. REAL ESTATE COMPANY BRAND Real estate companies that actively promote green building and position themselves as having a sustainable vision are able to create goodwill through improved stakeholder relations with their clients, employees, tenants, the media and the public.

7. SIMPLIFIED REPORTING Real estate companies cannot hope to accurately disclosure the environmental and social footprints of their operations by simply reporting the number and level of certifications that apply to their buildings. However, in cases where their buildings have third party green building certifications, reporting on sustainability efforts is made easier by the existence of a reputable third party standard.

BENEFITS TO TENANTS The burgeoning demand for green buildings by tenants is most prevalent in offices; however, tenant interest has been identified in all product types. Households are demanding greener homes and apartments; retailers want more energy efficient stores; industrial tenants are putting solar panels on their roofs; and government agencies are requiring greener buildings. The motivations that drive this demand for green spaces are as diverse as the tenant base and are a combination of several factors.

1. SUPPORTING CORPORATE RESPONSIBILITY EFFORTS Companies that have corporate responsibility strategies may include their decision to locate in a certified space among their initiatives to reduce their environmental footprint. Having the space certified by a green building standard simplifies tenant’s reporting.

2. IMPROVED BRAND /R EPUTATION FOR TENANTS Many firms looking for significant reputational benefits believe they can be garnered by adopting more sustainable business operations. Green corporate headquarters and other facilities can exemplify a company’s environmental commitments and efforts to clients, employees and other stakeholders.

3. COST SAVINGS There is a strong financial incentive to both owner-occupants and (net) lessees to adopt sustainable, energy-saving practices and technologies in order to reduce utility bills in the face of volatile energy costs.

4. IMPROVED PRODUCTIVITY In addition, some of the same green design features that make buildings less expensive to operate also render the facilities more conducive to productive and healthy workers. With labour costs representing such a high proportion of a firm’s overall operating cost even small productivity gains can yield attractive financial returns, especially relative to facility costs. Specific benefits vary by the design features of each building, by the nature of the tenant, and by the type of operation; these benefits can be documented through post-occupancy surveys of tenants. Among the most consistently reported benefits: reduced staff turnover, reduced absenteeism, improved morale and ultimately greater worker productivity.

It should be noted that beyond the above-listed benefits to tenants and owners a separate inventory of benefits could also be made that lists the advantages that green building brings to the environment and society.

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INVESTORS AND SUSTAINABILITY

RESPONSIBLE INVESTING Increasingly investors are recognizing that ESG issues are UNITED NATIONS PRINCIPLES FOR RESPONSIBLE material to the performance of their companies and the INVESTING (UNPRI) assets in their portfolios and, therefore, must be factored During the past 12 months, the number of global into investment analysis and decision-making. For signatories to the PRI has almost doubled to investors, this is not an exercise in philanthropy but approximately 640 institutions. The signatories represent an astonishing US$20 trillion-plus in assets. Between 10 rather an effort to maximize long-term investment and 15 organisations join the PRI every month. The returns, while also contributing to societal sustainability majority of new signatories continue to be mainstream goals. pension funds, insurance companies and investment managers. Until recently, investors wanting to consider ESG performance lacked a common framework for doing so. The PRI requires signatories to declare that, where The United Nations Principles for Responsible Investment consistent with their fiduciary responsibilities, they (UNPRI) provide this framework. commit to:

In Canada, there are 26 signatories to the PRI. This 1. Incorporate ESG issues into investment analysis includes: seven asset owners, thirteen investment and decision-making processes managers, and six professional service partners. The 2. Be active owners and incorporate ESG issues into ownership policies and practices asset owners are composed mainly of large pension 3. Seek appropriate disclosure on ESG issues by the funds such as British Columbia Municipal Pension entities in which they invest Plan Canada, Caisse de dépôt et placement du Québec 4. Promote acceptance and implementation of the Principles within the investment industry and Canada Pension Plan Investment Board (CPPIB). 5. Work together to enhance their effectiveness in Other pension funds such as HOOPP or OMERS have implementing the Principles responsible investment policies based upon the PRI but 6. Report on their activities and progress towards are not signatories. implementing the Principles

While responsible investing traditionally focused on equities, many responsible investors are now moving to incorporate ESG considerations into their alternative asset class investment decisions; for example fixed income assets (e.g. bonds), private equity and real estate.

RESPONSIBLE PROPERTY INVESTING While the PRI are not asset class specific, real estate has received special attention. In June 2008, the United Nations Environment Programme Finance Initiative (UNEP FI) Property Working Group, whose members manage US$300 billion in property assets, expressed concern that the property industry was moving far too slowly to address its environmental footprint, including reducing greenhouse gas (GHG) emissions. It is the opinion of the Group that the property industry will increasingly come under pressure to address challenges such as climate change. Companies that address these challenges are likely to see higher rates of return from corporate real estate investments than laggards in the sector.

RPI requires that portfolios be evaluated based on green building/environmental factors as well as social and cultural factors, economic considerations and urban planning/transportation issues. Incorporating these factors into portfolio management creates an additional level of discipline that allows real estate professionals to better

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address the risks and identify opportunities for long-term value creation, in light of emerging issues such as climate change, resources scarcities, population growth, increasing densities and new clean technologies.

RPI is at the nascent stage in Canada. However, investors are likely to increasingly recognize that RPI properties can produce more income by lowering various types of cash expenses, or that value can be enhanced because of lower capitalization rates associated with lower risk premiums. In addition, by incorporating responsible investing principles into their operations, real estate companies seek to integrate ESG considerations into their most important decisions and position their services to align with a growing list of responsible institutional asset owners.

ESG FUNDS Today there are a variety of financially successful investment funds that incorporate ESG. Included in this category are a small number of green real estate investment trusts (REITs). In the United States, examples include ProLogis and AMB Property Corp. (industrial), Thomas Properties Group (office), Regency Centers Corp, and Simon Property Group (retail). In Canada, we have yet to see a REIT that has branded itself as ‘green’. However, some asset managers with more conventional portfolios are demonstrating the potential for RPI by employing eco-efficiency strategies, fair labour practices, and stakeholder engagement programs that are economically viable and enhance public well being.

ESG SERVICES With pension funds being such large holders of real estate assets, it is interesting to note that many in Canada have already begun to expand their investment decision making criteria to include environmental, social and governance issues and are PRI signatories.

Asset management companies that are looking to differentiate their service offerings might look to accommodate these client concerns. For example, CBRE in the US claims to have integrated sustainability throughout its asset services, brokerage, global corporate services and project management service offerings while the UK division has a separate environmental consultancy. In the Canadian context, BC Investment Management Corporation has gone a long way towards integrating sustainability into its asset management decisions as a PRI signatory and many of the large, established asset service providers are moving to integrate green building/ sustainability/ energy efficiency into their buildings if not explicitly into their service offerings.

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METHODOLOGY

In developing this report we strived to:

Incorporate as many stakeholder opinions as possible
Invite a representative portion of the Canadian commercial real estate sector to participate
Evaluate companies, both in terms of their ESG profile and in terms of how well the industry as a whole is addressing the sustainability risks and opportunities outlined above

REPORT METHODOLOGY This initiative takes a deep look at CR&S performance in the Canadian real estate sector by examining the ESG performances of 18 Canadian companies. In addition, we include five international companies that are recognized for their strong ESG management. Including these five companies in our benchmark provides the full spectrum of performance levels, demonstrates that a number of established companies are devoting considerable effort to ESG management, and lastly, highlights a variety of relevant best practices.

Companies Country Portfolio Allied Properties REIT Canada Commercial – Office Boardwalk REIT Canada Residential – Multi Family Brookfield Properties Corporation Canada Commercial – Office Calloway REIT Canada Commercial – Retail Canadian Apartment Properties REIT Canada Residential – Multi Family Chartwell Senior Housing REIT Canada Residential – Long Term Care Cominar REIT Canada Commer cial – Office, Retail, Industrial Canadian REIT Canada Commercial – Office, Retail, Industrial Crombie REIT Canada Commercial – Office, Retail Extendicare REIT Canada Residential – Long Term Care H&R REIT Canada Commercial – Office, Retail, Industrial Innvest REIT Canada Hospitality MI Developments Inc. Canada Commercial – Office, Retail, Industrial Commercial – Office, Retail, Industrial Morguard Corporation Canada Residential – Multi Family Riocan REIT Canada Commercial – Office, Retail Bentall LP Canada (non-listed) Commercial – Office, Retail, Industrial Oxford Properties Group Canada (non-listed) Commercial – Office, Retail, Industrial Ivanhoe Cambridge Canada (non-listed) Commercial – Retail ProLogis U.S. Commercial – Industrial Investa Property Group Australia Commercial – Office, Retail, Industrial Lend Lease Corporation Australia Commercial – Office, Retail Land Securities Group plc UK Commercial – Office, Retail The British Land Company plc UK Commercial – Office, Retail FIGURE 4 - BENCHMARKED COMPANIES

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This report was undertaken in two phases:

PHASE ONE The CR&S performance of eighteen Canadian commercial real estate companies was assessed using publicly available information (corporate responsibility reports, annual reports, corporate websites, media reviews, etc.) and questionnaire responses were submitted. Fifteen of the Canadian companies were publicly traded REITs and real estate operating companies (REOCs), and three were privately held. Four of the five international companies are publicly traded; Investa is privately held but provides significant disclosure.

PHASE TWO Invitations to participate were extended to every Canadian company that has been included in the benchmark. Six of the top 18 commercial real estate companies in Canada joined the initiative by responding to our questionnaire and agreeing to discuss the results.

The participating companies were Allied Properties REIT, Bentall LP, Brookfield Properties Corporation, Morguard Corporation, Oxford Properties Group and Ivanhoe Cambridge. In general, these companies topped our list in terms of their ESG scores. The fact that the participating companies fared well is likely a result of two factors: 1) strong performers were more likely to participate, and 2) the act of completing the participation questionnaire improved data accuracy and scores. However, judging by Jantzi-Sustainalytics’ ongoing evaluations of these companies’ ESG performances, factor number one played a much larger role than factor number two.

BENCHMARK METHODOLOGY For more than 15 years in Canada, Jantzi-Sustainalytics has been evaluating the sustainability performance/CSR reporting of publicly traded corporations and assessing their ESG performance. In the course of its work, the company has developed a sophisticated evaluation framework and a robust research process.

BUILDING A STRONG METHODOLOGICAL FRAMEWORK Our evaluation and research framework is periodically reviewed and updated to include both the relevant metrics and their appropriate weightings. In order to identify international standards and norms or ESG reporting trends in the real estate sector we examined the metrics of: FIGURE 5 - ESG EVALUATION METRICS

1. Responsible investment ratings agencies
We surveyed the ESG evaluation methodologies for real estate of three prominent international sustainability research providers – Sustainalytics, Jantzi Research and Siris – which together serve a large portion of institutional investors in the North American and European financial sectors (Sustainalytics recently merged with Jantzi Research to form Jantzi-Sustainalytics)

2. The Global Reporting Initiative (GRI)
General disclosure and reporting framework
‘A Snapshot of Sustainability Reporting in the Construction and Real Estate Sector’

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3. The Carbon Disclosure Project (CDP)
Greenhouse gas reporting guidelines

4. Property Councils
The United States Green Building Council (USGBC) guidelines
The Property Council of Australia guidelines on CSR reporting in the property sector

5. A review of CR&S reporting in the real estate sector
A review of the reporting practices and metrics used by the publicly traded real estate companies tracked by Jantzi-Sustainalytics on an annual basis

The resulting benchmarking framework consists of 42 metrics that are divided between 10 sub-categories within the three main dimensions of Environment, Social, and ESG Governance (see Figure 3). The three dimensions and each metric are individually weighted to represent the materiality of their impact. The environment dimension is weighted at 50 per cent, the social dimension is weighted at 30 per cent and the sustainability governance dimension is weighted at 20 per cent. This set of metrics is smaller than Jantzi-Sustainalytics’ standard real estate evaluation template; the greatest difference being that a number of corporate governance and controversy measurements were omitted from this study as they were deemed to be beyond the scope of this report.

DATA COLLECTION This report is comprised of both primary and secondary research. Secondary analysis is based on the Jantzi- Sustainalytics analysis framework, wherein research is derived from public regulatory filings, CSR reports, company websites, search engines, Factiva, news media and non-governmental agencies. Primary research on companies included in the benchmark has been conducted through company contact and questionnaires.

ANONYMITY This first assessment of the Canadian commercial real estate industry is intended to provide market intelligence as opposed to competitive intelligence and so Canadian companies have not been referred to by name when listed next to scores. Instead, Canadian companies are listed as Company A, Company B, etc. The numbers in no way indicate a ranking. In addition, consistency between charts has been removed, so that Company A in Table 2 may not be listed as Company A in all charts and graphs.

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OVERALL FINDINGS

According to Jantzi-Sustainalytics’ database of corporate performance within the real estate sector, which uses an assessment methodology similar to the one used in this benchmarking project, as of December 2009, the average ESG performance score of Canadian companies (41.7 out of 100) lags behind those of the United States (45.9), Europe (50.2) and Australia (53.5).

These results were consistent with what we found in conducting our analysis. According to our benchmarking methodology 7, the average ESG score of the Canadian companies in our survey was slightly above 19 out of 100. Scores were fairly evenly distributed among the three dimensions of ESG with environmental scores and social TABLE 1 - AVERAGE SCORES IN TH IS BENCHMA RK scores being almost equal, while sustainability governance scores lagged slightly behind. For a summary of the findings, please see Figure 6 and Tables 1 and 2.

That being said, low overall average scores made the progress of a handful of Canadian companies that have taken considerable steps towards integrating sustainability best practices into their operations more striking. It is encouraging to see some leadership in the sector.

FIGURE 6 - OVERALL RESULTS

7 The methodology used for this benchmarking of the Canadian real estate sector is outlined in the methodology section. It differs from Jantzi- Sustainalytics’ traditional ESG evaluation framework in that it has an updated weighting system, and in that it omits a number of governance and controversy indicators that were deemed to be out of scope for this project.

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Canadian scores lagged those of the international leaders along every dimension. This was not at all surprising given that the international companies were chosen specifically because of their extensive ESG management. In addition, we have yet to see widespread sustainability disclosures in Canada. To date, four Canadian companies (Brookfield Properties, Oxford, First Capital Realty, and SITQ) have published sustainability reports. In comparison, 11 companies have published sustainability reports in the United States, 25 in the United Kingdom and 14 in Australia in 2008.

It was interesting to note that performance lagged most along the environment dimension, which we consider to be the most material to risk and returns. In general, the sector’s low average performance relative to the international leaders indicates that there is much untapped potential for future improvement.

TABLE 2 – CATEGORY SCORES

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ENVIRONMENTAL PERFORMANCE In our assessment of real estate companies’ overall ESG performance, the environment dimension is weighted most heavily, at 50 per cent, due to 1) the environmental impacts of real estate, 2) the risks of government intervention, and 3) the risks associated with changing expectations around leasing and investment in greener buildings. Yet our assessment of Canadian real estate companies’ management of environmental risks and impacts reveals the margin between performance and best practices was largest within this dimension. This may indicate that some companies risk failing to address rising sustainability expectations.

FIGURE 7 – ENVIRONMENT SCORES

OPERATIONS FORMAL ENVIRONMENTAL POLICY A formal environmental policy provides guidelines for business operations as well demonstrates awareness and commitment to operating responsibly. A strong environmental policy should support a precautionary approach to environmental challenges. The precautionary principle states that if an action or policy has suspected risk of causing harm to the public or to the environment, companies should, even in the absence of regulation, take action to minimize harm. This requirement is met, for example, if a company applies more strict standards than required by legislation or takes significant steps to reduce environmental impacts that are not triggered by regulatory requirements.

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Among the international companies we surveyed, all had environmental policies and three had policies that met all of the above criteria. While their approaches differ, they each commit to environmental management far beyond compliance.

Of the benchmarked Canadian companies, only three have publicly available environmental policies that meet the majority of our evaluation criteria, while eleven companies have no publicly available policy.

In analyzing corporate environmental policies, it becomes clear that many companies continue to focus on risk as compliance, which from our perspective does not capture many of the environmental risks and opportunities that have the potential to impact commercial real estate. One company that has developed a public environmental policy that is beyond compliance in nature is Oxford Properties Group. Its Sustainable Intelligence Guiding Principles are precautionary in nature, call for environmental leadership and the use of innovative technologies, and encourage stakeholder engagement.

ENVIRONMENTAL MANAGEMENT SYSTEM (EMS)/E XTERNAL CERTIFICATION The effective management of environmental risks and impacts requires systems, standards and procedures to monitor ongoing environmental performance and to identify areas of improvement. These measures can mitigate regulatory and reputational risk. Our criteria for evaluating an EMS include those required by the ISO 14001 certification. Six of the companies in our benchmark have a majority of the elements required by ISO 14001. However, 12 companies either have no EMS or do not report on their EMS.

None of the Canadian companies surveyed have pursued ISO 14001 certifications for the majority of their portfolios. This can perhaps be attributed to the complex nature of certifying multiple facilities at the same time, or to the rise of green building certification standards, which some may regard as a substitute for ISO 14001.

Each of the international companies in our benchmark has an EMS in place, and four out of the five companies have an EMS that meets a majority of our evaluation criteria. In addition, four out of the five international companies have some portion of their portfolio certified according to a recognized EMS standard and most state that the projects within their portfolios are aligned with ISO 14001-certified EMS.

CLIMATE CHANGE Climate change, which is arguably the greatest risk facing the real estate sector today, is increasingly becoming a high priority agenda item for corporations. However, while it would appear that the business case supports more proactive management of environmental impacts, many Canadian real estate companies appear to have done little to assess or address this emerging dimension of risk management and competitiveness. For example, in 2009 the CDP, on behalf of their investor signatories (475 TABLE 3 - CDP RESPONSE RATE institutional investors, holding $55 trillion in assets), sent GHG questionnaires to nine real estate companies in Canada in order to determine their exposure to GHG/energy related risk. Only one, Brookfield Properties, responded. This is in stark contrast to the response rates seen in other countries.

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In fact, only three companies (Brookfield Properties, Bentall LP and Oxford Properties) appear to have engaged with the issue of GHG reporting and only seven of the 18 Canadian companies surveyed appear to have GHG reduction programs in place; again in stark contrast to the level of attention GHGs are given by the international companies in our benchmark.

Bentall and Oxford both have taken steps to report even beyond standard GHG reporting requirements. Bentall tracks and reports on scope 3 emissions, which are emissions that take place outside its core operations, in this case related to water transmission and waste. Oxford has adopted an operational control approach to determining the boundaries of its GHG inventory, which means that it includes tenanted space in its inventory; a step which will encourage Oxford to work with tenants to find ways to reduce energy consumption and overall emissions.

RENEWABLE ENERGY While the first priority should be energy conservation, emissions reduction targets can also be supported by the use of cleaner less carbon-intensive energy. At present, none of the Canadian companies in our benchmark have formal programs in place to increase the use of renewable power from onsite generation. However, at least four companies showed evidence that they are in the process of assessing and identifying opportunities.

In addition, a few companies, most notably Ivanhoe Cambridge, have aggressively purchased large amounts of electricity through renewable energy distributors such as Bullfrog Power. Ivanhoe Cambridge began purchasing renewable energy in the early 2000s and is now one of North America’s biggest purchasers of green power in the shopping centre industry. In 2009, the company purchased approximately 69,000 MWh of renewable energy from a variety of sources in multiple jurisdictions.

INDOOR AIR QUALITY Indoor air quality (IAQ) refers to the air quality within and around buildings and structures, especially as it relates to the health and comfort of building occupants. Studies conducted by the U.S. Environmental Protection Agency (EPA) and others have revealed that indoor environments can sometimes have pollutant levels that are actually higher than levels found outside. 8 Pollutants in our indoor environment can increase the risk of illness and several studies by the EPA and independent scientific panels have consistently ranked indoor air pollution as an important environmental health problem. While most buildings do not have severe indoor air quality problems even well-run buildings can sometimes experience episodes of poor indoor air quality.

Despite this concern, there is a surprising lack of disclosure on IAQ management even among the international companies in our benchmark; with the exception of Investa, which has commissioned independent analysis of its buildings’ ongoing IAQ.

In Canada, only three companies appear to have proactive air quality management systems. For example, Brookfield’s properties are equipped with a Building Automation System that tracks indoor air changes, and the company has a national 24/hour call centre that tracks trends in air quality calls. Annual air quality samples are also performed.

8 U.S. Environmental Protection Agency, Office of Air and Radiation. "An Office Building Occupant's Guide to Indoor Air Quality". 1997. Accessed December 15, 2009. http://www.epa.gov/iaq/pubs/insidest.html 20 | P a g e

WATER USE Water has risen to become a significant material risk for many companies, as well as their investors. For example, the Norwegian government’s $456 billion 9 sovereign wealth fund, NOK2, one of the largest funds in the world, which owns about one per cent of all European equities, recently announced new provisions for water management at the companies in which it invests. In addition, one of the largest coalitions of international investors in the world, the CDP, in November of 2009 created its new Water Disclosure Project.

Within the real estate sector, a number of recent reports point to the growing trend of water conservation, which is highlighted by the new LEED requirements of 20 per cent water savings for every project, compared with conventional buildings.

This increased attention highlights the fact that for real estate companies with operations in regions that face scarcity there are potential risks that can have a material impact on financial returns. The extent and impact of water use varies across region and asset type. However, for some assets, the ability to adapt to a water-constricted business environment will have a material impact on net asset values. Water metering, fixture replacements, smart landscaping and irrigation, cooling tower water reduction, rainwater harvesting and grey water reuse in buildings are some of the technological options which can reduce impacts and add significant value to developments by lowering annual operating costs and increasing net operating income.

While each of the international companies in our benchmark has goals and significant programs to increase water efficiency only five of the Canadian companies in our benchmark have shown evidence of programs to manage their water use. The most commonly reported improvements include installing auto-flush, low-flow toilets as well as hands free faucets. Ivanhoe Cambridge has one facility that has the capacity to collect up to one million litres of rainwater in storage tanks to be used to irrigate the property and has linked another property’s irrigation system to meteorological stations that trigger sprinkler systems based on the measure of moisture in the soil. In terms of disclosure, Oxford Properties is the only Canadian company that currently reports publicly on water usage, at both an absolute and intensity basis, in its annual Scorecard. Other companies report having the data internally and are presumably using it to plan water efficiency initiatives.

WASTE The same companies that are addressing water conservation are also the most proactive in developing programs to track waste and divert waste from landfill. Bentall has gone so far as to create partnerships with waste management firms, encouraging them to find ways to help to reduce waste by compensating them for reductions.

SUPPLY CHAIN What and how a company buys and acquires goods, services and capital makes a big difference, both to its sustainability and to its credibility with those it seeks to influence. Green procurement policies and programs support overall sustainability strategy, can be leveraged to encourage employee engagement, and can be important to risk and reputation management.

9 http://www.top1000funds.com/latest-news/latest-news/norway-swf-posts-booming-quarter.html, Accessed December 7, 2009

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The international companies in our benchmark performed well in terms of management of both environmental and social impacts along their supply chains. In Canada, however, there is little management of supply chain ESG issues. Of the Canadian companies in our benchmark, two have formal green procurement policies which assign a preferred status to environmentally responsible vendors, while two others have significant programs to encourage the sourcing of environmentally responsible goods.

GREEN BUILDING LIFE CYCLE ANALYSIS When applied to real estate, a Life Cycle Analysis (LCA, also known as 'life cycle assessment’) is the investigation and evaluation of the environmental impacts of a given building and related services over its entire life. Companies use a life cycle approach as a way to better understand and manage the lifetime sustainability of products. Green buildings by their very definition minimize life cycle impacts, but beyond that, evaluating life cycle impacts enables companies to identify areas for improvement at each phase of a property’s life, during construction, building operations and demolition.

FIGURE 8 - THE LIFECYCLE IMPACTS OF BUILDINGS 10

Currently, no company appears to be utilizing life cycle analysis in a systemic way. However, Land Securities, Lend Lease and British Land each reference its use in materials selection, waste management or biodiversity management. Lend Lease is reportedly involved in the development of a Global Ecological Footprint Modelling Tool to assist decision making in the selection of products and materials.

10 Colliers International. Collier’s r.e.Design guide. 2007 22 | P a g e

GREEN BUILDING CERTIFICATIONS Green building certifications have a number of benefits. One notable benefit is that certification standards provide guidance on how to integrate some degree of life cycle considerations into construction and operations. In addition, certifications are a powerful way to clearly communicate the corporate sustainability levels of a company’s assets and operations.

While according to all available evidence over 50 per cent of the Canadian companies in our benchmark have chosen not to adopt significant green building practices, there has been overall strong growth in the number of green buildings being certified in the commercial real estate sector in Canada, in particular, in the downtown office segment. According to FIGURE 9 - GREEN BUILDING SCORES available sources at the time of writing, nine of the 18 Canadian companies in our survey have sustainable buildings in their portfolios, which according to our evaluation methodology means that they had at least one LEED building or BOMA BESt Level Four building in their portfolios. Seven companies have activities or formal programs in place to increase the sustainability of their buildings, and a few have made public commitments regarding the sustainability of new developments or improvements to their existing portfolio (see Table 4).

Of the Canadian companies benchmarked, Bentall LP, Oxford Properties, Brookfield Properties, Ivanhoe Cambridge, Morguard Corporation and Canadian Real Estate Investment Trust (CREIT) demonstrate varying degrees of commitment to green building certification standards. At the time of writing, four companies had between 2.5 per cent and 5 per cent of their portfolio invested into sustainable buildings and one had more than 5 per cent of its portfolio in sustainable buildings. It should be noted, however, that this measurement is very much a snapshot in time and a number of companies in our survey had, at the time of writing, buildings that were in the pre-certification stage that were not counted for the purposes of this study.

CANADIAN SUSTAINABLE BUILDING COMMITMENTS - BEST PRACTICES
Brookfield and Oxford have declared that all new developments wi ll be built to a LEED standard
Brookfield conducts LEED Commercial Interiors (CI) reviews for all of buildings and then furnishes tenants with the results in order to facilitate tenant adoption of green building practices and standards
Bentall, an asset manager, has more difficulty in making commitments regarding managed space, but in signing on to the United Nations Principles of Responsible Investing (UNPRI) it has agreed to incorporate ESG into its investment decisions
Morguard, has created its own sustainable building evaluation and ratings framework and at present 100 per cent of its office portfolio is assessed and rated under its Green Link program
Ivanhoe Cambridge has three LEED accredited professionals (AP) on staff. While the company doesn’t have any LEED buildings, perhaps due to its focus on retail, it approaches all projects from the perspective of the LEED planning framework, even before professionals are retained to assist with project planning and design

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Oxford has made a public commitment to reduce the greenhouse gas emissions from directly owned and managed properties (operational control), on a per square foot basis, by 20 percent by the year 2012 (relative to a 2005 base year)
No Canadian company has made firm commitments regarding existing building certifications, but, at least two companies, Oxford Properties and Brookfield Properties, have committed to evaluating LEED for Existing Buildings (EB) across their entire office portfolios and are developing a strategy for potential future certifications. TABLE 4 - CANADIAN REAL ESTATE COMPANY GREEN BUILDING COMMITMENTS AND PROGRAMS

All of the international companies in our benchmark had either very strong sustainable building programs and commitments or a large share of their portfolio invested in sustainable buildings. In Canada, we expect this trend to continue and for sustainable building practices to expand into non-downtown core offices as well as retail and industrial buildings. In addition, the need to achieve sustainability goals within managed space will only increase and so companies that engage with tenants to collaboratively identify opportunities to reduce their environmental impact will be best able to reduce operating costs and their environmental footprint.

GREEN LEASES Integrating environmentally friendly features into existing Green Lease or MOU? buildings in many cases requires a cooperative relationship In early 2008, British Land introduced a slightly different approach to green leases by between managers and tenants. In March of 2009, REALpac developing a sample sustainability released it National Standard Green Office Lease for Single- memorandum of understanding (MOU). Building Projects. A ‘green’ lease is one that seeks to encourage sustainable practices by both the landlord and the tenant and to Tenants may baulk at signing a ‘green lease’, remove disincentives to increased recycling, reduced raw which would tie energy efficiency obligations material, energy and water consumption, and to promote the into a binding contract. According to Justin use of sustainable materials in tenant improvements. At least Snoxall, head of the business group at British Land, MOUs are the preferred method of two of the companies in our benchmark were proactively getting buy-in from existing tenants. He says engaged in the development of REALpac’s standard green that, “the best way to achieve results is leasing form and at least three companies in Canada have through good will. Tying tenants up in legal already or are in the process of incorporating significant aspects knots through contractual agreements is of green leasing into their standard leases. counter -productive.”

Four of the international companies appear to have some degree of green leasing in place, though the percentage of leased space governed by green lease criteria is not clear. Three international companies have also published or have been involved in the publication of green lease toolkits. In early 2009, the London-based Better Building Partnership (BBP), which includes real estate companies, British Land, Land Securities, the Canary Wharf Group and Hammerson, published a green lease toolkit for the use of landlords and tenants looking to make their buildings more sustainable.

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SOCIAL PERFORMANCE The links between stakeholder-responsive practices and shareholder value are not difficult to see: improved reputation capital, with both employees and customers; enhanced social licence to operate; reduced regulatory and other operational risk; greater operational efficiency; and more rapid responsiveness to changing environmental and societal trends. All of which go to enhancing shareholder value both today and into the future. Metrics within the social dimension of ESG measure companies’ management of their relationships with core stakeholders. Canadian companies performed quite well along the social dimension, in some cases outperforming their international peers, who have focused more on environmental excellence.

FIGURE 10 - DETAILED SOCIAL SCORES

EMPLOYEES Companies in Canada, as a whole, had relatively strong policies, programs and procedures related to the implementation of the CR&S policies that most directly affect employees. The average scores were somewhat hurt by a few companies’ poor performances or lack of disclosure. However, overall, Canadian companies were in line with or exceeded international best practices along this dimension.

POLICIES , DISCRIMINATION AND DIVERSITY The majority of Canadian companies have business codes of conduct that cover issues such as a harassment, bribery, corruption and discrimination. Among the international leaders, four out of five had policies on discrimination. In addition, three out of the five had strong programs to increase the diversity of their workforce.

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Diversity is one area in which no Canadian company, to date, has provided leadership. Some examples of international best practices include:

Land Securities states that its diversity policy helps to address the challenges of recruiting and retaining a diverse workforce within its industry and it has won awards for its activities to promote diversity within the communities in which it works.

Lend Lease has a Diversity Strategy, appointed a Global Diversity Officer in 2008 and has stated a commitment to increase the ratio of women in the company above the current 30 per cent share.

Investa, in its CSR report, provides demographic data about its workforce related to gender and part-time vs. full-time employees. In addition it provides a clear breakdown of male and female salaries at the executive level, middle management level, and non-management level.

HEALTH AND SAFETY Half of the 18 companies in our benchmark fulfilled at least some of our criteria regarding health and safety policies and procedures, and one third have some company-wide programs or policies in place. However, nine of the Canadian companies in our benchmark showed no evidence of any health and safety policies or programs. It is not clear whether this resulted from a lack of programs or a lack of transparency. All of the international companies had strong publicly disclosed policies and programs and three report on actual performance (e.g. lost injury time, accidents and fatalities). British Land went the furthest in its disclosures, reporting on the total number of lost days and total number of reportable accidents for each of its properties.

SOCIAL SUPPLY CHAIN Health and safety and other employee protections should not be confined to corporate operations. Within the real estate sector, the construction and maintenance of commercial properties are often supply chain management issues and increasingly companies are taking responsibility for their outsourced operations. Company policies can significantly impact suppliers operations; in particular in regards to protecting ‘precarious’ workers who are not able to protect their own labour rights. Precarious employment refers to the practice of short-term, temporary, low-benefit and low-wage work, which can have a significant impact on employee retention, tenant satisfaction and property value.

The responsible contracting of supply chain employees remains at a nascent stage in the overall Canadian real estate sector. However, four of the companies in our benchmark, have policies or practices that address this management issue. For example, Ivanhoe Cambridge has a process for selecting service vendors that includes the collection of information on wages, medical benefit programs and training offered to employees of service contractors. This information is assigned an economic value for the purposes of selecting the successful bidder.

TENANTS OCCUPIER SATISFACTION SURVEYS The link between satisfied tenants, net asset values and robust management fees is not difficult to discern. Happier tenants are more likely to renew their leases at higher rates, and are less likely to complain.

We assess the degree to which companies are responsive to tenant demands by determining whether or not they conduct periodic occupier satisfaction surveys. The surveys typically ask tenants which aspects of services and 26 | P a g e

building performance are most important to them and assess the degree to which expectations are being met. Questions may cover topics ranging from staff responsiveness to indoor environment to security.

Due to the limited transparency of some of the non-participating companies in our benchmark, the degree to which occupier satisfaction surveys are used in the sector is unclear. However, at least four Canadian companies conduct bi-annual surveys of all or a sample of their tenants. Oxford uses a professional industry research firm for this process. This allows the company to track satisfaction year-over-year and to link satisfaction to different aspects of the tenancy experience, thereby providing actionable market research data to create goals and targets.

COMMUNITIES AND PHILANTHROPY By their very nature, real estate companies and the properties they own or manage operate close to local communities. As such, properties have the potential to create both positive and negative consequences for local residents. This can take the form of philanthropic giving or be more directly linked to operations through local consultations and ongoing engagement with communities.

COMMUNITY ENGAGEMENT The bulk of the Canadian companies in our benchmark showed no evidence of formal community engagement programs. This was in contrast to the international companies in our benchmark, which placed strong emphasis on their community involvement activities and programs and, in some cases, had formal programs. While no company had formal policies, a number of Canadian companies have property specific community outreach activities. For example,

Morguard’s retail properties serve as hosts to community initiatives and events
Allied Properties is actively involved with a number of Business Improvement Areas
Oxford has established relationships with local first providers as part of its emergency preparedness and response planning

PHILANTHROPY In terms of philanthropy, 14 of the 18 Canadian companies in our benchmark are involved in some form of corporate philanthropy, but surprisingly, only a handful take steps to communicate their aggregate annual efforts. In addition, none of the companies publicly disclose the actual amounts. Best practice according to our evaluation methodology is philanthropic giving of greater than or equal to 1 per cent of net earnings before taxes. However, there is no evidence that any Canadian company donated more than 0.5 per cent of net earnings before taxes in the 2008 reporting period.

Only three companies, Brookfield, Chartwell and Ivanhoe Cambridge, have policies or guidelines for their philanthropic donations or sponsorship, which focuses their charitable activities mainly on basic needs. Basic needs programs include those focused on disadvantaged communities; programs to fight poverty or malnutrition; or programs to promote affordable, sustainable housing, education, health care, etc.

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SUSTAINABILITY GOVERNANCE PERFORMANCE Sustainability governance measures the degree to which a company has integrated ethical and sustainability management practices into its organization. If the board and the executive team do not appreciate the risks and opportunities inherent in more responsible business practices, corporate responsibility will remain a challenge. Sustainability governance entails executive and board oversight of ESG risks and performance, strong policies and procedures, participation in relevant international standards, and transparency and disclosure. Most of the metrics within this dimension do not measure performance. Rather they focus on structural and procedural aspects of company operations that are considered to be leading indicators of actual performance.

The sustainability governance dimension was the weakest among Canadian companies with an overall average score of only 17.2, whereas the international leaders surveyed scored 50.2. This reflects an overall under appreciation of the importance of sustainability within the Canadian real estate industry.

FIGURE 11 – DETAILED SUSTAINABILITY GOVERNANCE SCORES

BUSINESS ETHICS POLICIES Ten out of the 18 Canadian companies surveyed have strong, publicly available codes of business conduct that address bribery and corruption; eight have either weak codes or none at all. Only three of the Canadian companies surveyed had whistleblower programs that would be deemed strong by Jantzi-Sustainalytics. Oxford has a whistle- blower program that met all of our criteria:

It has phone and web-based Ethics Hotline, both of which provides employees with a mechanism to anonymously report concerns relating to alleged unethical behaviour or non-compliance
There is an accompanying non-retaliation clause to protect employees from reporting violations without fear of reprisal

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Employees are required to review and acknowledge compliance with code provisions upon hire. Key employees are required to acknowledge compliance of certain policies on an annual basis

MEMBERSHIP IN THE GLOBAL COMPACT At the time of writing, no Canadian company in our survey was a signatory to the United Nations Global Compact or the PRI. The Global Compact is comprised of 10 universally accepted principles for good business ethics in the areas of human rights, labour rights, environment and anti-corruption. Of the 5,200 businesses in 130 countries around the world that are signatories, 54 are in the real estate investment and services industry; but surprisingly none are in Canada.

RESPONSIBLE INVESTING In terms of responsible investing, Bentall recently became a UNPRI signatory. On December 1 st , 2009, Bentall LP announced it had adopted a set of comprehensive environmental and socially responsible investment guidelines that will apply to its integrated real estate development, advisory and management business. This is perhaps a sign that real estate companies will increasingly leverage the opportunities inherent in RPI.

In addition, a small number of other asset managers have structures in place to respond to the needs of clients/owners that actively consider ESG criteria. Three of the companies we researched provide clients with some level of ESG information for managed assets, thereby giving their clients some of the information necessary to make responsible investment decisions.

Three out of the five international companies in our benchmark have a public policy on responsible investing. Investa and Lend Lease have both sent letters to the United Nations that explain exactly how they will comply with all six of its Principles of Responsible Investing. Moreover, in 2007, Investa Funds Management became the first Australian property fund manager to receive SRI (Sustainable Responsible Investment) Certification for its two principal funds: Investa Diversified Office Fund (IDOF) and Investa Commercial Property Fund (ICPF). To achieve this certification, Investa had to meet strict disclosure requirements and had to demonstrate how its funds apply a systematic methodology for taking environmental, social, ethical and labour standards into account in the selection and management of buildings.

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REPORTING , TRANSPARENCY , AND OVERSIGHT Disclosure of sustainability initiatives and overall ESG performance demonstrates a commitment to transparency and accountability to all stakeholders, including shareholders.

REPORTING Reporting transparently on sustainability performance can potentially improve both corporate reputation and brand equity. Moreover, given the uncertainty over the effects of climate change, future energy prices, the costs associated with water scarcity, rapidly emerging renewable energy technologies, and supporting feed-in tariffs, effectively managing and reporting on sustainability risks and opportunities is becoming a business imperative. FIGURE 12 – REPORTING, TRANS PARENCY, AND OVERSIGHT SCORES Reporting on targets, goals, timelines and on progress are essential requirements of transparent disclosure of ESG performance. However, there is little evidence of this in the Canadian real estate sector. Only four Canadian companies provide significant sustainability reporting, although there are indications that other companies are considering producing corporate social responsibility (CSR) reports.

Brookfield published a brief, first sustainability report in 2009

Oxford has published three documents, which can be downloaded from its website. The documents include the company’s guiding principles, its environmental scorecard, and its sustainability ‘Plan’

SITQ, a subsidiary of Caisse de dépôt et placement du Québec, was not included in our benchmark, however, it published a CSR report in 2008

First Capital Realty, also not included in our benchmark, published a brief CSR report in 2008

All of the international leaders included in our benchmark produced significant stand-alone sustainability reports in 2008 and many have been doing so for a number of years. Some companies use their report to proactively engage with stakeholders. For example, in February 2009, Investa surveyed 339 of its stakeholders (including tenants) asking them to comment on the effectiveness of its sustainability website and report. Four out of five of the international leaders took the additional step of third party verification of their sustainability reports. None of the Canadian companies have taken this important step to date.

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MANAGEMENT OVERSIGHT Management and board oversight of ESG issues means integrating social and environmental considerations into overall strategy and risk management plans. The companies that are most successful in integrating sustainability into their operations have either a manager or a committee that is tasked with overseeing the management of sustainability issues, which reports to the board or to the executive team. Within our benchmark, all of the international companies have put in place committees devoted to planning and managing CR&S initiatives; three are at the management level and one is at the executive level.

FIGURE 13 – MANAGEMENT & BOARD OVERSIGHT OF ESG ISSUES

To date in Canada, management oversight of CR&S issues, beyond core governance concerns, is the exception rather than the rule (see Figure 13). According to our research, only four companies have structures in place to formalize the management of ESG issues.

Bentall’s board level audit committee prescribes a frequency for reporting on environmental issues, and supports the incorporation of the PRI as it applies to Bentall's services. In addition, sustainability criteria have been incorporated into some manager’s performance assessments. In particular, property services executives are evaluated and awarded for their contributions to Bentall's sustainability strategy

Oxford Properties has a sustainability steering committee. The CEO of the company sits on the steering committee, as does a representative from OMERS, the company's pension fund owner

PUBLIC POLICY In Canada, four companies have policy statements regarding political contributions that are considered weak because they do not fully prohibit or mandate the disclosure of contributions. Two companies make policy statements that prohibit all forms of political contributions, while 12 companies appear not to have a policy in place. Of the international companies in our benchmark, two commit to not making any political contributions and two have weaker policies. That being said, there was virtually no disclosure of political contributions by companies in our benchmark and we could find no evidence of large political contributions being made.

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CONCLUSIONS

LEVERAGING THE SUSTAINABILITY DRIVERS

COMPANIES NEED TO ADDRESS THE MOST IMPORTANT ESG ISSUES Canadian real estate companies’ average ESG scores are below the averages of companies in Australia, the UK and the United States. Still, Canadian companies have relatively strong performance in the areas of labour practices, health and safety and business ethics, which implies that Canadian real estate companies as a whole are operating well within what used to be society’s normative expectation of what constitutes a responsible company. It is only in recent years that these expectations have changed among mainstream stakeholders such as governments, tenants, investors and employees to include issues such as climate change and energy efficiency, social and environmental supply chain impacts, transparency and disclosure.

The first challenge for companies that seek to respond to these new expectations is to identify the most material ESG issues related to their company. A recent report 11 analyzed the most important sustainability KPIs for over 60 different industries based upon feedback from 13 different responsible investment ratings agencies. 12 It identified the three most material metrics for REITS, developers and real estate asset management companies as being,

Proportion of certified (sustainable) green buildings
Energy / greenhouse gas efficiency of construction / buildings in use
Labour standards in-house and for subcontractors

What is striking is that while in-house labour standards are within widely acknowledged operational expectations, the other metrics that are considered to be most important by this panel of experts fall outside of ‘business as usual’. Companies need to recognize and respond to the increased importance being placed on these new areas of management.

COMPANIES THAT SATISFY MULTIPLE STAKEHOLDER ’S EXPECTATIONS WILL CREATE THE MOST BUSINESS VALUE FOR THEMSELVES Addressing your company’s most important ESG issues means minimizing its greatest social and environmental impacts and meeting the expectations of your most important stakeholders. Our analysis indicates that the bulk of Canadian companies are doing this only to a degree. Most are satisfying the expectations of their employees through traditional corporate responsibility programs (e.g. labour practices, philanthropy). However, the large majority of companies are positioned far from the centre of the above diagram, outside of the area that

11 Dr. Axel Hesse on behalf of the German Federal Environment Ministry. SD-KPI Standard 2010 – 2014. January 2010.

12 Companies that contributed to the study include: Crédit Agricole Cheuvreux, Dexia Asset Management, Ethix SRI Advisors, GES Investment Services, Hermes, imug/EIRIS, KLD Research & Analytics, RiskMetrics Group, Sarasin, Social Investment Forum Japan, Société Générale, Jantzi- Sustainalytics and Vigeo

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has the potential to create the most value. Two opportunities are in most case not being realized. First, more than half of the Canadian companies in our survey are not fully leveraging the opportunity that is green building, which may prevent them from meeting the demands of increasingly energy (cost) conscious or socially responsible tenants. Second, very few companies are monitoring and reporting on the social and environmental profiles of their portfolios in such as way that the information can be incorporated into investment decisions; ignoring this opportunity risks failing to meet the disclosure requirements of responsible investors.

ENVIRONMENT PERFORMANCE IS LAGGING

THE INDUSTRY AS A WHOLE HAS NOT RESPONDED TO ENVIRONMENTAL RISKS SUCH AS CLIMATE CHANGE In Canada, there is less overall focus on the management of environmental issues within the commercial real estate sector than in the United States, the UK and Australia. Canada produced fewer CSR reports (4), has a lower response rate among commercial real estate companies to the CDP (11 per cent), and only 61 per cent of Canadian companies have publicly available environmental policies. It is not clear why Canadian commercial real estate companies are managing environmental issues with less urgency than their counterparts in other countries.

Judging by foreign examples, in particular that seen in Australia, the transformation of real estate markets to proactively addressing these risks and opportunities can happen very quickly and is driven by various combinations of regulations, standards, government incentives, competition, investor demands, growth in capabilities and changing market dynamics. Some markets in Canada (downtown class A offices are one example) are already transforming themselves. Developers, owners and asset managers should be monitoring these factors and the pace of transformation in order to position themselves to lead, rather than follow, the change.

GREEN BUILDING IS BECOMING MORE PREVALENT According to McGraw Hill Construction’s recent survey of a representative section of the construction industry, by 2013 green building in the United States is expected to account for 20 to 25 per cent of all new construction starts. In Canada, it is likely that we will see similar growth in green building projects and retrofits. This growth will likely continue to be driven by the downtown office market segment, but will, over time, expand into non-downtown core offices as well as into retail and industrial buildings.

It is important to note, however, that only a small portion of Canada’s building stock is renewed each year and so improving the sustainability performance of existing buildings is even more important than building green. In order to have the greatest impact, asset management companies should consider collaborating with tenants to collectively identify opportunities to reduce their environmental impacts and reduce operating costs.

AIR QUALITY , WATER AND WASTE ARE NOT BEING REPORTED ON In terms of operations, which entails reducing both the inputs to operations (i.e. energy, water and materials) and the quantity output (i.e. emissions, waste water and material waste) approximately 39 per cent of the Canadian companies in our survey have activities to create reductions but even among these companies only a few have detailed policies, programs and targets. In addition, while some companies have begun to address energy conservation, less attention has been given to managing and reporting on material, water and waste. Water conservation, in particular, is an issue rising up the priority list that to date has received little attention by the bulk of commercial real estate companies.

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PORTFOLIO WIDE DATA MANAGEMENT IS POSSIBLE One of the barriers to more proactive environmental management is the collection, analysis and communication of portfolio or company-wide environmental data. While this remains a challenge, the proactive management of environmental impacts presents an opportunity to cut costs through more efficient use of resources. Moreover, it is impossible to clearly communicate corporate sustainability progress without this data. A number of companies in our benchmark and many other companies globally have demonstrated that the accurate collection, management and reporting of portfolio-wide data is an achievable goal.

SOCIAL PERFORMANCE IS COMPETITIVE

OVERALL STRONG AVERAGE PERFORMANCE The social dimension was the one that Canadian companies performed most strongly against, in some cases outperforming their international peers, who have focused more on environmental excellence. In particular, companies in Canada, as a whole, had relatively strong policies, programs, and procedures related to the implementation of the CR&S policies that most directly affect employees such as health and safety. In addition, the majority of Canadian companies have business codes of conduct that cover issues such as a harassment, bribery, corruption and discrimination. However, formal programs to monitor and manage workforce diversity was identified as an area that international companies have focused on but which Canadian companies have, as yet, not addressed.

LITTLE ATTENTION PAID TO THE SOCIAL SUPPLY CHAIN Four of the five international companies in the benchmark group have social supply chain standards by which they take responsibility for their outsourced operations, in particular in regards to protecting the labour rights of short- term, temporary, low-benefit and low-wage workers. Managing the social supply chain can have a significant impact on employee retention, tenant satisfaction, and property values13 . Some investors and managers of real estate assets in Canada and the United States 14 have recognized the importance of supply chain workers to the development and maintenance of quality buildings. They are incorporating these issues into their management and investment strategies by adopting fair wage standards, establishing responsible contractor policies (RCPs), or requiring union-only contracting.

The responsible contracting of supply chain employees in the Canadian real estate sector has received little attention to date. According to our analysis approximately 20 per cent of the companies in our survey have policies or practices that address this management issue. However, this is an area of significant social impact within the real estate sector, among the top three metrics according to some experts, and deserves more attention.

13 Dr. Tessa Hebb, Dr. David Wood and Ashley Hamilton. Responsible Property Investing and Property Management: Exploring the Impacts of Good Labour Practices on Property Performance. January 2009.

14 Most notably The Shareholder Association for Research and Education (SHARE) in Canada and The California Public Employees' Retirement System (CalPERS) in the United States 34 | P a g e

SUSTAINABILITY GOVERNANCE PERFORMANCE IS LIMITED

REPORTING AND DISCLOSURE Among the companies that have engaged with environmental and social issues, much progress has been made in the last few years in terms of management systems and performance. However, overall sustainability communications within the real estate sector continues to be limited, with only four companies in Canada producing any sustainability communications at all.

While this lack of transparency may indicate poor overall ESG management it is also true that a number of companies with significant programs are not reporting on their progress. This conservative approach may stem from an unfounded fear that less than perfect levels of performance are dangerous to reveal. Or, companies may mistakenly believe that if they don’t report on environmental or social issues, they will escape attention, something which at one point may have been true, but is no longer the case. Increasingly, tenants, investors, and employees are taking notice and demanding more disclosure.

In any case, our conversations with a number of commercial real estate companies in Canada indicate that increased sustainability reporting is being considered more than before.

MANAGEMENT AND BOARD OVERSIGHT OF ESG ISSUES IS THE EXCEPTION RATHER THAN THE RULE The strength, credibility and longevity of a company’s sustainability culture and management practices stems first and foremost from its executive branch. Sustainability objectives must be established and driven from top decision makers, such that middle managers can develop management systems, employee training and compliance mechanisms to ensure that objectives are successfully met. Leading sustainability companies have internal governance structures in place through sustainability committees; have senior management in charge of ESG issues who are accountable to the board; and have an overall approach to sustainability that is governed by interdisciplinary, multi-stakeholder initiatives and affiliations (e.g. membership in green building and responsible investing organizations).

To date in Canada, management oversight of CR&S issues, beyond core governance concerns, is the exception rather than the rule as only four of 18 companies demonstrated evidence of formal roles, responsibilities and reporting lines related to the management of ESG issues.

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BROAD RECOMMENDATIONS

The companies that actively participated in this benchmarking initiative will receive information on their scores performance relative to peers by ESG dimension, category and by individual metric. In conjunction with this report, insights from the benchmarking exercise will presumably provide them with a degree of sustainability intelligence upon which strategic CR&S decisions can be made.

The following is a broad set of high level recommendations derived from benchmark findings, which are applicable to the sector as a whole. Companies that wish to more actively manage their CR&S performance should:

GATHER SUSTAINABILITY INTELLIGENCE :
Assess the implications of evolving sustainability trends facing owned or managed real estate portfolios
Seek to understand the business case for more proactive CR&S management
Analyze, prioritize and engage with real estate stakeholders to determine expectations
Monitor domestic and international competitors that are improving their CR&S practices and identify and adopt best practices where applicable

INTEGRATE CR&S INTO CORPORATE STRATEGY
Create a CR&S vision, mission statement and supporting policies at the board and executive levels of management
Integrate CR&S into business operations and report on progress in financial presentations/reporting
Develop a strategic approach to environmental management, in particular to climate change, by introducing corporate policies and setting short- and long-term targets

IMPLEMENT
Collect, manage and report portfolio wide data
Research, innovate and experiment to understand the commercial technical, and customer implications of green building certifications and technologies
Think holistically about operations by targeting low hanging fruit that will lead to cost savings from resource efficiency; then use those savings to fund more long term, and capital intensive initiatives

COMMUNICATE
Create internal buy-in from all employees through education and regular engagement.
Implement a communications strategy to communicate your company’s CR&S efforts both internally and externally to tenants, clients and the communities in which they operate.

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ESG METRICS FOR COMMERCIAL REAL ESTATE IN CANADA

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JANTZI -SUSTAINALYTICS

IDENTIFYING IMPORTANT SUSTAINABILITY ISSUES AND TRENDS IN THE BUSINESS ENVIRONMENT Our approach to identifying and analyzing important sustainability trends and issues is to understand them as a product of political, economic, social, technological, environmental and legal forces, from regional, national and global levels. In the course of our daily research process our large team of analysts monitors a broad range of research and information sources from media, government, labour, industry and not-for-profit organizations, including thousands of publications around the world through sources such as Dow Jones Factiva and Capital IQ.

REGIONAL AND INDUSTRY -SPECIFIC EXPERTISE The Jantzi-Sustainalytics team consists of professionals possessing multi-faceted skill sets the include project management, strategy, stakeholder analysis, risk assessment, environmental sciences, and other technical subject matters. The industry specialization, broad academic backgrounds and diverse language skills of our consultants ensure that we can staff your project with the appropriate team. Moreover, our combination of global coverage and local and industry specific expertise ensures that our evaluation of your sustainability performance and operating environment is customized to reflect material areas of impact.

INTERNATIONAL COMPARISONS AND BEST PRACTICES Jantzi-Sustainalytics specializes in analyzing corporate sustainability practices worldwide. Our global proprietary database, the Sustainalytics Global Platform of more than 2000 companies’ sustainability profiles allows us to develop benchmarks with consistent and thorough methodology. Our collection of global best practices can be an invaluable source of competitive intelligence.

ROBUST ACTIONABLE DATA Our ESG evaluation methodology is normative in the sense that we attach scores and rankings to performance. This means that our benchmarking and gap analysis provides data which can be used to identify areas of environmental and social risk and opportunity.

IN SUMMARY Our expertise in collecting, managing and analyzing quantitative and qualitative sustainability data allows us to deliver the highest level of sustainability intelligence; an essential component to the strategic planning process that will allow you to confidently prioritize sustainability initiatives. In addition, we firmly believe that to be the best we must distinguish ourselves not only through the strength of our products but also through the diligent application of outstanding service.

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WORLDWIDE OFFICES

Sustainalytics – The Netherlands Sustainalytics – Germany Sustainalytics – Spain [email protected] [email protected] [email protected] T: +31 (0)20 205 00 00 T: +49 (0)69 719 14 69 / 0 T: +34 91 788 60 10 / 11 F: +31 (0)20 205 00 99 F: +49 (0)69 719 14 69 / 27 F: +34 91 640 54 44

Jantzi Sustainalytics – Canada Jantzi -Sustainalytics – U.S. [email protected] [email protected] T: (+1) 416 861 0403 Tel. (+1) 617 261 8409 Fax (+1) 617 342 7080 F: (+1) 416 861 0183

CONTACT US Simon MacMahon Sarah Smith Director, Sustainability Services Client Services Jantzi-Sustainalytics – Canada Jantzi-Sustainalytics – Canada (+1) 416 861 0403 Ext. 31 (+1) 416 861 0403 Ext. 19 [email protected] [email protected]

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Canadian Commercial Real Estate Sustainability Performance Report

prioritize sustainability initiatives. In addition, we firmly believe that to be the best we must distinguish ourselves not only through the strength of our products but also through the diligent application of outstanding service.

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