March 2015 For professional investors and advisers only. Schroders Responsible Real Estate Investment

Responsible investment is at the heart of our investment philosophy

Responsible Real Estate Investment 3

Our approach 4

Responsible investment… is good investment 6

Responsible real estate investment… is about developing resilience 8

Governance, assurance and industry engagement 18

Case studies

Towards zero in Zurich 9 Staying ahead 11 Sustainable technologies 13 See the light! 14 Occupier appeal 15 Regenerating a town centre 16 An innovative concept 17 4 Responsible Real Estate Investment

Our approach

A knowledge advantage Developing resilience

With an imperfect real estate market where The global financial crisis has accentuated the risks are often not fully incorporated into prices, importance of understanding economic risk that we seek a knowledge advantage through may affect our investments. The emergence of detailed research and analysis. environmental and social issues in recent years is no different. Understanding and managing all risks is critical to developing resilience within our portfolios. Responsible Real Estate Investment 5

Benefiting stakeholders

A successful responsible investment programme should deliver enhanced returns to investors, improved business performance to tenants and tangible benefits to localcommunities and wider society.

Duncan Owen, Head of Real Estate, Schroders 6 Responsible Real Estate Investment

Responsible investment… is good investment

Schroders has been managing real estate for over 40 years. Over this time we have witnessed the emergence of a variety of different risks to real estate and adapted our business to ensure the assets we manage continue to offer an attractive return on investment. Responsible Real Estate Investment 7

The changes in markets as a consequence The industry’s potential to cost-effectively of environmental and social issues are reduce emissions and the consumption of simply investment risks which Schroders depleting resources, combined with the must understand to protect our clients’ political imperative to tackle issues such assets from depreciation. as climate change, means the real estate sector will remain a prime target for policy Offering occupiers resource-efficient action. This presents new challenges and and flexible space is critical to ensure opportunities for the real estate industry with our investments are fit for purpose and profound implications for both owners sustain their value over the long term. and occupiers. As a landlord, we have the opportunity to help reduce running costs for A good investment strategy must our occupiers, increase employee incorporate environmental and social productivity and wellbeing, and contribute issues alongside traditional economic to the prosperity of a location through considerations. At Schroders we believe building design and management. If we a complete approach should be ignored such issues when considering rewarded by improved investment and investments, we decisions and performance. would risk the erosion of income and value as well as missing opportunities to enhance investment returns. “To maximise returns for our clients we must anticipate and understand Through its construction, use and the impact of all issues and trends to demolition, the built environment reduce exposure to long term risks.” accounts for more than one-third of Neil Turner, global energy use and is the single Head of Real Estate Investment Risk, largest source of greenhouse gas Indirect Investment & Research, emissions in many countries. Schroders 8 Responsible Real Estate Investment

Responsible real estate investment… is about developing resilience

Resilience to change Legislation Attitudes and behaviours are changing It is clear that European legislation is not as the world accepts the impact of only increasing, but has the potential to climate change, the economic crisis and significantly change the real estate market, changing demography. These impacts particularly in relation to energy usage and are stimulating a myriad of issues that management and the protection of the directly impact real estate investment natural environment. creating different perspectives on risks While there is some consistency provided old and new. We need to respond and by the EU, national governments continue design approaches to develop investment to implement a variety of legislative, resilience to these changes. regulatory and fiscal controls which Responsible investment requires have varying impacts on occupiers and anticipating and managing all risks to landlords. Schroders monitors emerging maximise returns to investors. Risks may legislation and seeks to participate with appear absolute such as legislation, industry bodies to help shape the agenda. however all require in-depth analysis founded on local knowledge and dedicated research. This helps to develop investment resilience to changing economic, social and environmental conditions. Our pan-European investment portfolios enable Schroders to draw upon best practice from across our regional teams to develop asset strategies that incorporate cost-effective and appropriate solutions. Responsible Real Estate Investment 9

Energy and emissions Developing energy efficiency and reducing In France, the Grenelle law is aiming to emissions is a key EU focus. The EU reduce energy consumption in buildings climate change and energy package by at least 38% by 2020 and could brought in energy and climate change accelerate the emergence of a two-tier targets for 2020. These are a 20% market. From 2013, an environmental reduction in greenhouse gas emissions, appendix is mandatory in every a 20% reduction in energy consumption commercial lease or renewal signed. through efficiency improvements and The appendix sets some obligations for 20% of energy to be provided by from tenant and landlord to meet and renewables. Member states have set discuss how to improve the building’s strategies for these goals. environmental efficiency. It can also include obligation from tenants in order In the UK it was announced in 2012 that to reduce their energy consumption in buildings with poor Energy Performance the building. Certificates (“EPCs”) may not be lettable from 2018. The regulations were granted In contrast, the Swiss government Parliamentary approval in March 2015. has taken a different approach and is This should act as a catalyst for encouraging the improvement of the improvements to building stock and existing stock by providing subsidies for occupational efficiency, many landlords ‘sustainable’ refurbishments. For investors, had been waiting for the law to come this offers an opportunity to add value into effect before taking action. We without incurring additional cost. are assessing exposure to lower rated At Schroders we aim to improve the energy properties and developing appropriate efficiency and consumption within buildings asset strategies. in our portfolios where appropriate.

Case study Towards zero in Zurich

In Schroder ImmoPLUS, we are undertaking an extensive refurbishment of the ZRH+ office building to create a more desirable and efficient space for Zurich-based occupiers. By improving the Building Management System, replacing the heating and cooling system and converting from gas to geo- thermal, we should achieve a two thirds reduction in the heating demand and reduce

associated CO2 emissions.

“We considered a range of options and worked hard to balance the economic and environmental considerations for this refurbishment. The result will be a vastly more efficient building and a very comfortable working environment.” Roger Hennig, Head of Real Estate Investment, Switzerland, Schroders 10 Responsible Real Estate Investment

Renewable energy The value of research Governments are trying to reduce carbon and analysis emissions associated with national This diverse regulatory landscape requires energy production which has led to Schroders to have detailed local knowledge the proliferation of onsite and offsite of our markets which extends beyond renewable energy generation across compliance. We must understand and Europe. Many governments have provided anticipate the unintended consequences support, albeit often short term, in the of such legislation as the market reacts. form of guaranteed prices for onsite We must be prepared to take the generation. The challenge with these investment decisions necessary to ensure initiatives is, therefore determining cost our assets are not only compliant, but effective technologies which offer benefits prepared for tighter and stricter regulation to landlords and tenants over the longer in the future. term. At Schroders we explore renewable technologies where appropriate. “We are continually assessing changing Corporate responsibility legislative requirements, occupier attitudes and evolving investor demands. Each Reputation is core to any business asset requires a customised approach.” and measures which require disclosure Nick Montgomery, and encourage transparency, whether Head of UK Real Estate Investment, by legislation or by investors and Schroders consumers, should stimulate corporates to act more responsibly across all aspects of their operations. In 2014 EU member countries began to implement Article 8 of the Energy Efficiency Directive which requires large companies to undertake energy audits. The first audit is required by 5 December 2015 and then at four yearly intervals. We are establishing the requirements of the UK’s Energy Savings Opportunity Scheme and other member country schemes to ensure compliance. The UK scheme does not require public disclosure however companies may opt to disclose compliance to confirm their commitment to acting responsibly.

17 Responsible Real Estate Investment 11

Case study Staying ahead

We are testing a new approach with the Schroder UK Real Estate Fund to develop improved sustainability risk profiles for assets and the Fund. Our focus is to identify portfolio resilience to emerging regulation, legislation and occupier preferences.

The analysis considered the implications of climate change and socio-economic impacts addressing building fabric, flood, energy performance, legislative compliance and tenant retention. Opportunities to improve resilience have been identified across the portfolio ranging from low and no cost options through to higher cost capital expenditure measures. 12 Responsible Real Estate Investment

Adapting to a Technology changing climate The physical effects of climate change The rising frequency of extreme weather coupled with the desire for efficiency and events across Europe confirms the natural reduced emissions, necessitate scrutiny of risks presented by climate change to both building technologies. For many buildings property owners and occupiers. Prolonged this involves optimising existing systems higher temperatures may reveal the and plant and machinery, which requires inadequacy of existing cooling equipment analysis of patterns of actual consumption to maintain internal temperatures, and and occupier demands. This means changing rainfall patterns require analysis of ensuring metering is in place and fine potential disruption to business operations tuning Building Management Systems. and investment value from flooding. We One of the most cost effective ways to recognise the implications of climate improve energy usage is to make changes change and the need for our buildings to to the type of lighting source and usage. adapt to meet the needs of our occupiers EU emissions targets also affect emissions now and in the future. from gases involved in plant, for example air conditioning systems, measured in carbon dioxide equivalents. Flooding Technologies deployed for refurbishments The increased incidence of flooding as and developments, therefore, require seen in the UK, France, Germany and Italy analysis and specialist advice to determine is impacting the physical viability of some specifications appropriate to balance locations. The ability to obtain insurance the needs and finances of occupiers adds to the challenge. The overall effect and investors and to meet legislative could be to accelerate the obsolescence requirements and building standards. of certain locations. Schroders is taking steps to analyse the flood exposure of Schroders seeks to ensure our our portfolios and reflecting the results in buildings’ technological configuration asset business plans. and management delivers appropriate, effective, efficient and compliant solutions for occupiers.

Water The global demand for water and potential for scarcity requires changes to the way buildings are managed and maintained. Technologies need to minimise the volume of water used whilst protecting users’ health. Short flush toilets and regulated taps for hand washing are common. However, rainwater harvesting for toilets and watering grass and planting provides health risk challenges which need to be balanced with the desire to achieve a responsible approach. Schroders aims to ensure that water is used responsibly and safely in all areas of a property under our control and encourage tenants to adopt similar practices. We aim to install water saving devices where appropriate. 17

Case study Sustainable Technologies

Through the Bracknell Regeneration Partnership, Schroders worked with Waitrose, a major UK supermarket operator, to develop a new 25,000 sq ft store in Bracknell, Berkshire. The building incorporates numerous responsible technologies including an on-site energy centre, air quality controls, presence controlled lighting, sun tubes, smart water systems and a green roof. The building is rated BREEAM ‘Outstanding’ and in December 2012 won a British Council for Shopping Centres Gold Award Commendation for Sustainability. 14 Responsible Real Estate Investment

Delivering on occupiers’ needs As landlords it is our business to provide We also need to ensure buildings support desirable and efficient space to occupiers. the activities of the occupier, current and future. This may involve rethinking building Lowering operational costs for us and our configurations to increase occupancy occupiers through efficiencies in energy, due to cost control and changing working water and waste, is one of the most patterns or improving accessibility in view immediate ways we pursue a responsible of the environmental and lifestyle cost of investment approach and realise financial car bourne commuting. benefits. Schroders considers this an integral part of good asset management. To meet occupiers’ needs we ensure We expect our property managers to all aspects of a building work together monitor these issues with the same rigour to provide an efficient and comfortable they apply to rent collection. It makes good environment for the operation they host. economic and environmental sense to add value to our properties by making them more cost-efficient.

Case study See the light!

The refurbishment of a warehouse in Born, Netherlands, in the Schroder European Logistics Fund, included the installation of LED lighting and motion sensors, and marks an evolution in occupier engagement. As part of the lease negotiation and in return for the additional capital outlay for energy efficient technology, the occupier agreed to extend the lease and pay a rental premium, which was more than offset by a reduction in their annual energy spend.

“Tenants are becoming more aware of the energy saving potential and are placing more importance on reducing costs and carbon emissions. If we proactively help these tenants, we will position ourselves as a landlord of choice.” Tony Smedley, Head of Continental European Investment for Real Estate, Schroders Case study Occupier appeal

The refurbishment of 82 Dean St in central , owned by the Schroder UK Real Estate Fund, should extend its operational life by 15 years. The works included new mechanical and electrical systems, water saving devices, cycle racks and zone controlled lighting. We achieved a BREEAM ‘Very Good’ rating and upgraded the EPC from F to C. We expect to see a 25% uplift in the rental value as a result of the refurbishment, enhancing value by more than double the initial capital outlay. The building specification was designed to appeal to media companies, the dominant occupiers in the locality.

Engagement Waste Deploying technological and It is important to consider not only the management innovations enables management of waste and how practices Schroders to deliver more advanced may reduce the amount transported and and cost effective property solutions the cost to landfill, but also how we can to our occupiers. These range from make better use of waste. The property replacing inefficient lighting and fitting industry embraces recycling and using smart meters, to comprehensive recycled materials for refurbishments retrofits, renewable energy programmes and developments. The combustion of and centralised waste management. waste to produce energy also presents We assess where such measures are an opportunity to contribute to renewable appropriate and cost effective, but given energy targets. our responsibility in many instances Schroders aims to arrange for our tenants’ extends only to common parts, we waste to be recycled for all sites which we recognise that the greatest opportunities control and use recycled materials where are found by engaging with occupiers. appropriate within refurbishment and Whether this is formalised through development projects. green leases or not, the key to reducing operational costs and associated environmental impacts of the built environment is through active collaboration between owner and occupier. In some regions this is easier than others due to lease structures and transparency. Schroders has achieved some success through open dialogue with informed occupiers and seeks to apply this approach to all our portfolios where possible. 16 Responsible Real Estate Investment

Connecting with communities At Schroders we believe in the importance Understanding social change and the needs of understanding a building’s relationship of the locality is important in developing with the community and its contribution to the sustainability of an asset. Changing the well-being of society. All buildings serve business practices, such as flexible and a social need and managing this dynamic home working, technology developments helps maximise investment value. The and changing corporate responsibilities, degree of integration varies considerably combined with a more transient yet from a mixed use scheme of shopping, connected society, means that occupier offices and housing, which may provide a demands will continue to evolve. Creating complete community including parks and aspirational communities within vibrant and new transport solutions, to a single office sustainable centres is one of the challenges building meeting the needs of a business facing many towns and cities as they seek and its employees. to reinvent themselves and bring people back into town centres. At Schroders we look to understand and develop the community relationship to ensure our investments provide sustainable social solutions for the long term.

Case study Regenerating a town centre

Bracknell in Berkshire (UK) has struggled to provide for its residents and compete with neighbouring town centres for many years. Through the Bracknell Regeneration Partnership, Schroders has developed a master plan comprising new shopping, housing, social amenity, green spaces and transport routes, all helping reinvigorate and reposition the town. The project’s success heavily depends on the community’s support and trust. The Partnership has developed initiatives with a multitude of local groups. Success is evident with Bracknell winning a Britain in Bloom Gold Award for a third year and a Green Apple Award for waste management.

“We are proud to be delivering on our vision for Bracknell. The town is a changed place and is now beginning to serve its residents’ needs with a sense of vitality that has been absent for a long time.” Neil Meredith, Head of UK Business Space, Schroder Real Estate Responsible Real Estate Investment 17

Case study An innovative concept www.enjoy-work.com

In the late 1990s we began the development of Chiswick Park in West London. The concept was to provide high quality office space with good transport links connected with the local community, to create vibrant and successful commercial enterprises, pioneering environmental management, and an engaged and satisfied community. The brief has been fulfilled, the Park is a great success, has won awards and continues to attract occupiers ranging from small enterprises to large multinationals.

“Chiswick Park is living proof that responsible investment is good investment.” James Lass, Fund Manager Schroder UK Real Estate Fund, Schroders 18 Responsible Real Estate Investment

Governance, assurance and industry engagement

Schroders is committed to responsible investment across our investment activities. Through governance and industry engagement, we continue to improve our understanding of emerging risks, learn from and adopt best practice from our regional teams and the wider industry, and deliver innovative solutions to our clients.

Schroder Real Estate Schroder Real Estate is involved with investment community with greater numerous industry bodies with interests transparency about our management of in responsible investment. We are a environmental and social issues. founding member of the UK Green We continue to monitor voluntary Building Council. Initiatives such as initiatives and will participate in those these help ensure we are well placed which offer valuable insight, useful to learn from, and contribute to, metrics or improve best practice. industry best practice. However, it is important to recognise the We have submitted three of our UK funds limitations of these initiatives if they do to the Global Real Estate Sustainability not confirm an understanding of risks and Benchmark, and will consider the building resilience and how these need to benefits of expanding our contribution to be built into investment decisions. this initiative in future years. We understand the importance of providing our clients and the wider Responsible Real Estate Investment 19

Schroders Plc Schroders Plc is a signatory of the UN For more information about Principles for Responsible Investment Schroders Plc corporate and we believe that our approach to responsibility and responsible responsible investment is in compliance investment activities please visit with the principles. www.schroders.com/global/about- schroders/corporate-responsibility We were a founding member of and www.schroders.com/ri the Institutional Investors Group on Climate Change. We are a signatory and special advisor to the Carbon Disclosure Project and we commit to greater transparency of our investment activities, and as members of UKSIF and EUROSIF we actively promote socially responsible investing. Corporate responsibility is important to Schroders and we have policies and schemes in place to ensure that the Group acts in a socially responsible way in its day-to-day operations. Responsible Real estate Investment

Trusted heritage Advanced thinking

Contact us: About Schroders: Schroder Real Estate Investment Schroders is a global asset Management Limited management company with £319.5 31 Gresham Street (€441.6/US$474.3) billion under London management. Our clients include EC2V 7QA corporations, insurance companies, local and public authorities, charities, Tel: +44 (0) 20 7658 6000 pension funds, high net worth Fax: +44 (0) 20 7658 3960 individuals and retail investors. [email protected] www.schroders.com/realestate Source: Schroders, at 31 March 2015. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored.

Important Information: For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Real Estate Limited does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The Schroder ImmoPLUS and the Schroder European Logistics funds are not registered and not available for distribution in the . The Schroder UK Real Estate Fund (the “Fund”) is authorised by the Financial Conduct Authority (the ‘FCA’) as a Qualified Investor Scheme (‘QIS’). A QIS may not be promoted to a member of the general public. Property-based pooled vehicles, such as the Fund, invest in real property, the value of which is generally a matter of a valuer’s opinion. It may be difficult to deal in the shares of the Fund or to sell them at a reasonable price because the underlying property may not be readily saleable, thus creating liquidity risk. Any investment in the Fund must be based solely on the prospectus, or any other document issued from time to time by the Manager of the Fund in accordance with applicable laws. This document is intended for the use of the addressee or recipient only and may not be reproduced, redistributed, passed on or published, in whole or in part, for any purpose, without the prior written consent of Schroder Real Estate Investment Management Limited. Issued in March 2015 by Schroder Real Estate Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1188240 England. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. w46874