We are cognisant that climate change is presenting new and growing forms of financial risks to real assets. Beyond the physical impacts of climate change, increasing regulations and changing market preferences as part of the low carbon transition are influencing investment management and performance. As we strive to future-proof our portfolio, it is also imperative to take into account longer trends resulting from climate change as well as costs associated with mitigation actions and climate risk.
In FY2023, we set out to adopt TCFD recommendations for the first time and will be implementing a phased approach towards climate reporting. This is also in line with the MAS Guidelines on Environmental Risk Management (“EnRM”) for Asset Managers as well as SGX requiring listed companies from the material and buildings industry to provide climate-related disclosures based on the TCFD recommendations from FY2025 onwards.
The following section demonstrates AA REIT’s approach to managing climate-related risks that may impact our business, with close reference to the four primary pillars of TCFD.
|Key Components of TCFD Recommendations
|AA REIT’s Response
- Describe the board’s oversight of climate-related risks and opportunities.
- Describe management’s role in assessing and managing climate- related risks and opportunities
The Board provides strategic directions and oversees the determination, monitoring and management of material ESG factors of the REIT. This includes:
- Considering the environmental risk profile in setting the firm’s strategy plan;
- Approving an environmental risk management framework and policies to assess and manage the environmental risk of assets managed;
- Setting clear roles and responsibilities of the Board and senior management relating to oversight of environmental risk; and
- Providing oversight in relation to building environmental risk management competency at the Board and management level.
Management, represented by the Sustainability Council, manages sustainability strategy and objectives, oversees the implementation of initiatives and set targets for continuous improvement. This includes:
- Ensuring development and implementation of EnRM framework and policies, detailing how AA REIT incorporates environmental risk considerations in investment research, portfolio construction, risk management and stewardship practices;
- Ensuring ESG commitments align with the environmental risk profile set by the Board through short, medium and long-term lens;
- Establishing an internal escalation process for managing environmental risk; and
- Providing regular updates to the Board on material environmental risk issues.
Please refer to the “Sustainability Governance” section in the FY2023 Sustainability Report
- Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.
- Describe the impact of climate related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
- Describe the resilience of the organisation’s strategy, taking into consideration different climate- related scenarios, including a 2°C or lower scenario.
- Management has integrated environmental risk into the existing Enterprise Risk Management process and accounts for environmental risk considerations in its investment process and at a portfolio level, which are monitored and appropriately managed where the risk is material.
- Management has conducted a qualitative assessment of climate-related transition and physical risks for all its properties, considering short-term, medium-term to 2030 and long-term to 2050 time horizons per SGX recommendations for a phased TCFD approach.
Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.
- Describe the organisation’s processes for identifying and assessing climate-related risks.
- Describe the organisation’s processes for managing climate- related risks.
- The Board will periodically review the existing Enterprise Risk Management policy to ensure that environmental and climate-related risks are being appropriately captured and assessed to manage potential and actual impacts of environmental risk.
- AA REIT acknowledges that achieving our sustainability goals will require building sustainability capabilities across our organisation. As such, we will introduce training and development programmes to upskill employees and Board members on the topic of environmental and climate-related risks.
Metrics and Targets
Describe the targets used by the organisation to manage climate related risks and opportunities and performance against targets.
- Disclose the metrics used by the organisation to assess climate- related risks and opportunities in line with its strategy and risk management process.
- Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
- Climate-related and environmental metrics such as energy consumption and intensity and Scope 1 and Scope 2 GHG emissions are disclosed in the Energy and Emissions section of this sustainability report. Please refer to page 99 for more information on AA REIT’s target for energy and emissions.
- AA REIT currently has long-term emissions reduction goals. Moving forward, AA REIT is exploring additional metrics and targets to measure relevant environmental risks and opportunities
In FY2023, AA REIT conducted our inaugural qualitative environmental risk assessment and scenario analysis exercise to identify and assess the potential impacts of:
- Transition risks, under the Network for Greening the Financial System (“NGFS”) net zero scenario and a business-as- usual (“BAU”) scenario
- Physical risks, under the Intergovernmental Panel on Climate Change (“IPCC”) RCP 2.6 (1.5°C) scenario and RCP 8.5 (4°C) scenario6
The net zero scenario assumes that the global mean temperature increases by the year 2100 from pre-industrial levels would be 1.5°C or less and will attract higher transition risks arising from the regulatory, market and technological changes in a lower-carbon and more environmentally sustainable economy.
The BAU scenario assumes that global mean temperature increases by the year 2100 would be more than 4°C, with higher physical risks arising from changes in the physical environment and climate.
The identified transition and physical risks were assessed for the following time horizons:
- Short-term: Within the next 2 years (by 2025)
- Medium-term: Within the next 2 to 7 years (by 2030)
- Long-term: Within the next 8 to 27 years (by 2050)
These time horizons are in-line with TCFD, IPCC and NGFS scenario analysis guidance. The risks considered can be categorised as transitional risks and physical risks, and are listed in the table below.
|Possible Impacts and AA REIT's Response
|Regulatory and policy
|The risk of loss resulting from failure to comply with laws, regulations, contracts or court decisions relating to the impacts of climate change.
- Mandatory climate-related disclosures (and stricter sustainability reporting requirements) would result in additional costs as regulated companies create and maintain processes for carbon emissions monitoring. AA REIT is already capturing relevant data and working with stakeholders to improve the quality and timeliness of that data.
- AA REIT is assessing and managing risk of capital financing being affected by non-compliance with GHG disclosure requirements by collecting and disclosing energy consumption and GHG emissions.
|The risk of damage to an organisation’s image and brand as a result of its actions or perceived inaction on climate- related issues.
- AA REIT is managing potential reputational risks through regular and robust stakeholder engagement. Please see pages 90 to 91 of FY2023 Sustainability Report for more information on AA REIT's stakeholder engagement efforts.
|The risk of financial loss resulting from market changes.
- AA REIT understands that less desirable properties in locations vulnerable to climate change may lead to reduced occupier/tenant demand, reduction in customer base and reduced asset value and are incorporating such considerations into our investment approach.
- We understand that inability to meet or keep up with market expectations for green technologies may result in the loss of competitive edge. This is one of the reasons we have endeavoured to install rooftop PV solar panels and are in the process of updating buildings with energy-efficient fittings. Please see pages 99 to 102 of FY2023 Sustainability Report for more information.
|The risk of obsolescence or increased operational cost resulting from the failure to adopt new technologies or business practices that address the impacts of climate change.
- Failure to implement new technologies that have the potential to address energy/emissions/water/waste demands in the operations may lead to a loss in market share and stranded assets. AA REIT is working towards upgrading its buildings to improve energy and water efficiency.
- Neglecting the adoption of sustainable and eco-friendly technologies in the long run may lead to increased energy and operational expenditure. In FY2023, we made progress towards advancing our green technology journey by inking a partnership with SP Group to install 10.8 MWp of solar PV system which will collectively produce 14,500 MWh of energy per year, atop six of our Singapore properties.
|Extreme weather such as flooding and fire caused property damage and business disruption.
- AA REIT is aware that flooding events may damage properties and disrupt the use of facilities. We are carefully monitoring this risk.
- AA REIT is carefully monitoring fire events in Australia that may damage facilities and disrupt use of facilities.
|Long-term, persistent impacts of climate change on an organisation’s assets, operations and supply chains.
- Extreme weather and rising temperature lead to higher cost of refurbishments and expense of up-front countermeasures and property insurance premium. AA REIT is carefully monitoring these risks.