Metrics for Responsible Property Investing: Developing and Maintaining a High Performance Portfolio

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ULI

Paper for Presentation at 2009 ULI Fall Council Forum

Metrics for Responsible Property Investing: Developing and Maintaining A High-Performance Portfolio
November 2009

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Lisa Michelle Galley Founder and Managing Director Galley Eco Capital Jean Rogers Principal Arup David Wood Director Responsible Property Investing Center Boston College

Acknowledgements
The authors are indebted to Scott Zengel of Bay Area Council and Nick Stolatis of TIAA-CREF for their willingness to participate in the case study and to test the RPI metrics in the real world. Their insights were invaluable. The authors would also like to thank Andrea Fernandez of Arup for her tremendous assistance in researching indicators, interpretation of data, and editing.

Contents
1 2 Introduction Institutional Real Estate’s Volatile Investment Environment
2.1 2.2 RPI in the Contemporary Real Estate Environment Impacts of Sustainability on Institutional Real Estate 5 6 7 10 12 12 13 13 15 20 21 23 23 25 26

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New Metrics for a New Era
3.1 3.2 3.3 3.4 3.5 3.6 Gaps in current reporting efforts Proposed metrics for RPI evaluation Use cases for RPI metrics Discussions of proposed RPI metrics Portfolio characterization Case Study Results

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Implication for Reporting and Management
4.1 4.2 Adapting for higher performance High-Performance Portfolio Dashboard

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Notable Benefits and Conclusion

Tables Table 1: Sustainability Impacts on Real Estate Table 2: Proposed RPI Metrics Table 3: Portfolio Characterization 10 14 20

Figures Figure 1: Institutional real estate’s performance, as measured by the NCREIF Property Index as of 12/31/08 Figure 2: “Market standard” fund performance characteristics 6 9

Appendices Appendix A: Metrics Case Study – Acquisitions Appendix B: Metrics Case Study – Portfolio Management 27 35

1 Introduction
Responsible Property Investment [RPI] is an emerging investment strategy and discipline concerned with integrating environmental, social, and governance [ESG] data into investment decision-making. Proponents point to increased regulatory risk, resource constraints, changing consumer preferences and demographics – all as they relate to the increased importance of environmental and social issues -- as drivers of change in the real estate investment industry. To date, however, the industry has yet to develop standards to evaluate ESG data that compare to its traditional evaluation of portfolio performance. The emergence of third-party standards offer investors some guidance especially on environmental issues, but tend not to cover the range of RPI. In any case, there has yet to develop a fully elaborated set of issues, vocabulary, and measurement that allow investors can use to evaluate whether their portfolios are achieving their environmental and social goals, or that enable investors to evaluate the relationship between ESG data and financial performance. One important step along these lines will likely be the development of an industrystandard set of metrics to evaluate ESG performance that allows investors to measure performance across their own portfolios, to enhance their acquisition and disposition decisions, and to report their performance to investment partners, regulators, civil society organizations, and other stakeholders. For ESG analysis to become industry best practice, some system of measurement will need to establish rigorous standards that hold investors accountable for their claims, and offer investors the capacity to favor higher performing buildings and portfolios in practice. These metrics must be rigorous enough to allow for substantive analysis, but flexible enough for investors to tailor them to their specific needs. They have to be comprehensive enough to capture real performance, but simple enough to be usable in the context of investments in the real world. These challenges will require collaboration, and a willingness to test ideal systems in the day-to-day world of investing This paper is a preliminary effort to address these challenges. After reviewing the state of real estate in the wake of the recent financial crisis, and the role of RPI in that context, we offer a set of sample RPI metrics, along with 2 case studies with actual investors (TIAACREF and the Bay Area Fund of Funds). Our hope is to catalyze a discussion on how to make metrics that are rigorous and useful. We want to raise the profile of this issue among industry professionals, and draw from their expertise and experience to develop a system that helps the industry face the imperatives of key environmental and social challenges, and capitalize on the opportunities that will come with a transforming economy. Real estate investment plays a fundamental role in determining how society uses resources, how the built environment shapes social life, how economic activity can be sustainable over time. As an asset class, real estate offers especially tangible demonstrations of the importance of ESG analysis in creating value for investors and society alike. We believe that a robust metrics system can help shape the market to better create sustainable outcomes for all stakeholders.

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2 Institutional Real Estate’s Volatile Investment Environment
Institutional real estate is in the midst of a major downturn, as real estate performance has both driven and followed the plunge in US and worldwide economic activity. At their peak, annual real estate returns for tax-exempt property owners (governments, pension funds, etc), ranged from 14%-20% from 2003-20071.
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NCREIF Property Index
8% 6% 4%

Total Return Income Return Capital Return

2% 0% -2% -4% -6% -8% -10% -12% 78 82 86 90

Year

94

98

02

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Figure 1: Institutional real estate’s performance, as measured by the NCREIF Property Index as of 12/31/08

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2008 will be remembered as a year where property returns for institutional investors ended at an estimated -6.46%, reflecting the impact of a national credit and housing crisis, and speculative excess tied to real estate investment. It is unclear to what extent real estate investment will track economic recovery, given the size of the bubbles that have popped. Most in the economy clearly recognize that credit and investment capital is highly constrained and an easy credit environment will not be back for a long time. Real estate owners must become experts at economic sustainability; conserving and organically growing cash flow though long-term investment strategies, while becoming more efficient users of capital the next several years to come.

Hidden Rise of Un-Sustainability
The current credit crisis has exacerbated other problems within commercial real estate –hidden during the boom years -- that have only recently come to light. During the real estate boom years of 2004 to 2007, low interest rates, easy liquidity and increased debt leverage had combined to help inflate real estate prices. Many investors focused on these speculative returns at the expense of attention paid to the real rise in energy and water costs on their properties. During that period, rising (and fluctuating) energy costs, particularly within the past 36 months, have been increasing consumer cost of living and weakening the business sector through higher costs of operations. In addition, fuel costs for transportation have also played a key role in the real estate crisis, impacting with greater force on those properties in suburban areas or locations with poor access to public transit. The potential long-term risks of exposure to climate-related regulation, changing consumer sentiment, and even the simple operating costs of buildings in their portfolios have become more apparent in recent years. As the short term orientation of real estate markets has suffered, the long term implications of sustainability have risen in importance.

Data from the National Council of Real Estate Investment Fiduciaries as of 12/31/08 (www.ncreif. org; accessed on 4/6/09). The graph shows the returns for the NCREIF Property Index (NPI) for the nation, which includes over 4,200 properties at a market value exceeding $150 billion. The NPI income graph shows the return from the Net Operating Income (NOI) for the properties and the NPI capital graph shows the return from gain in value net of any. Returns are calculated by NCREIF quarterly based on appraised values and are shown on an unleveraged basis as if properties were all purchased on an all cash basis.

Quarterly Return

2.1 RPI in the Contemporary Real Estate Environment
The very widespread problem of energy, water, and fuel supply and price risk helped to propel environmental concerns to the national agenda and even partially shaped the outcome of the 2008 American presidential election. Stakeholders from regulatory agencies to consumers have become more aware of the negative impact of buildings on the use of natural resources and the related effects building siting and operations have on communities. Widely cited statistics note that 40 percent of primary energy use, 72 percent of U.S. electricity consumption, 29 percent of carbon dioxide emissions, and 13.6 percent of potable water consumption are due to buildings. Against this backdrop, buildings constructed using green building principles are present a compelling alternative: • Energy use in green building is 29 to 50 percent less than non-green counterparts. • Green buildings use an estimated 40 percent less water. • Carbon dioxide emissions in green buildings are reduced by 33 to 39 percent. • Solid waste attributable to green buildings is reduced by 70 percent. More comprehensively, the built environment shapes fundamental decisions about where and how to live, social inequity in the provision of housing, and access to public and private services. Responsible Property Investing (RPI) is a response to increasing public concerns about the environmental and social impacts of buildings, in conjunction with a growing awareness among investors that environmental and social analysis can enhance their ability to assess building and portfolio performance over the long term. RPI facilitates a more comprehensive engagement between investors, their properties, and tenants by “taking into account social, ethical and environmental factors in the selection, retention and realization of investment, and the responsible use of rights (….) that are attached to such investments2. Responsible property investing has emerged in response to the need for investors to adopt responsible investing principles, which are more tailored for property investments.
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Mansley, definition of Responsible Investing

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RPI takes into account the social, ethical and environmental factors in the selection, retention and realization of investment, and the responsible use of rights attached to such investments

The United Nations Environment Programme Finance Initiative Property Working Group has defined RPI in terms of social and environmental dimensions of real estate investment, including: • Smart Growth (e.g., transit-oriented development, walkable communities, mixed-use development • Social Equity and Community Development (e.g., affordable housing, community outreach, fair labor practices, workforce development) • Urban Revitalization (e.g., goods and services provided to underserved communities, infill development, flexible interiors, brownfield redevelopment) • Energy Conservation (e.g., energy efficient buildings, conservation retrofitting, green power generation and purchasing) • Environmental Protection (e.g., water conservation, recycling, habitat protection) • Worker Well-Being (e.g., plazas, indoor air quality, childcare on premises, handicapped access) • Health and Safety (e.g., property security, avoiding hazards, first aid readiness) • Local Citizenship (e.g., aesthetics, minimum neighborhood impacts, considerate construction, stakeholder engagement, historical preservation) • Corporate Citizenship (e.g., regulatory compliance, sustainability disclosure, independent directors, and adopting of independent voluntary codes such as LEED, Energy Star, Green Seal, UN Principles for Responsible Investment, and Global Reporting Initiative)

These principles highlight the range of RPI issues, and also create a framework for applying ESG analysis to the real estate asset class. In practice, these issues have been treated as vital by many investors – RPI offers a means to bring them together into a coherent framework.

Industry Practice Today
The application of responsible property investing principles to institutional real estate portfolios can best be framed by understanding the current context for property investment and investment metrics here in the United States. The Real Estate Roundtable estimates the size of the US commercial real estate market at $5 trillion, with approximately $2.5 trillion in assets owned by institutional investors. The balance is owned by corporations. Institutional investors can be public funds, union/multi-employers, foundations, endowments, healthcare, insurance companies, high net worth individuals or mutual funds. Those investors utilize a diverse array of financial structures to achieve their investment objectives, such as equity, fixed income, non-US equity or fixed income, balanced real estate or alternative investments. Each of these financial structures have distinct risk and return profiles.

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Fund Diversification
Professional real estate investment operates through the contract between the institutional investor and the asset manager, also called the real estate manager. The goal of the management contract is to establish relationship guidelines, performance goals, and regulate investment discretion. The typical selection criteria that institutional investors use to select real estate managers are: • Experience and stability managing real estate • Competitiveness of fund performance • Competitiveness of fees • Appropriate fund diversification and use of leverage The classic measures of success, which ultimately determine whether the institutional investor is receiving satisfactory performance, appear in portfolio characteristics below and in Figure 2, which are the most direct measures of fund performance:
Property type Geographic Property size

Life Cycle Diversification
Existing buildings Redevelopment Development Land

Performance Summary
Year Quarter Income Appreciation Gross total return Net total return Dividend paid out

Figure 2: “Market standard” fund performance characteristics

In other words, contemporary institutional real estate investing happens through a diverse array of financial vehicles, managed by real estate managers. These arrangements are considered ‘market standard’ because they are thought to encompass nearly all of the most relevant criteria and processes needed to obtain market or above market rates of return on an investment of institutional capital within real estate.

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RPI Metrics as Enhanced Investment Analysis
The endgame of using metrics is to provide real estate market participants with transparency, benchmarking, risk assessment, performance evaluation, and an unbiased way to compare asset managers’ investment efforts. The likelihood or reaching that endgame, however, relies on one fundamental, largely unspoken, assumption, which drives many of the explicit agreements and assessment parameters – that the current set of information used by institutional real estate investors is complete, and delivers predictable forecasts of future performance. In other words, the key assumption within the system of performance criteria and measurement outlined above is that there are no new issues or factors beyond that highlighted above, which would affect the business system of real estate including the results (returns) of the investment process. In the next section, we examine why that is no longer the case.

Portfolio Characteristics
1. Fund strategy: core, value-added, opportunistic, etc. 2. Legal structure and fund type: closed-end, open-end, private REIT, etc. 3. Number of properties 4. Use of leverage

2.2 Impacts of Sustainability on Institutional Real Estate
Many experts have written extensively about global sustainability challenges and the impacts are now being observed in many kinds of systems. The increased global and
Sustainability-related Drivers

social awareness about sustainability in general has sharply impacted institutional real estate in several interrelated ways, as shown in the table below.

Impacts on Institutional Real Estate Opportunities Challenges
Potential obsolescence of non-green buildings Unreliable energy supply and pricing Unreliable water supply and pricing Increased building construction and costs Increased regulation

Global natural resource depletion in particular fossil fuels and water.

“Green” or resource-efficient buildings Sustainable mixed use developments Commissioning and retrofitting green

Increased global atmospheric carbon levels

Zero-carbon eco districts.

Meeting zero carbon targets at building scale Financing renewable on-site energy generation

Negative impacts of suburban land development patterns

TOD, urban-infill properties Adaptive reuse Increased value of TOD sites TOD, urban-infill properties Self sufficiency:getting off the grid for power and water New financing tools through ESCOs

Land use restrictions

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Dearth of clean, economical public transportation Demographic trends toward urban environments Growth constraints due to municipal utilities

Cost of public transit Increased competition for prime urban locations Increased operating costs for power and water Increased risk of business interruption due to power failures Limitations on development OR requirement to fund adequate water and power supply facing limits on supply Financing investment in sustainable water and energy infrastructure

Building energy labeling requirements

Competitive positioning for owners of Energy Star rated buildings

Heightened legal compliance associated with disclosure Market leasing and sales risk, if disclosures are unfavorable

Impending carbon legislation Utilities facing renewable portfolio standards

Monetization of carbon reductions from energy efficiency measures On-site generation can be win-win (33% in California) Green building policies offered through some insurers (Fireman’s Fund, Traveler’s) Increased attention on indoor environmental health Lower insurance premiums for implementing green and/or energy efficient approaches

Carbon tax on properties in the near to mid-term Contract risks Space requirements for on-site generation Higher insurance costs for a host of business liability issues Withdrawal of insurers from some real estate markets Some green building techniques perceived as “risky” Decrease in tenant satisfaction Legal risks of poor indoor air quality

Insurers overexposed to climate chvange risks

Increased attention on indoor environmental health

Green buildings with healthy materials, and good access to daylight and views

Table 1: Sustainability Impacts on Real Estate

The above are sustainability-related forces which constitute risks and opportunities for institutional real estate investors. At the portfolio level, these risks and opportunities will express themselves in the following property performance features: • Increased or reduced revenue and overall cash flow • Rent growth, occupancy rates and ongoing investment cost management • Asset operating expense efficiency and cost escalation management • Depreciation and obsolescence • Risk profile of target properties • Discount and cap rates applied to properties To the extent that a real estate portfolio may benefit due to the presence of these impacts, they constitute portfolio performance opportunities. Nonetheless, most of today’s “market standard” portfolio performance metrics do not directly account for any of these forces, meaning that sustainabilityrelated opportunities and risks that may be present within these portfolios currently lie outside the real estate business system, unmeasured.

The presence of these new forces within the real estate universe means that institutional investors and their managers will have to expand their measurement and definition of performance to include an assessment of these sustainability-related factors. By doing so, they gain an understanding of portfolio performance which reflects important new trends and comes closer to what they always strive for: transparency, objectivity, and credibility within the new context of investing. In order to create measurements that are meaningful across regions, sectors, and investors, there is a need for a relatively uniform set of additional metrics which are better suited for the new issues facing real estate investing.
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In 2008, the Global Reporting Initiative undertook a review of major sustainability reporting efforts in the construction and real estate sector. It aimed to understand the relative frequency of which key sustainability indicators were measured and reported by leaders in the field. Among those already producing detailed sustainability reports, the review shows that portfolio-level performance is underreported and that no standard exists for metrics at this level. The reporting frequency of identified indicators varies widely across the sample of investors, making valuable cross-industry analysis impossible. Even many of the leaders in the industry report much more on CSR and philanthropic issues than those of portfolio performance. We hope that the GRI Sector Supplement for construction and real estate, now in development in coordination with a quorum of participating industry leaders, will address these concerns before its anticipated release in 2011.

3 New Metrics for a New Era
3.1 Gaps in current reporting efforts
A number of initiatives, both industry-wide and investor-specific, have attempted to quantify and report on sustainability metrics outside the traditional scope of portfolio analysis. These include the Global Reporting Initiative and Principles for Responsible Investing at the industry scale, and, for instance, the Investa Sustainability Indicators and CBRE Standards of Sustainability at the individual company scale. To varying degrees, these efforts track (or aid in tracking) data on natural resource use, building performance, environmental and community impact, and other key indicators. Many of them focus on (or are derived from) an understanding of building performance, conducting analysis at an asset level rather than a portfolio level. In the meantime, gaps at the portfolio level are present to the extent that sustainability data may be both inconsistent and misrepresented, keeping this valuable information from reaching its full potential for investors, asset managers, stakeholders, and industry analysts alike. The field of RPI lacks a powerful, standardized set of portfolio-level metrics which is recognized and used by investors and managers across the real estate industry, thereby defining and giving credibility to the practice of RPI. Such a system would not only create improvements in building and portfolio performance, but would also allow for benchmarking and development of a database of “comps”. Currently, reporters are selective about which metrics to include or exclude, and data is not comprehensive or comparable from one portfolio to another. Even those firms leading the field of responsible investing and sustainable asset management may report only one-off examples of buildings or initiatives which cannot be extrapolated to obtain a view of portfolio level performance. Showcasing exemplary projects can be helpful to outside parties and a great method of generating positive feedback, but should not be done without providing relative performance with respect to both the rest of the portfolio and the industry as a whole (where possible). For example, two pages of discussion in a report of a single LEEDCertified building may mask the fact that the majority of the portfolio consists of businessas-usual properties. A unified system of RPI metrics to measure performance at the portfolio level would prevent these discontinuities and help establish standards and best practices for high-performance portfolios sector-wide.

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In 2004, Paul Hawken studied the makeup of socially responsible investment (SRI) funds against traditional funds and determined that an SRI portfolio had almost identical characteristics and holdings as non-SRI investments. Furthermore, he found that there were no standards, definitions, or formal codes of practice for SRI. To continue to remain relevant, portfolios aiming for RPI achievement should have a markedly different, more sustainable mix of assets than non-RPI portfolios. This difference should be quantitatively demonstrable, an aim which this system of metrics can help to achieve.

RPI metrics, therefore, must use vocabulary that is flexible enough to allow for a variety of financial, social and environmental advantages, and still be able to differentiate responsible property investing from more conventional real estate projects

3.2 Proposed metrics for RPI evaluation
The scope of RPI is broad. It includes, for example, “deep green” projects that focus on poor communities or environmentally fragile areas, energy efficient buildings that offer clear financial advantages through reduced operating costs, affordable housing projects that draw upon local tax credits, and now carbon reduction projects that hedge risk and result in renewable energy certificates. RPI metrics, therefore, must use vocabulary that is flexible enough to allow for a variety of financial, social and environmental advantages, and still be able to differentiate responsible property investing from more conventional real estate projects. Building off of the ten elements of social and environmental impact and opportunity in real estate as defined by the UNEP FI Property Working Group, we have developed a set of 26 quantitative metrics that can help investors to find, create and articulate value through improving the economic, social, and environmental profile of their investments. We recognize, of course, that individual investors will tailor their adoption and use according to their specific investment strategies. These metrics were selected for their ability to allow real estate professionals to better address risks and identify opportunities for long-term value creation. The metrics take two forms to support different use cases: acquisition and portfolio management, as described below.

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3.3 Use cases for RPI metrics
We envision three primary uses for RPI metrics in practice: informing acquisition decisions, enhancing portfolio management, and reporting performance. Metrics can be used to guide investors across the life cycle of responsible property investment, from existing buildings to new development, from acquisition to disposition. Because of their different purposes -- at the acquisition stage (evaluation of one property) or at the level of portfolio management (evaluation of the portfolio of assets in its entirety), RPI metrics take different forms depending upon the use case. Reporting can happen in both instances: characterizing the nature of an RPI opportunity, or demonstrating for stakeholders how investment values have been put into practice in an RPI portfolio, and how a particular investment strategy can create value over time. Our case studies (see Appendices A and B) test the validity of these use cases, and establish links to value, where possible.

RPI Metric
Energy Use Intensity Total Annual Energy Use Renewable Energy CO2 Emissions Intensity Energy Star Rating Retrocommissioning

Acquisition
For property, BTU/sf For property, BTU/yr On-site generation at property location, % of total demand From energy use, for property, pounds/sf/yr Energy Star Score for Property Performed last 24 months, yes/no

Portfolio Management
Average across portfolio, BTU/sf Total across portfolio, BTU/yr On-site generation across portfolio, % total demand Average across portfolio, pounds/sf/year Average Energy Star Score across Portfolio Properties on regular commissioning schedule, across portfolio, %

Energy Conservation and Carbon Management

Environmental Protection
Water Use Intensity Total Annual Water Use Recycled Water Use Water Management Fees Solid Waste Generation Diversion Rate For property, gal/occupant/day For property, MG/yr On property, % of total water use For property, combined water and wastewater charges, $/yr For property, tons/yr For property, % diverted from landfills through recycling programs In place on property, yes or no Averaged across portfolio properties, gal/ occupant/day Total for portfolio, MG/year Average across portfolio, % Total for portfolio, $/yr Total for portfolio, Million tons/year Average across portfolio, % Properties in portfolio operating under green lease structures, %

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Green Leases

Urban Revitalization and Adaptability
Brownfield Infill Yes or no Yes or no % brownfield properties in portfolio % properties in CBD in portfolio

Smart Growth and Transit Oriented Development
Walkscore Rating Rating for property Average rating across portfolio

Health and Safety
Risk Management Plans Vulnerable Location Prepared for property, yes or no Yes or no % properties in portfolio with risk management plans in place % properties in coastal areas and/or earthquake zones

Worker and Tenant Well Being
Tenant Satisfaction Survey Score on Kingsley survey Average score across portfolio on Kingsley Survey

Social Equity and Community Development
Benefits to CRA area Essential services Property located in a CRA census tract, yes or no Project brings essential services to an underserved area, yes or no % of properties in census tracts designated by the Community Reinvestment Act (CRA) % of properties in the portfolio bringing essential services to underserved areas

Local Citizenship
Community Engagement Public space Community Engagement Plan in place for property, yes or no Amount of public space maintained by the project, sq ft % properties in portfolio with community engagement plans in place Amount of public space maintained, as % of total area in the portfolio.

Voluntary Certification
Third Party Certification Property is certified under USGBC LEED, Energy Star, or other green building rating system, yes or no % of properties in the portfolio with third party certification underway or in place

Governance
Reporting Performance Alignment of Incentives Performance of the property is reported against triple bottom line metrics, yes or no Property manager is evaluated on triple bottom line performance, and it is tied to compensation, yes or no Is the performance of the portfolio reported against triple bottom line metrics? % of property managers evaluated and compensated on the basis of triple bottom line performance

Table 2: Proposed RPI Metrics

3.4 Discussions of proposed RPI metrics
3.4.1 Energy Conservation and Carbon Management An Energy Star rating of 75 is needed to get an Energy Star certification and for LEEDEB. 85+ is good, and 90+ is very good. The score is essentially the percentile compared to the rest of the EPA database, so 95% would mean only 5% of buildings perform better. For an office building (based on Commercial Building Energy Consumption Survey, or CBECS data) typical energy use (energy and gas) is in the range of 90 kBtu/sf/year (electricity use of 17 kWh/sf/yr = 59 kBtu/sf/yr plus gas use of 32 kBtu/sf/yr). Of course, energy use is climate specific, but a well designed low energy office building might achieve 30 to 50 kBtu/sf/yr total. A net zero energy building might beat code baseline by 60% and then make up the rest with renewable and offsets. While energy intensity is a metric that can identify underperforming buildings, total energy use for the portfolio is also important. This indicates the magnitude of the value opportunity for even small increases in energy performance.

Metrics relating to energy conservation and renewable energy generation have the advantage of being tied directly to reduced operating costs. Therefore, it is no coincidence that the metrics surrounding building energy use and associated greenhouse gas emissions have been the focus of many green building initiatives to date. However, these are generally communicated as gross totals across investments rather than in normalized or percentage terms which allow comparisons between properties and between portfolios. When evaluating a portfolio, it is most useful to set targets and interpret performance by building types and climate zone. Recently enacted EPA GHG reporting requirements and legislative initiatives promoting net zero buildings (California Energy Commission) will drive adoption of metrics such as these for portfolio management.

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RPI metrics take different forms depending upon the use case: acquisition or portfolio management

3.4.2

Environmental Protection In San Francisco, commercial rates for potable water and wastewater are escalating, with rates proposed at approximately $10.00 per ccf (hundred cubic feet = 748 gals)6 for provision of water and wastewater services by 2012. So, a 30 storey office building with a floor plate of 30,000 sf could save over $50,000 per month by investing in conservation and efficiency measures. Solid waste generation can be 0.08 lb/sf/day or 1.24 lb/ employee/day7 for a typical office building. However, diversion rates of 75 % or more can be achieved for an office building with robust sorting, recycling, and composting programs in place. With solid waste collection and disposal rates approaching $150/ton, the magnitude of the value opportunity for even 50% diversion significant (for our hypothetical 30 storey office building it could be over $1M per year). Green lease arrangements tie tenant efforts to conserve resources directly to the savings realized by such efforts, so that investors, managers, and tenants alike each have motivation to maximize reductions.
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The management of other resources used or generated by properties, namely water and waste, is also a key issue for investors to consider for their portfolio. These parameters have direct links to value, with reduced water potable use, reduced wastewater and solid waste volumes resulting in reduced operating costs. According to the DOE, commercial buildings consume 88% of the potable water in the US4. A typical office building can use up to 60 gals/ sf/year, or 70 gals/person/day for indoor use, cooling, and irrigation5. This is compared to a highly water efficient building, which can achieve up to 10 to 15 gals/sf/year or gals/ person/day through water efficient fixtures, xeriscaping, and use of recycled water. While potable water savings represent significant cost savings, wastewater charges can be double to quadruple water charges in some areas with limited capacity and aging infrastructure, or communities with new wastewater plants that must be amortized. Therefore, reducing wastewater volumes is even more important to the bottom line that reducing potable water use.

http://www.buildings. com/ArticleDetails/ tabid/3321/ArticleID/6461/ Default.aspx http://www.seco. cpa.state.tx.us/ waterconservation.pdf SFPUC 2009-2013 proposed water and wastewater rate package

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California Integrated Waste Management Board, Estimated Solid Waste Generation Rates for Commercial Establishments, http://www.ciwmb. ca.gov/WasteChar/ WasteGenRates/ Commercial.htm

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3.4.3

Urban Revitalization and Adaptability of space as opposed to conventional sprawl. Some real estate funds invest exclusively in brownfield properties (e.g. Cherokee). However, most funds do not report the scale of these types of investments at the portfolio level either as a percentage of properties or a total square feet in the portfolio.

Focusing investments on sites and properties which return brownfield sites to productive use or which take advantage of underutilized urban space reduces the need for greenfield development and encourages land conservation. Additionally, government and market incentives are increasingly directed toward investments which make efficient use

3.4.4

Smart Growth and Transit Oriented Development Similar to the manner in which some portfolio managers aggregate EnergyStar ratings and establish a portfolio wide target, walkscore ratings can also be aggregated across a portfolio, providing a useful view into the character of the properties in the portfolio. The effect of walkability on property value was the subject of a study by Dr. Gary Pivo, professor of planning and natural resources and senior fellow at the University of Arizona, and Dr. Jeffrey Fisher, professor of real estate and director of the Benecki Center for Real Estate Studies at Indiana University8. Dr. Pivo and Dr. Fisher pulled real estate data going back a decade from the Nation Council of Real Estate Investment Fiduciaries (NCREIF) and obtained walkability ratings for nearly 11,000 buildings using a Walk Score. For each of the property types analyzed – office, retail, multi-family and industrial – higher walkability scores equated to higher overall property values and net operating incomes. Comparing properties with a Walk Score of 80, defined as “very walkable,” to properties with a score of 20 (“car-dependent”), the study found that the walkable properties were 29 percent to 49 percent more valuable and generated 34 percent to 71 percent more NOI per square foot. The positive correlation between walkability and property value and NOI was expected, Dr. Pivo and Dr. Fisher said in the study. According to Dr. Pivo, the premiums suggest higher rents, occupancy and general market demand for walkable properties.
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Compact, walkable communities are the solution to some of our biggest shared challenges, from childhood obesity to social isolation, from crash deaths to disappearing farmland, from the high price of gas and GHG emissions, to the architectural blight of strip malls. Investing in areas with existing density and access to essential services and public transit is one of the principal ways that RPI can support smart growth. Walkscore ratings can serve as a proxy measure for smart growth and transit orientation, since with density comes public services and “walkability”. Measuring the walkscore for a property is a simple as putting in the address into the walkscore calculator (www.walkscore.com). The property walkscore is a number between 0 and 100. General guidelines for interpreting the score are as follows: • 90-100 = Walkers’ Paradise: Most errands can be accomplished on foot and many people get by without owning a car • 70-89 = Very Walkable: It’s possible to get by without owning a car • 50-69 = Somewhat Walkable: Some stores and amenities are within walking distance, but many everyday trips still require a bike, public transportation, or car • 25-49 = Car-Dependent: Only a few destinations are within easy walking range. For most errands, driving or public transportation is a must • 0-24 = Car-Dependent (Driving Only): Virtually no neighborhood destinations within walking range. You can walk from your house to your car!

http://www.u.arizona. edu/~gpivo/ Walkability%20Paper%20 8_4%20draft.pdf

3.4.5

Resiliency satisfied. Numerous studies have found benefits in monitoring and improving occupant comfort, particularly in productivity gains. Providing services such as childcare and wellness programs on-site are another way to improve worker well-being, and aiming to institute these types of programs across a portfolio is a valuable RPI commitment. We have chosen the property score on the Kingsley survey as a metric that can establish occupant satisfaction across a broad range of factors, and be aggregated across the portfolio. The Kingsley Index is the largest and most comprehensive performancebenchmarking database in the industry. Compiled from over 20 years of analyzing the performance of real estate industry leaders, the proprietary Index represents the standard for measuring tenant, resident, employee and client satisfaction, as well as broker relations and operational effectiveness. Many portfolio managers, such as TIAA-CREF, routinely conduct Kingsley surveys for their properties. Scoring high on occupant satisfaction has a direct link to value, as tenant turnover will be lower. 3.4.7 Social Equity and Community Development

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Properties that endure are inherently sustainable. Properties can be vulnerable to all kinds of disasters which in turn could jeopardize the sustainability of the occupants and/or community. Additionally, rebuilding damaged properties has an enormous environmental impact. Looking at the age of buildings in a portfolio is revealing, as building codes have become more stringent over time. However, dDesigning to code protects life safety, but does not protect the asset. Therefore, a portfolio manager should assess the resiliency of the portfolio to risks associated with climate change, earthquakes, other natural disasters, and security. Rather than establishing metrics for performance of the asset against specific risks, having a risk management plan in place serves as a proxy for performance. As investors become more sophisticated, they can begin to look into specific risk parameters with the potential to affect health and safety such as location: climate, floodplain, or earthquake zones, structural stability, life safety systems, façade integrity, or business continuity plans. Adequate knowledge and mitigation of risks increases disaster resiliency and overall sustainability by improving the durability and longevity of properties. With certain risk mitigation measures in place, appraised value can be higher and insurance premiums can be lowered, thereby establishing a direct link to value. 3.4.6 Worker and Tenant Well-being

Taking an interest in the personal health and wellbeing of tenants not only demonstrates a dedication to RPI, but can bring benefits in the form of increased property values and occupancy rates. Occupancy surveys provide valuable feedback on the occupant experience in a building and can lead to a better understand of what makes occupants

Three pressing and interconnected issues have caused increasing amounts of concern for real estate development as urban land has become scarcer: gentrification, housing affordability, and exclusionary policies and practices. In low income areas, sustainability equates to jobs as a first priority. Underserved areas typically need not only buildings, jobs, transportation and green space, but access to essential services, including local markets for food and sundries, health care, places of worship, community centers, and day care services. Investment practices can help to bring essential services to underserved areas,

either through direct investment in retail, food markets, or urban agriculture, or through inclusion of space for essential services as part of a development program. By tracking the ability of properties to create jobs and provide services for underserved areas, investors can lower risks associated with regulation and community opposition as well as setting an example of social sustainability. For existing assets, the two metrics we selected to represent this element of RPI include investment in a CRA area (Community Reinvestment Act), and the amount of space allocated to essential services provided to an underserved area as part of the project. These metrics are easily tracked across a portfolio but are currently under-reported, even for funds that have a stated goal of targeting low to moderate income census tracts or benefitting CRA areas. 3.4.8 Local Citizenship

3.4.9

Voluntary Certification

Buildings – even green buildings – often lack a close connection to their surrounding area and community. Developing Community Engagement plans on a site-by-site basis allows projects to be sensitive to the needs of the citizens and areas in which they are constructed. Understanding issues such as site context, cultural resources and concerns, and potential for shared use agreements ensures that negative impacts and public opposition to projects will be minimized. These plans should also include provisions for the public use of private space, which has well-documented success in San Francisco and other cities. Across a portfolio, investing in projects that positively contribute to the community in which they are anchored creates a positive image, minimizes, risk, and improves social sustainability.

LEED has established itself as the predominant green building certification for new development in the United States and several other parts of the world, with its marketability and value being realized by many investors and managers across the country. Still, many green building initiatives and LEED certification achievements are reported as single-property accomplishments and the true sustainability impacts of the portfolio remain hidden . Because of the time, complexity and cost of LEED certification, many portfolio managers have indicated an unwillingness to make LEED certification a portfolio-wide policy. Energy Star is emerging as the premier portfolio wide approach for certification of energy performance, due to low cost of certification, ease of use of the Energy Star Portfolio Manager software, and focus on value drivers. Portfolio manager can manage energy and water consumption for all buildings, help set investment priorities, identify underperforming assets, verify efficiency improvements, and receive EPA recognition for superior energy performance. TIAA-CREF, for example, has set a goal of Energy Star labeling for 100% of their office buildings. Setting a goal of certifying most or all of a portfolio’s properties and tracking progress toward this goal makes a profound statement of a company’s true commitment to sustainability, reaching much beyond the demonstration of the system’s benefits in a single building.

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3.4.10

Governance

This category represents the degree to which metrics have been adopted and institutionalized within the portfolio management process. Reporting performance on RPI metrics is a shared responsibility between property managers and portfolio managers. Systems must be put in place to track performance

of individual assets, with the capabilities to aggregate and view performance across the portfolio. Finally, incentives must be aligned with goals, if a commitment to RPI is to be diffused throughout the portfolio. This means that property managers must be not only evaluated, but compensated, on the basis of triple bottom line performance.

3.5 Portfolio characterization
In order to make sense of the performance of a portfolio with respect to RPI metrics, portfolios must be characterized according to their asset composition, geography, strategy, and other factors. This can help in benchmarking, review of progress against goals and in identifying trends over time. In order to have a complete picture of performance, progress, Characterization
Asset type Size Climate Zone NCREIF region Occupancy rate Age of Buildings Ownership structure Property Manager (s) # of Distinct Properties Strategy Return on Investment
Table 3: Portfolio Characterization

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and opportunities, certain measures need to be understood at the outset and tracked along with the performance metrics. We have called these attributes “characterization” indicators. They are quite useful for normalization and comparison of performance data. They take a slightly different form for acquisition vs. portfolio management, and they are shown below. Portfolio
Asset type in portfolio by sf

Acquisition (Asset)
Property sf and type (office, industrial, retail, apartment) Gross sf of property CBECS zone NCREIF region for property Most recent quarter occupancy rate

Total gross sf held in portfolio
% property held in each CBECS climate zone % property held in each NCREIF region Most recent quarter occupancy rate (average across portfolio) Average age of buildings in portfolio Within portfolio (direct or commingled) Number of property managers working with portfolio In portfolio % of portfolio invested in core, valueadded, opportunistic Targeted for portfolio

Age of building For building
For building In investment opportunity Core, value-added or opportunistic Targeted for deal

3.6 Case Study Results
The development of the RPI metrics for acquisition and portfolio management was undertaken by piloting an original, longer set of draft metrics with two real estate funds—TIAA-CREF and Bay Area Fund of Funds. Individual case studies are presented in the Appendix. The pilot testing sought to determine if the metrics are valid, reasonable, informative, linked to value, and relevant for decision-making. The metrics presented in this document reflect the findings of this pilot testing. For many of the issues covered within the realm of RPI, the acquisition decision is the most critical stage in defining performance achievement, as improvement may depend on outside factors (such as CRA location or walkability) or quite simply, the metric is static (such as brownfield site or vulnerable location). It is essential then that performance results for these metrics be at an acceptable level at the acquisition stage. Several categories contain RPI metrics which investment managers could directly tie to value either through their indication of decreased operating expenses or indirectly aid in obtaining higher rents, lower vacancy or selling the property at a higher price. Other categories do not link directly to asset value, rather allow the investor to property determine the correct ESG measures which must be in place in order to achieve maximum RPI benefits. The key to obtaining the biggest benefits from RPI metrics during acquisition is to conduct the review of the right metrics at the right stage of the acquisition process. Some metrics are more easily obtained during the pre-LOI stage, others require more investigation and so can only be obtained during formal due diligence. A few might not be available until post-closing. No matter when performance is measured, it is clear that the RPI metrics lend themselves to the classic investment process and can supply valuable information for both ‘classic’ and triple bottom line acquisition decision making.

Use of Metrics to Screen Potential Assets during Acquisition
Successful property acquisition rests on equal parts judgment and execution. While investment managers have to make sure that their due diligence is accurate, the most successful develop a reputation for closing in a timely and reliable fashion. Unlike portfolio management which is an on-going monitoring function, acquisition evaluation is a collection of one-off evaluations that must be accomplished within a very limited timeframe. So the use of responsible property investing metrics has to fit the timing of real estate acquisition. Our work indicates that an investor can develop decisions and execute on a potential investment utilizing many of the proposed metrics. Moreover, the inclusion of RPI metrics within the acquisition process may strengthen a key objective: identifying the areas of potential value enhancement within the investment.

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The inclusion of RPI metrics within the acquisition process may strengthen a key objective: identifying areas for potential value enhancement

Use of Metrics for Portfolio Characterization and Management
Managing a real estate portfolio requires measuring and monitoring a variety of financial fundamentals, including asset value, operating income, occupancy rates, and others. Use of ESG metrics can provide insight into risks and opportunities across the portfolio, however, the burden of additional data collection requirements must be balanced with the potential insight to be obtained. Metrics must point to potential actions to take, or indicate the results of those actions, or they are not worth the additional cost and time. Our work indicates that RPI metrics can be incorporated into standard procedures for portfolio management, even where multiple property managers exist. The performance results help to drive strategies for improving performance across the portfolio—beginning with low hanging fruit, such as no cost and low cost measures to improve energy efficiency, to measures that may involve more significant capital cost but deliver greater payback. A view into ESG performance across the portfolio helps to prioritize investments that can be implemented portfolio wide. Our research indicates that once ESG metrics are in place portfolio wide—managers take a “horizontal” rather than a “vertical” approach to greening the portfolio—in other words, rather than greening one building at a time, strategies are enacted in tranches across the portfolio. Moving to a “horizontal” portfolio management approach is one of the best ways to achieve value—value creation from the initial measures can help to make the business case for subsequent measures. Additionally, leveraging the size of the portfolio can mean economies of scale for implementation. Prudent portfolio managers will look to enter into portfolio wide contracts for commissioning, efficiency, renewables, and other measures to improve performance, and use RPI metrics to track the value of improvements portfolio wide. The ability to benchmark ESG metrics portfolio wide provides deep insight. While external benchmarks are helpful, the ability to evaluate progress over time and characterize the changing nature of the portfolio is viewed as even more beneficial.

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Once RPI metrics are in place, portfolio managers take a “horizontal” rather than a “vertical” approach to greening the portfolio—implementing strategies in tranches across the portfolio
Environmental metrics are perceived as having more direct links to value, however social metrics are seen as helpful in characterizing progress on advancing the social agenda of the fund, while maintaining financial returns. Environmental metrics are more malleable than social metrics—in other words, most environmental metrics can be improved over time across the portfolio, whereas social metrics are often determined at the point of acquisition, and remain static (walkability, CBD properties, etc.) Over time, both environmental and social metrics may help drive investment strategy and portfolio management, by setting targets for certain parameters. In summary, tracking RPI metrics in addition to standard financial metrics can provide added insight into risks and opportunities (useful for all investors), and can provide tangible evidence of a socially responsible investment agenda.

4 Implications for Reporting and Management
4.1 Adapting for higher performance
Implementing a system which tracks all of the key performance indicators recommended for RPI will take some investment and require changes to current reporting and management processes. However, implementing these changes will contribute positively to longterm portfolio performance and help foster better relationships between investors and asset managers around RPI and sustainability objectives. Additionally, reporting across RPI metrics will help to develop a new literacy of investment criteria and performance. Portfolio managers, property managers, and stakeholders will be able to engage in a dialogue regarding value created across the triple bottom line through responsible investment practices. Adapting portfolio reporting processes to include RPI metrics involves: 1 Establishing a commitment to obtaining, managing and reporting on the metrics 2 Implement a system for tracking and updating the listed metrics
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To ensure ease of collection and interpretation of the additional data, systems should be put into place to ensure the metrics are tracked at each property and easily aggregated to the portfolio level. This should generally align well with current information-gathering practices, though may require improved relationships with managers to be fully effective (discussed below). Furthermore, having an individual or team dedicated to RPI and sustainabilityrelated analysis and management would help the metrics reach their full potential as portfolio improvement tools.

Responsible Property Investing: What the leaders are doing, UNEPFinance Initiative, 2008I

A concrete commitment to tracking a new set of metrics at the investor level is an important first step toward realizing benefits for the portfolio, as well as toward gaining acceptance for the metrics industry-wide. An investment of time and resources should be put toward understanding existing available data, establishing a baseline, benchmarking, and performing a gap analysis to target key improvement areas. Examples of this type of action are available from industry leaders who have proven that this approach has benefits for reporting and performance9.

In 2007, Lend Lease released a framework for tracking and assessing its progress in reaching key sustainability targets. Among these was a commitment to ensuring that energy, water, and waste data are measured and monitored in a comparable way across all assets under management. This commitment is an essential first step toward using the metrics to improve performance.

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Reporting across RPI metrics will help to develop a new literacy of investment criteria and performance

3

Institute education programs with managers to increase awareness of needed changes at the property level

4

Educating appraisers and seeking support for increased appraisal values where appropriate

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Many key improvements at the portfolio level rely heavily on improvements occurring at the property level – through design and siting as well as operations. Creating a standardized education program tailored specifically toward managers, promoting awareness of new metrics and their implications should provide for participation and consistency across the portfolio. Effective relationships with educated managers will greatly improve the accountability associated with many of the operational issues in particular, and improve performance in the long-term . Use of new KPIs to characterize portfolios is akin to creating a new language- a way to articulate value beyond financial performance, using standardized metrics and benchmarks. Over time, property managers and portfolio managers alike will become fluent in this new language of RPI. In 2008, CB Richard Ellis established its “Standards of Sustainability” which create a minimum set of sustainabilityrelated actions to be completed for all of its office buildings. These include seeking ENERGY STAR certification for any eligible buildings, providing relevant training at each building, and reporting internally on sustainability performance each month to ownership. These standards align well with RPI goals, and could be very powerful if applied successfully at the portfolio level.

Investments which improve performance across key RPI metrics, particularly in areas such as energy performance, GHG emissions, resource management, and connection to transit and essential services, may bring an added value compared to standard assets without such considerations. As energy prices fluctuate and government regulations become increasingly stringent, these benefits will bring risk reduction, reduced operating costs, and other benefits which are generally not accounted for in the current standard appraisal process. Though these may be difficult to quantify directly in the short term, making a case for their incorporation into the appraised value of assets in some form is one of the most important ways for investors to realize their value across a portfolio . The chicken and egg situation should be avoided—some portfolio managers want to see clear links to value before committing the additional time and energy to reporting, while reporting on these metrics over time is the only way to demonstrate clear links to value. A common complaint of investors who are committed in principle to RPI is that appraisers are slow to recognize value beyond BAU. Appraisers are often unclear how to value specific sustainability techniques for atypical assets. Appraisers notoriously default to “comps” to assess property, and the only way to create a comparable database of sustainable properties is to begin reporting on those metrics that matter, beyond traditional financial metrics for real estate valuation. This situation may improve with the emergence of the new National Green Building Underwriting Standards, a tool that can be used to assign a green value score to a property.

4.2 High-Performance Portfolio Dashboard
Ideally, a unified approach could also be taken to visualizing, analyzing, and managing the data obtained for individual metrics, building upon the action items mentioned above to create a dashboard for monitoring and improving portfolio performance in the context of RPI and investor and stakeholder interests. In the short-term this would take the form of a standardized aggregation of data from properties across the portfolio (gathered quarterly or monthly) which could be analyzed for specific trends. This data should be fairly easily accessed, particularly once relationships with managers are streamlined. This would allow quick identification of the “winners” and “losers” in a portfolio with respect to the RPI metrics. From this analysis, best practices from the “winners” could be applied to underperforming properties to maximize the performance of the portfolio as a whole. Finally, in the mid- to long-term there is potential for real-time information monitoring, benchmarking, and analysis across a portfolio. Sensors exist which are capable of monitoring building resource use and transmitting this data for analysis and visualization for every minute of the day. This technology, combined with regular manager reports and occupant surveys, can give an incredibly a timely and accurate picture of performance across a portfolio, and lead to new realizations and improvements. There are many useful software tools on the market- from EnergyStar Portfolio Manager (mentioned previously) to proprietary systems such as Tririga (www.tririga.com). Tririga combines portfolio management tools with portal views for property managers, and facilities management functionality. This helps to integrate goals and establish common metrics from asset to asset, which roll up to a portfolio wide view of costs, benefits, and performance.

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5 Notable Benefits and Conclusion

The benefits of committing to RPI are potentially significant, but a lack of uniform metrics which can be adopted industrywide has hindered the potential impact of RPI on the real estate sector. By adopting the metrics listed above and following the suggested implementation program, individual investors can realize substantial gains which could be quantified and managed without significant additional reporting burden. The most notable of these gains are: • Long-term value creation through increases in assessed value of property • Greatly reduced operating costs by driving environmental metrics
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• Minimization of risk in several key areas during acquisition • Improved public image and investor confidence • Improved relationship between investors and asset managers • Increased visibility and transparency • Demonstration of values in practice

Through adoption of these KPIs, investors can become literate in responsible property investing. RPI literacy is powerful—it enables us to finally begin to articulate the connection between the values of mission driven investing, the actions that are taken by investors to shape a sustainable portfolio, and the resulting performance of the portfolio. And literacy enables us to communicate our shared values in a shared language— managers with investors; investors with shareholders. In a changing and volatile investment environment, there is a unique and urgent need to better understand the benefits of making a commitment to responsible property investing. The potential for improvements at the portfolio level is great, with benefits accruing to investors, the industry, and society as a whole, and the potential for these considerations to improve the industry as a whole is even greater. There is no better time for their adoption than now.

RPI literacy is powerful—it enables us to finally begin to articulate the connection between the values of mission driven investing, the actions that are taken by investors to shape a sustainable portfolio, and the resulting performance of the portfolio

APPENDIX A

Metrics Case Study: Acquisitions

Using Metrics in Property Acquisitions: Bay Area Council Family of Funds Case Study

Objectives
The objective of this case study was to trial the draft metrics for assessing a property acquisition according to the principles of Responsible Property Investing. The draft metrics were developed through a collaborative research effort between the Responsible Property Investing Center, Arup and Galley EcoCapital. The findings from the trial were used to refine, streamline and evolve the metrics into a final set that best reflected the RPI principles and a triple bottom line approach to investing. The Bay Area Council Family of Funds (FOF) offered to participate in the trial by testing the metrics on three recently acquired properties. The study considered: • Which RPI metrics can provide the best indicators of value during the acquisition process? • Which RPI metrics can be most easily applied by investment acquisitions staff during the acquisitions process? • Would the use of RPI metrics materially change the investment acquisitions process?

Portfolio Strategy
The three properties studied are part of FOF’s Smart Growth Portfolio of Funds, which are two private real estate equity funds, with a combined size of approximately $191 million. The Funds have a 10-year term. They are comprised of 17 assets, totaling 1,971,172 square feet commercial space and 1,066 forsale homes and 514 rental units. The Smart Growth Portfolio of Funds’ objectives are two-fold: • First bottom line returns: to seek market returns from office, industrial, retail and multifamily properties in low-to-moderate income submarkets, generally located along transportation corridors. The Fund believes that these assets are typically under-managed and that insufficient organized competition plus enjoys the support of local government and community groups for investment in these areas. • Second bottom line return: to benefit the communities the investments are made in, by focusing on improving jobs, housing and environmental impact. The Smart Growth Portfolio of Fund’s investment parameters are to focus on LMI census tracts within the nine county Bay Area region, provide equity to real estate projects and invest mainly in value-add opportunities, with a no more than 20% of fund capital being made available for new development.
Per FOF, the expected combined “target” size of the funds will be $191 million.

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About the Bay Area Council Family of Funds
The Bay Area Council Family of Funds is a regional effort developed by the Bay Area Council to attract private capital into low-tomoderate income (LMI) neighborhoods of the San Francisco Bay Area. FOF acts as a Fund Sponsor and Special Member for several commercial real estate investment funds. It works with Kennedy Wilson, the Fund Manager, who manages the investments on a day-to-day basis.

Current Use of Metrics
The FOF has a defined strategy and process for assuring double bottom line outcomes on its investments. The FOF, as Sponsor, has the formal responsibility of establishing the double bottom line strategy for each of its investments. The Sponsor and the Fund Manager have joint responsibility for implementation of the established double bottom line strategy. Within implementation, the Sponsor and Fund Manager track the progress of the double bottom line factors on all investments on a quarterly basis. The following criteria are among the criteria that are part of the double bottom line strategy that the Sponsor and Fund Manager may adopt: • Overall, qualitative assessment of environmental return/impact • Economic Impact: Catalyst for increased economic activity and value creation in the priority neighborhoods, particularly for current residents. • Wealth Creation: Home, business and real estate ownership, better quality community shopping centers, and access to mainline financial services (e.g. local banking), particularly for current local residents. • Community Impact: Job creation, affordable housing and home ownership, joint ventures with community developers, and local and minority contracting. • Community Engagement: Incorporation of community input in projects through the entitlement process and/or other community participation vehicles. • Environmental Impact: Energy conservation, waste reduction, recycling, pollution prevention, alternative energy, and green building construction and operations.

It should be noted that, while double bottom line results are critical to the FOF investment thesis, the Sponsor indicates that it does not set double bottom line “targets” per se for its acquisition and portfolio management process. This is because the potential for double bottom line impact for any given investment can vary widely by type and amount mainly due to local market factors, and so decision making on individual assets can require tradeoffs between equally good options that are very hard to quantify.

Methodology for pilot test
The pilot test was carried out by providing the Smart Growth Fund investment manager with a worksheet containing a draft large set of RPI metrics that could be used to evaluate property acquisitions. The investment manager selected three recently acquired properties to test the metrics so that a minimum base of observations could be used to draw common themes about the exercise. The investment manger was asked to: • Identify performance data for each indicator • Asses potential for improvement (post-acquisition) • Assess value impact: a. Does this metric currently factor into your due diligence? (Yes/No) b. Do you think this metric can directly or indirectly impact the property’s value? (Directly, Indirectly, No Impact, or Not Sure) c. Link to Value (if possible, list where you would account/budget for the impact on value) d. How important is this info for acquisition decisions? (1=no importance, 2=some relevance, 3=critical)

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Property Characterization
The three properties studied were of different asset classes and in different urban locations within the San Francisco Bay Area. Property
Asset Class Location Age Square Feet / Units Tenancy Certified Green or Energy-Star Labeled? Located In CRA-designated census area? Energy Mix
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A
Office San Francisco 1958 124,980 Multi-tenant No Yes Gas & electric

B
Retail Marin 1995 182,000 Multi-tenant No Yes Gas & electric

C
Multifamily Richmond Late 1980’s 712 units Multi-tenant No Yes Gas & electric

Application of the Metrics
The table below summarizes the results of applying the metrics to the three properties. RPI metric
Energy conservation and carbon mangement Environmental protection Urban revitalization Smart growth / TOD Health & Safety Worker and Tenant Well-being Social Equity and Community Development Local Citizenship Voluntary Certification

Currently Tracked?
No No No Some No No Some No No

Data available?
No Some Yes Some Yes No Some Some Yes

Perceived link to Value
Yes tYes No Yes Yes No No No Yes

Perceived relevance for acquisition decisions
High High Medium Unknown - medium High None High Medium Unknown

Other specific insights include: • Interestingly, on projects A and B, value potential through decreased vacancy allowance/rent concessions was perceived to be linked to the percentage of tenants with green leases and quality of green space. • One set of data that was readily available is the walkscore, which relies on an external data source. Properties A and B had walkscores of 80 and 97 respectively. Property C had a walkscore of 52. The properties distance to public transportation ranged from 0.25 miles to 0.75 miles.
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Findings
1 The use of responsible property investing metrics during acquisition can help pinpoint opportunities to improve an asset’s tangible value and its environmental and social profile at the same time. FOF indicated that opportunity analysis during prospective acquisitions is a critical task of the investment manager, particularly opportunities to improve asset value. They indicated that the performance benchmarks and indicators of many of the metrics within the following categories directly and indirectly linked to asset value as well as provided helpful or even critical information for acquisition decision making. • Energy conservation and carbon management • Environmental protection • Smart growth/TOD • Voluntary certification • Health and safety 2 Some RPI metrics correspond to double bottom line characteristics already in use during acquisition screening process. FOF would be able to build on that foundation if they chose to broaden their RPI approach. A metrics-based approach works better if there is a foundation of compatible assessment criteria to build upon. We determined that FOF already uses some RPI metrics as acquisitions assessment criteria: • Distance to public transportation • Management reporting on ESG characteristics • Tenant sub-metering (on certain properties) • Minority and women-owned business contracting

3 RPI Metrics should be grouped according to acquisition stage. Upon use of the metrics, it became immediately clear that certain types of information is made available to the investment manager at different stages of the acquisition process, and so some metrics could be evaluated in the initial, pre-LOI stage, while many would be evaluated later during formal due diligence. A few, such as “worker and tenant well being” would only be obtainable post-closing. The investment manager indicated that separating the metrics according to their applicable acquisition stage made the evaluation process much easier. An easier process makes for more likely use of the metrics in investment decision making.
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4 Consider adding or revising some of the metrics for better acquisition review FOF also recommended that certain changes to the metrics helped them to deliver more insights to the acquisitions personnel. Of primary interest were metrics which more clearly helped to identify valueadd opportunities, such as opportunity for commissioning, or opportunity for upgrading energy and water systems. This sort of assessment fits well with the typical objectives of an acquisition analysis.

RPI Metric

Acquisition

Property A

Property B

Property C

Energy Conservation and Carbon Management
Energy Use Intensity Total Annual Energy Use Renewable Energy CO2 Emissions Intensity Energy Star Rating Retrocommissioning For property, BTU/sf For property, BTU/yr On-site generation at property location, % of total demand From energy use, for property, pounds/sf/yr Energy Star Score for Property Performed last 24 months, yes/no Not available Not available 0% Not available No No Not available Not available 0% Not available No No Not available Not available 0% Not available No No

Environmental Protection
Water Use Intensity Total Annual Water Use Recycled Water Use Water Management Fees Solid Waste Generation Diversion Rate Green Leases For property, gal/occupant/day For property, MG/yr On property, % of total water use For property, combined water and wastewater charges, $/yr For property, tons/yr For property, % diverted from landfills through recycling programs In place on property, yes or no Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available Not available

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Urban Revitalization and Adaptability
Brownfield Infill Yes or no Yes or no Not available Yes Not available Yes Yes Yes

Smart Growth and Transit Oriented Development
Walkscore Rating Rating for property 97 80 52

Health and Safety
Risk Management Plans Vulnerable Location Prepared for property, yes or no Yes or no Not applicable Yes Yes Not applicable Yes

Worker and Tenant Well Being
Tenant Satisfaction Survey Score on Kingsley survey Not available Not available Not available

Social Equity and Community Development
Benefits to CRA area Essential services Property located in a CRA census tract, yes or no Project brings essential services to an underserved area, yes or no Yes Yes Yes Yes Yes Yes

Local Citizenship

Conclusion
This was a very insightful exercise for Bay Area Council Family of Funds, which revealed a deep sensitivity to achieving the goals of double bottom line investing. The firm is already oriented towards the principles of responsible property investing, with a defined strategic and implementation process for achieving its double-bottom line objectives on its investments. In its feedback on the study properties, the FOF was able to tie many of the RPI performance benchmarks to positive asset value impacts, mostly by decreasing operating expenses but they also identified some instances where RPI characteristics might point to asset value increases through possibly higher rents and lower vacancy. Several metrics had direct or indirect links to asset value and would improve investment decision making by providing important information for acquisition decisions. Through its work with the study properties, the FOF demonstrated that responsible property investing principles can not only be achieved, but are measurable. Critical to the success of the measurement during acquisition is to recognize the time sensitivity of the acquisition process. For example, they recommend the grouping of the assessment of metrics performance and characteristics around the natural stages of acquisition, in order to make the process practical and useful for investment managers. Also, certain revisions to the proposed metrics might facilitate data gathering and enhance opportunity-seeking, which is a core objective of the acquisition team. Turning to the industry as a whole, it appears from this study that the acquisitions process presents a ripe opportunity to not only use the metrics to screen for certain socially responsible characteristics within a potential acquisition, but also drive decision making and strategy – because the metrics reveal areas where social responsibility, asset quality and value can be demonstrably improved with a single action, revealing solid opportunities during acquisition. The introduction of RPI metrics to the acquisition process helps investment funds that want to demonstrate social responsibility and are in need of appropriate real estate investment criteria. At the time of this writing, the triple bottom line criteria established by the very few funds exhibiting leadership in this space is mostly self-selected and not transparent. Moreover, the unclear benchmarks attached to most self-selected metrics makes it difficult to establish the proper expectations, not to mention any sort of comparable track record for an investment manager’s triple bottom line success with investment over time. By employing RPI metrics during acquisition, users can avoid these sorts of problems. The particular value of this metrics structure and process during acquisition is that it helps the investor to change from monitoring social responsibility post-acquisition to driving it because the assessment is happening during at the earliest stages of an investment and the potential for achieving social and environmental objectives would be known prior to closing. Finally, a comprehensive and systematic application of RPI metrics would allow any investor to clearly define, communicate and reliably replicate their Fund’s social and environmental performance and opportunity assessment across different kinds of assets, in diverse market settings and differing property construction.

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APPENDIX B

Metrics Case Study: Portfolio Management

Using Metrics in Portfolio Performance Assessment: TIAA-CREF Case Study

Objectives
The objective of this case study was to trial the draft metrics for assessing the performance of a portfolio of properties according to the principles of Responsible Property Investing. The draft metrics were developed through a collaborative research effort between the Responsible Property Investing Center, Arup and Galley EcoCapital. The findings from the trial were used to refine, streamline and evolve the metrics into a final set that best reflected the RPI principles and a triple bottom line approach to investing. The study was focused on: • Assessing if the draft metrics are valid and useful • Identifying those metrics for which data were currently unavailable, but TIAA-CREF would like to track in the future • Considering link to value (direct or indirect) • Considering the importance of the metric to investment strategy and portfolio characterization TIAA-CREF offered to participate in the trial by testing the metrics on real estate properties in its General Account. About TIAA-CREF TIAA-CREF is one of America’s largest institutional real estate investors in the United States, with an approximate $70 billion global portfolio of direct and indirect investments (12/31/07). TIAA-CREF originated its first commercial mortgage in 1934 and began direct investment in commercial real estate in 1947. Today, on behalf of individuals, public and private institutions in the U.S. and abroad, TIAA-CREF Global Real Estate directly owns over $25 billion (2008 data) of primarily highquality properties in the office, retail, industrial and multifamily sectors across the U.S., Canada and Western Europe.

Managing across the triple bottom line is not new to TIAA-CREF, the large provider of pension services for the academic community. They have implemented socially responsible investing programs geared towards competitive returns through investments with broad social appeal, such as workforce housing and urban infill development in low to moderate income areas. In 2006, they surveyed their stakeholders and determined that while financial return was a top priority, environment, human rights and community impact were also top concerns. It was also noted that there was a deep need for more information about SRI strategies and particular fund accounts. In 2008, TIAA-CREF announced that it would seek to reduce energy usage in its real estate holdings by 10% by 2010. The results have been impressive. TIAA-CREF was named a 2008 and a 2009 ENERGY STAR Partner of the Year for outstanding energy management and reductions in greenhouse gas emissions. Over the past six years, 67 of the nearly 200 office buildings in TIAA-CREF’s real estate portfolio have earned an Energy Star label one or more times, with 47 of those buildings doing so in 2009. Thus far, the buildings that comprise the office portfolio have reduced energy use by 125 million Kilo British Thermal Units, which is equivalent to an estimated 37 million pounds of carbon dioxide emissions. The aggregate annual savings is equal to approximately $6.1 million.

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Portfolio Strategy
The real estate portfolio under study is part of TIAA-CREF’s General Account, an insurance account that is funded through fixed annuities and is not open to investors. The fund strategy is described as “hybrid core”. In other words, some assets are acquired for their potential to be upgraded, and some assets are selected because they are already exhibiting high performance on RPI metrics, or they help to advance the overall goals of the portfolio. It should be noted that several times during our case study, it was stressed that TIAA-CREF’s focus was first to fiduciary duty, and that any attention to RPI metrics should be seen as supporting fiduciary duty rather than superseding it. For this reason, TIAA-CREF was most interested in considering those KPIs that had a direct link to value.

Methodology
The pilot test was carried out by providing TIAA-CREF with a worksheet containing a draft set of RPI metrics and benchmarks that could be used to evaluate a property portfolio.

TIAA-CREF was asked to: • Obtain data across the portfolio, if possible • Provide a perspective on the link to value (direct or indirect) • Comment on the importance of the metric to investment strategy and portfolio characterization • Identify those metrics for which data were currently unavailable, but TIAA-CREF would like to track in the future

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Current Use of Metrics
According to Nick Stolatis (Director, Strategic Initiatives), TIAA-CREF Global Real Estate tracks its portfolio using primarily energy metrics, in addition to standard operating and financial performance metrics. It has plans to implement water and wastewater tracking using Energy Star Portfolio Manager software. This case study provided an opportunity for TIAA-CREF to think about those metrics that would be relevant in terms of triple bottom line impacts and value created, all while maintaining a focus on fiduciary duty.

TIAA-CREF was given 2 weeks to work with property managers to compile the data and evaluate the proposed indicators for relevance and utility.

Portfolio Characterization
The portfolio is comprised of 15.9 M sq ft of office space (approximately 60% Class A, the rest B and C), 12.2 M sq ft of industrial property, 1.8M sq ft of retail, and 1.4 M sq ft of residential properties. The fund also includes some undeveloped land holdings. The fund is made up of approximately 164 distinct properties, about half of which are Characterization
Asset type

located in the South, and the rest distributed evenly throughout the East, Midwest, and West. Tellingly, the average age of the property holdings is 18 years old. Fifteen different property managers answer for the performance of these properties to TIAACREF. The most recent quarter occupancy rate, averaged across the portfolio was 86.75%.

TIAA-CREF Data
15.9M sf office (60% Class A); 1.8M sf retail; 1.4M sf residential

Size Climate Zone
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19.1M gross sf in portfolio Not available 50% South; 50% East, Midwest and West 86.75% average 18 years Not available 15 property managers 164 properties 100% Hybrid core Not available

NCREIF region Occupancy rate Age of Buildings Ownership structure Property Manager (s) # of Distinct Properties Strategy Return on Investment

Application of the Metrics
Application of the draft set of metrics – which was considerably longer than the final set-was a challenge. The K in KPI is critical—a small number of KPIs are essential if they are to be actually used by portfolio managers. With the input of TIAA-CREF, the original list of metrics was streamlined from over 50 metrics to just 26 high impact metrics that still cover the 10 dimensions of RPI. The KPIs that survived were the ones that demonstrated clear links to value, and were attainable with a minimum level of effort, now or in the future.

In some cases proxies for performance had to be adopted, in order to gain momentum on the topic and establish preliminary data sets. For example, rather than trying to characterize TOD properties on the basis of transit options available within a certain proximity of the property on a daily basis (an onerous and data intensive task), the more efficient alternative was to instead look at the relative percentage of CBD properties vs. the rest of the portfolio, as well as walkability scores. The table below summarized the tracking, availability, value and relevance of each metric.

RPI metric

Currently Tracked?
Yes No Some Some Some Yes No No Yest

Data available?
Yes Some Some Some Some Yes Some Some Yes

Perceived link to Value
Yes Yes Low Yes Yes Yes No No Yes

Perceived relevance for portfolio management decisions
High High - plans in progress Low Medium - CBD proxy Medium Medium Low Low High

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Energy conservation and carbon mangement Environmental protection Urban revitalization Smart growth / TOD Health & Safety Worker and Tenant Well-being Social Equity and Community Development Local Citizenship Voluntary Certification

While TIAA-CREF agreed some of the metrics would be nice to know, since data had not been tracked previously, there was no chance of getting them in time for the study. For example, CBECS zone is far more telling in terms of energy opportunities and climate risk. However, the portfolio was characterized only by NCREIF data. Walkability score also fell into the category of nice to know, but not able to obtain quickly enough.

Findings
TIAA-CREF already had a pretty good handle on energy use, and progressive programs in place to obtain Energy Star ratings and benchmark. It was a surprise to them, however, to learn that the average age of the buildings in their portfolio was 18 years. This provided insight into the future competitiveness of the current holdings, as well as opportunities for energy efficiency and upgrading energy systems. The general fund was already well below average in terms of Energy Use Intensity (EUI)—77 kBtu/sf/yr combined gas and electric as compared to a CBECS average of 90 kBtu/sf/yr, with an Energy Star rating across the portfolio of 75 (better than 75% of buildings). This energy performance represents a 6% reduction in energy use across the portfolio since the target of 10% reduction was announced. Only 40% of the properties have been assessed to date, so there is still room for improvement, despite the aging assets. TIAA-CREF pays on average 10 cents per kWh for energy across the portfolio, a reasonably competitive rate. Total energy costs per year amount to $45M across the portfolio. Each percentage decrease in energy use saves nearly a half million in operating costs annually. While TIAA-CREF does not have any renewable energy generated on-site as part of their general fund portfolio, they have established a target of 10%. Plans are underway to implement similar tracking systems for water and solid waste, although performance data were currently unavailable for these metrics.

TIAA-CREF is heavily invested in infill/urban properties, with 45% in the CBD. Walkability scores were unknown at this time, although a parameter that TIAA-CREF will track in the future. 95% of properties have risk management plans in place, and 95% undergo occupant satisfaction surveys. This is an excellent start. In the future, TIAA-CREF can begin to benchmark the actual survey scores, to identify and address underperforming properties. They can also dig deeper into risk management, to begin mapping properties to exposure to specific risks such as seal level rise, flooding, storm events, and earthquakes. Surprisingly, metrics related to social equity and community development were not currently tracked for the General Fund. This is in contrast to the stated goals of socially responsible investing for TIAA-CREF. Tracking key indicators such as qualified investment in CRA census tracts, and public space maintained within the portfolio would help TIAA-CREF to demonstrate tangible actions and performance with respect to their publicized values. Approximately 40% of properties have undergone some sort of voluntary certification (LEED or Energy Star)—and 35% have obtained Energy Star labels. A full 100% of eligible properties have undergone a LEED gap assessment, although there are currently no plans to implement a LEED certification program portfolio wide. One of the factors property managers are evaluated on is their contribution to achieving sustainability goals. A summary of performance is provided in the following table.

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RPI Metric

Portfolio Management

TIAA-CREF Results

Energy Conservation and Carbon Management
Energy Use Intensity Total Annual Energy Use Renewable Energy CO2 Emissions Intensity Energy Star Rating Retrocommissioning Average across portfolio, BTU/sf Total across portfolio, BTU/yr On-site generation at property location, % of total demand Average across portfolio, pounds/sf/yearr Average Energy Star Score across Portfolio Properties on regular commissioning schedule, across portfolio, % 77 1,470,700,000 0% 22 75% Not available

Environmental Protection
Water Use Intensity Total Annual Water Use Recycled Water Use Water Management Fees Solid Waste Generation Diversion Rate Averaged across portfolio properties gal/occupant/day Total for portfolio, MG/year Average across portfolio, % Total for portfolio, Million tons/year Average across portfolio, % Properties in portfolio operating under green lease structures, % Not available Not available Not available Not available Not available Not available

Urban Revitalization and Adaptability
Brownfield Infill % brownfield properties in portfolio % properties in CBD in portfolio Not available 45%

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Smart Growth and Transit Oriented Development
Walkscore Rating Average rating across portfolio Not available

Health and Safety
Risk Management Plans Vulnerable Location % properties in portfolio with risk management plans in place % properties in coastal areas and/or earthquake zones 95% Not available

Worker and Tenant Well Being
Occupant Satisfaction Survey Average score across portfolio on Kingsley Survey Not available

Social Equity and Community Development
Benefits to CRA area Essential services % of properties in census tracts designated by the Community Reinvestment Act (CRA) % of properties in the portfolio bringing essential services to underserved areas Not available Not available

Local Citizenship
Community Engagement Public space % properties in portfolio with community engagement plans in place Amount of public space maintained, as % of total area in the portfolio Not available Not available

Voluntary Certification
Third Party Certification % of properties in the portfolio with third party certification underway or in place 40% LEED or Energy Star

Governance
Reporting Performance Alignment of Incentives Is the performance of the portfolio reported against triple bottom line metrics? % of property managers evaluated & compensated on triple bottom line perormance Partially 100%

Conclusion
TIAA-CREF has done an admirable job of tracking KPIs related to energy to date, with plans for water and waste—parameters with a clear impact on operating expenses and therefore a direct link to the bottom line. It could benefit from instituting portfolio wide tracking on additional parameters, particularly on factors related to social equity and community development, to demonstrate a tangible link to the stated values of socially responsible investing. While risk management plans are a good proxy for management attention to the issue, knowing that 100% of the properties have risk management plans does not equate to insight and ability to make investment decisions regarding the potential to mitigate or transfer specific risks across the portfolio. Risk management practices would improve markedly with a concerted drill down into specific parameters such as earthquake readiness and climate change vulnerability for each property, aggregated across the portfolio. Finally, the authors would like to acknowledge the invaluable input of TIAA-CREF in shaping the final list of proposed RPI metrics, with an eye towards simplicity, ease of use, materiality, and value creation across the triple bottom line.

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Jean Rogers Arup [email protected] Lisa Michelle Galley Galley EcoCapital [email protected] David Wood Responsible Property Investing Center Boston College [email protected]

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