CWR talks to Link REIT on Building Low-Regret Resilience

By Dr. Calvin Lee Kwan 20 February, 2023

Link REIT, Asia's biggest REIT, got CWR to stress test its GBA portfolio against IPCC “low-regret” scenarios. We chat with Dr. Kwan, Head of Sustainability & Risk Governance, on being early movers and discuss key findings & benefits

Being a responsible investment manager means assessing the spectrum of likelihoods & risks and as IPCC warned, low-likelihood climate outcomes are possible at anytime now
Stress tests revealed: asset resiliency to 6m & 8m SLR, property-specific vulnerabilities, red flag locations ++; all feeds into our ongoing portfolio future-proofing activities
Rising seas does mean the end of investing in coastal properties; district level collab & govt adaptation strategies are key to future investment & building low-regret resilience
Dr. Calvin Lee Kwan
Author: Dr. Calvin Lee Kwan
Dr. Calvin Lee Kwan has over 15 years of expertise in developing and implementing sustainability strategies covering legal, environmental, financial, social and risk management themes across a variety of industries including oil and gas, automotive, academia and real estate. Currently Director of Sustainability and Risk Governance at Link Asset Management Limited, Dr. Kwan is responsible for developing and executing the Group’s long term sustainability strategy and oversees progress by implementing a dynamic, decentralized risk management system. Under his “Business as Mutual” approach, Link has become a recognized leader in sustainable finance and climate action with the latest initiative to achieve Net Zero by 2035. As co-chair of Principles of Responsible Investment’s Real Estate Advisory Group, Dr. Kwan steers cross-industry efforts on enhancing climate resilience while ensuring APAC-specific issues and implementation challenges are on the Group’s radar. Dr. Kwan earned a Doctorate in Environmental Science and Engineering from the University of California, Los Angeles, an EMBA from Kellogg School of Management at Northwestern and HKUST and lastly, a Juris Doctorate from The Chinese University of Hong Kong.
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Link Real Estate Investment Trust (Hong Kong stock code: 823), is the largest REIT in Asia. It is managed by Link Asset Management Limited, a leading global real estate investor and asset manager. Link REIT recently released their Annual Report 2021/2022 – Growing Beyond. In the report, they highlighted that CWR helped stress test their Greater Bay Area portfolio against three “low-regret” scenarios that factored sea level rise according to the latest IPCC findings and potential storm surges. We sat down with Calvin Kwan, Director of Sustainability and Risk Governance at Link Asset Management Limited, to hear why they decided to do this, cover some of the key results and what they will be doing next.

CWR: It was a pleasure working with Link REIT on stress testing its Greater Bay Area (GBA) portfolio against coastal threats and multi-metre sea level rise (SLR) last year. Before we dive into that, can we take a step back to why you decided to embark on stress testing your portfolio and why you used the “cannot be ruled out” scenario?

Dr. Calvin Kwan (CK): Climate impacts are intensifying and accelerating, leading to the development of “low-regret” transformative adaptation action. As the latest IPCC publication warned, multi-metre sea level rise by the end of this century cannot be ruled out. Low-likelihood climate outcomes at the tipping points where critical thresholds beyond which a system reorganises – usually in an abrupt and irreversible manner, are possible anytime now.

Being a responsible investment manager means assessing the spectrum of risks & likelihoods

As a responsible investment manager, we continually seek to future proof our real estate portfolio. This involves not only identifying and assessing the impact of a particular risk scenario, but also the spectrum of its likelihood.

This is why we included the “cannot be ruled out” scenario, so that we can make informed decisions of where our risk tolerance levels should be and then determine/develop the appropriate mitigation strategies.

CWR: Key results were included in Link REIT’s annual report. Can you share some of these findings for those who haven’t seen the report?

Dr. CK: We commenced a local, detailed geospatial analysis of coastal threats, stress-testing our GBA portfolio against three low-regret scenarios that have taken into account both sea level rise according to the latest IPCC AR6 findings and potential storm surges.

Stress tests revealed: asset resiliency, property-specific vulnerabilities, red flag locations ++

This information has fed into our ongoing portfolio future-proofing activities including identifying vulnerabilities such as potential physical damage and operational disruption associated with flooding.

Results of these “low-regret” stress-tests revealed:

  • Around half of our GBA assets demonstrate strong resilience against coastal flood risk and day-to-day operations will likely be minimally affected even in the 8m stress test while less than a fifth of our GBA assets are exposed to storm tides of 6m.
  • Detailed property-specific vulnerabilities, enabling targeted allocation of resources that can enhance and maximise portfolio storm tide resilience.
  • Potential red flag locations where current public infrastructure and accessibility may be compromised by coastal flooding – sea level rise coupled with storm tides, providing vital data to make climate-informed investment decisions.

CWR: These are clearly material and the upcoming IFRS standards will require such disclosure if adopted by the HKEX. Why did Link REIT’s decide to publish this ahead of mandatory disclosure? Was it difficult to get sign-off to include this in the annual report?

Dr. CK: Link has a history of being an earlier supporter of improving ESG disclosures, in particular those related to climate change. We feel this can help facilitate discussions and negotiations as best practices continue to emerge and mature. More importantly, as a leading real estate player in APAC, our participation ensures that the regional challenges are heard and considered at the global table.

Disclosing early can facilitate maturing discussions & ensure regional challenges are heard at a global table

Link’s Board has overall responsibility for our corporate sustainability strategies, targets, and ESG and climate-related risks and opportunities. The Board also has oversight of the incorporation of climate-related considerations into investment, risk and asset management processes and oversees progress against goals for addressing climate-related issues.

As investors increasingly focus on climate risk and exposure, they are concurrently requesting greater disclosure and transparency. Including Link’s climate risks and opportunities in the annual report is a natural approach to meeting those demands and expectations.

CWR: Has the exercise helped inform Link REIT’s long term investment strategy? Does rising seas spell an end to investing in coastal property or does it create opportunities? How important are government adaptation strategies when looking at future investments?

Dr. CK: Link has established a responsible investment policy, which outlines the necessary ESG due diligence process for opportunities that emerge across the real estate lifecycle. The policy specifically highlights flooding. Rising seas does not spell an end to investing in coastal properties. Instead, greater awareness to flooding enables us to examine investment properties in a different way.

“Rising seas does not spell an end in investing in coastal properties…

…Govt adaptation strategies are very important in future investments…”

For example, we would consider whether a property is already designed to adapt to instances of flooding such has having electrical and machines rooms in elevated locations impermeable flooring to channel water quickly. This enables us to have more information to factor into the required investment costs for a property.

Government adaptation strategies are very important in future investments, in particular for the case of flooding risk where the mitigation strategies – district drainage, urban planning and coastal flood protection such as seawalls – typically fall under the purview of government planning.

CWR: It was great to see Link REIT share its stress test findings with Asia Pacific Real Estate Association (APREA) in the “APREA ESG Guidebook for Real Assets in Asia Pacific”. Why did you decide to share the stress tests and what did you hope to gain from sharing them? Do you think they can help drive collective adaptation action?

Dr. CK: Effective district level flood resilience and mitigation requires collaboration and alignment across multiple entities. This is best achieved by sharing and disclosing information so that our neighbors can also visualize the same flood risk that their own properties are exposed to. By doing so we hope to generate more discussion on how we can collaborate with other aligned parties to improve climate resilience at the local and regional levels.

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