A Discussion With Ivanhoé Cambridge's CEO Nathalie Palladitcheff
Nathalie Palladitcheff, President and Chief Executive Officer of Ivanhoé Cambridge attended COP26 in Glasgow last month and shared her thoughts on accelerating the real estate transition:
Earlier this month, I had the opportunity to partake in two panel discussions at COP26 in Glasgow. The discussion was rich as it pertains to our industry and the consensus around the necessity to go faster, was clear. Decarbonizing our economy and mitigating the imminent threats of climate change and its negative impacts on the planet, and the obsolescence of our assets, is a priority for our industry. Being the largest asset class globally and responsible for 40% of global carbon emissions, we need to develop sustainable properties and build a resilient business model. We are engaged in a true race against the clock, a race we all need to win.
Mitigating the double-threat: obsolete buildings and eroded value
Up until recently, it was widely recognized that climate change would impact real estate either physically – through the increasing frequency and intensity of natural catastrophes affecting buildings – or from a financial and a policy perspective through carbon regulations. Let’s be realistic: the impact on our sector will come from both sides, representing risks as well as opportunities for long term investors like us. At Ivanhoé Cambridge, we have already taken bold steps to strongly reduce our carbon emissions and have committed to become carbon neutral from an operational perspective by 2040.
Fix or build: redefining the value chain and why capex can no longer be a bad word
In addition to sustainable approaches to new construction, achieving these goals is dependent on our ability to finance and realize the low-carbon transition of existing buildings. This requires a huge amount of investment but how can this “green CAPEX” find its place in the traditional valuation process? This implies a profound paradigm shift to the entire real estate community. Real estate asset valuation models are not suited to account for extra-financial performance nor reflect future carbon costs. CAPEX weighs on the valuation of assets, however we firmly believe that green investments should, on the contrary, have a positive impact on valuation. I’m calling on our industry peers to seriously consider the way we could really take into account ESG performance in the numbers and tie financial performance to carbon performance over the whole life cycle of a property. Assigning the true value to assets would lower the risk of making sustainable choices and help investment to find their way to these projects.
Greening the money trail and tying people to performance… and planet
To achieve this monumental transition to a low-carbon economy we need to align the economic interests of all players of the value chain. At Ivanhoé Cambridge, we have already agreed with 12 of our lenders to adjust upwards or downwards the cost of our corporate loans and credits, depending on our progress against our ESG and carbon goals, for a total of C$8.5 billion. We have also applied a similar concept to our own employees with an incentive plan tied to the progress we make against our carbon targets. Company performance on carbon must be tied to people’s compensation if we want individual actions to align with ESG targets.
As asset and property managers are key to driving sustainable value, we started to set up green incentives clauses in property management agreements to reward improvements in buildings’ operational efficiency, including on carbon. We’d like to see a similar concept being applied to asset management. Incentivizing our ecosystem of partners and the entirety of our supply chain will be the key in creating a transformational industry movement and the required shift in our real estate culture. Creating ‘green promote’ structures that integrate ESG and carbon targets alongside financial ones will thus create a positive correlation between ESG and financial performance objectives.
Ushering in the era of green coopetition: no one is a (green) island
I’m convinced that sustainable investments are profitable investments, and we can move the needle and have a positive impact if we well choose our priorities. To get there, it will require more than an industry effort. As members of the real estate industry, it will require we think about these issues as a community. We must garner deep alignment on purpose, value chain redefinition, valuation philosophies, risk mitigation practices and tolerance, and finally carbon pricing and financial levers. It will require we compete together, for the planet. I invite you all to join us.
Earlier today, I had a great conversation with Nathalie Palladitcheff, CEO of Ivanhoé Cambridge and Stéphane Villemain, Vice President, Corporate Social Responsibility.
I want to begin by thanking both of them for taking the time to talk to me and thank Gabrielle Meloche of their communications and public affairs department for organizing this call.
I had initially sent Gabrielle several questions but because the year-end is wrapping up, we put off discussing performance and strategy until early next year when results will be made public.
Nathalie was gracious enough to tell me we will revisit performance and strategy when the results will be made public.
Anyway, here are the three questions I wanted to cover:
- Last month, you had the opportunity to partake in two panel discussions at COP26 in Glasgow. What were the key takeaways from these discussions and how did the conference influence your thinking about climate change in general and real estate specifically?
- How does ESG now figure into Ivanhoé Cambridge’s long-term strategy? Please give me concrete examples and how a holistic approach will enhance long-term returns.
- Leo de Bever once told me that “rising rates and real estate” keep him up at night. That was years ago and since then, rates plunged to record lows and so have cap rates. What risks do you see in real estate and how are you preparing for the next crisis?
Nathalie told me she was very happy to take part in two panel discussions at COP26 as they are leaders in their industry.
"For me, the main takeaway was the economic world is realizing we are doing our part in this big transformation of the world and in our industry. There will be some follow-ups after the Glasgow conference which will be quite significant and I'd say actual in our industry."
Second, she discussed is the importance of data. "Data is instrumental in setting targets not only for ourselves but for the industry as a whole. If we want to assess ourselves and the progress we are achieving, not only ourselves but the industry, data is essential."
She added: "We have the tools to assess where the main improvements have to be achieved. Even if data isn't perfect, it's better than nothing, we can't wait to have everything perfect when it comes to data."
Third, she discussed the path to transitioning. "We have to deal not only with new buildings and new constructions but also what we have currently in our portfolio. To be honest, that's more complicated but it's probably the biggest responsibility because as I say the cleanest form of energy is always the one you don't consume and the best building is the one you don't build. That's why it's important for me to have those two dimensions on the same ranking in terms of our attention, not only the new construction but also the transitioning of the current portfolio."
Fourth, she discussed aligning all the interest of the value chain. "We want not only ourselves but our partners -- asset managers, property managers, bankers, lenders -- on board to have the same targets and goals. We need this collaboration."
Importantly, on this last point she emphasized: "Our industry is very competitive, most of the time we are competing among ourselves but today we should compete for the world not among ourselves. Wherever the best ideas are, we should replicate them, make them best practices of the industry and not hide them for ourselves."
She was frank telling me when she moved to Montreal six years ago, she was surprised how there wasn't much conversation and exchange of ideas among peers because she came from a world where she was active among many associations and they were more transparent.
Nathalie told me she is Vice Chair of REALPAC now and she is trying to change the culture of the industry to be more proactive, collaborative and transparent to accelerate the transition to net zero.
This is critical because the industry must advance in unison to do its part in addressing climate change and Nathalie also stressed other reasons, like addressing valuations of assets during this transition period "which is something for the time being we do in a very competitive way, each of us talking to the same valuators but having some trade secrets we don't share."
She added: "We are at a point where we should on the contrary really share a new methodology in the way we are going to take into account CAPEX relating to decarbonization."
I asked her if valuators are integrating ESG into their valuations?
"It's a key element we will have to change because for time being, sometimes they will increase the risk premium if they think the building isn't so green or they take into account CAPEX when we as a landlord tell them we are going to renovate (to make it more energy efficient) but they don't really take into account that the liquidity is going to change dramatically if we don't do anything. So, doing nothing is not even an option for us because if we want our buildings to remain valuable in the future, then we will have to move. For time being it's like black and white, so if we say we want to turn this building into a green one, then we will magically decrease this value by 20% because of CAPEX, but on the contrary if don't do anything, then they will decrease it by I don't know, let's say 2% each year. We will potentially end at the same spot but the thing is it will happen sooner rather than later. So, they will have at a certain point make this ESG shock in the values that they are not really taking into account and of course, nobody wants that, nobody wants the value to decrease by 20% tomorrow so we have to really think as an industry how we will move without being penalized by the valuators but it's not up to the latter to tell the industry how to move. The entire industry needs to engage as one to further the conversation so we are all on the same page when it comes to integrating ESG in valuations."
"Real estate (and other private assets) is where the revolution lies, this is where disruption will take place. For me, it's not going to be like this building will be discounted a little bit, at one point, it will be zero or one. Liquidity is the main risk in our industry, when you can't find a buyer, there's no value. At a point electricity came into buildings, now you can’t buy a building without electricity. At a point ESG standards will be the same, nobody is going to buy a building where you cannot guarantee the quality of the air, especially after the pandemic, all these factors will be the new normal."
I told her it's critical to listen to your clients. For example, in real estate, big tech companies and other companies are looking to lower their carbon footprint, you cannot ignore their demands, you either follow suit and are up to their standards or quickly become irrelevant (and obsolete) in the long term."
She replied: "Exactly, it's really a question of relevance, we had a conversation this morning on one of our assets, is it going to relevant tomorrow or not and if the answer is not then we have no choice."
Interestingly, here she took a detour and told me she is enthusiastic stating:
"For me, I am optimistic. Today, I am 54 and it's refreshing and I am so happy and enthusiastic to think about how we can do our job better to build a better world. We have a lot of actual solutions -- and Stéphane can elaborate on that -- which are actionable because of the tools, prospects, data and because we know very well our portfolio and are very clear on what we can do and what we can't and what we are going to do tomorrow and what we won't do anymore. As soon as you know that, then there is a path, a very positive path to make us better as citizens and more profitable as a company. That's why for me, even if it's zero or one, the one is very attractive and very feasible. We would not have taken the commitment to carbon neutrality if Stéphane would have not built this path to achieve this goal. I would not have made any statement if I was not sure that it's possible and feasible. And sometimes it's more about reallocation of our resources, monies and sometimes selection of our partners and locations to achieve this and it is achievable."
When she was first appointed to head Ivanhoé Cambridge, the pandemic hit a short while after and she was wondering whether it's a curse or blessing. She decided it's a blessing.
She emphasized "it's a fun period to be working in real estate" because of the disruption going on in the industry.
She told me they are able to attract and retain qualified people because they share this enthusiasm to transform the world for the better:
"In 2021, the most important thing for me is when we hire someone today, 8 times our of 10, people join Ivanhoe because of our commitment to ESG, not because we have $65 billion is assets are among the ten biggest real estate investors in the world. Of course this matters but above that, it's our positive commitment to ESG. For me, as a manager, I'm doing the right job, I’m doing what is fair for the company, for Quebecers, and for the world and the day I leave, I'll tell myself very humbly that we did our small part to change the industry in the right direction."
Nathalie spoke very highly of Stéphane Villemain, Vice President, Corporate Social Responsibility:
Stéphane Villemain is responsible for all our activities related to corporate social responsibility (CSR). He defines the Company’s evolving CSR and sustainable investment strategy along with its main business groups and units. He establishes a working structure and oversees sustainability initiatives for properties, regional offices and corporate departments. His duties also include managing risks and opportunities arising from the environmental, social, and governance (ESG) issues associated with our investments, such as climate change, reduction of carbon emissions and the well-being of the occupants.
Before joining Ivanhoé Cambridge in 2020, Stephane was Director, Responsible Investment, at PSP Investments, where he helped define and implement ESG strategies, policies and action plans for the investment portfolio. He was previously Senior Manager, Climate Change and Sustainability Services, at Ernst and Young from 2012 to 2016. He also held positions of increasing responsibility in CSR and sustainability for Deloitte and its clients from 2007 until 2012.
Stéphane graduated (MEng) from École Polytechnique (Paris) and École Nationale du Génie Rural des Eaux et Forêts (AgroParisTech) and holds a master’s degree in civil and environmental engineering from McGill University.
Stéphane took over to provide some more details.
Interestingly, he told me "20 assets in their portfolio make up 50% of their carbon footprint," which floored me.
He said "it's fairly concentrated and it has prioritized efforts".
I asked him if that's across all regions or in developing countries and Nathalie interjected "no it's very developed".
Stéphane said they have a "structured approach to carbon reduction opportunities" and "it all starts with data" to measure and understand how efficient the property is. "So you do an audit, for example, and identify incremental opportunities to see if aligns with the CAPEX plan, to see if you can implement more energy efficient options through cleaner forms of energy like geothermal or green electricity....so various strategies depending on the asset, region or the sector."
He then went into detail on the alignment of interests within the value chain:
"As an investor, we have strong influence but we don't have control over everything and that comes back to alignment of interests within the value chain. So something we have done, for example, is aligning cost of debt with ESG targets including on carbon so we converted $8.5 billion in corporate debt whereby if we reduce the carbon footprint, the cost of debt will be lower and inverse is also true. We are also incorporating into property management agreements incentive fees which are tied to achievement of certain ESG targets such as certification and energy reduction. We are also looking to do the same with asset managers so the promote structures are aligned with ESG targets. The whole value chain has to be linked to common objectives to really move from talk to action."Lastly, on risks in real estate, Nathalie pointed out two main risks:
- Obsolescence "which is accelerating really, really fast right now". "Something which seemed to be correct a few years ago seems to be very outdated today and this trend s going to accelerate not just for real estate reasons but because leverage is changing in the economy from companies to employees, communities and consumers and they are all demanding change."
- There is a big change in real estate purpose and culture: "Before, it used to be if you build it, they will come. Now we have to do something that is meaningful, not just think about short-term cash flow but because it makes sense for the community we are dealing with. We should not think anymore about building one tower somewhere but think more about building an entire neighborhood, so when we do a project, we think about building an entire neighborhood around it."
She told me it's very important to understand both these risks and "walk the talk" to realize your objectives.
She ended by saying while it's nice to be invited to prestigious conferences and take part in panel discussions, she says they are "privileged" and there is "tremendous responsibility" to be a good leader to set the right direction because they are "role models" and "other investors look at us for direction".
I agreed and pointed out to a recent comment of mine on Canada's most responsible asset allocators in 2021 where CDPQ, BCI and AIMCo ranked high and stood out as leaders.
I stated we have a lot to be proud of in Canada in terms of responsible investing and as this research notes, leaders and finalists matter a lot, they set the global bar and others follow.
Nathalie agreed stating "it's a big responsibility but it's a great privilege."
She also added: "My background is purely financial, I'm not talking about dreams, my responsibility is to create value and to bring performance for Quebecers, and this is the value I'm talking about."
It was my privilege and honor to talk to Nathalie and Stéphane and I hope we can meet for a coffee one day soon.
Ivanhoé Cambridge employees are very lucky to have a leader like Nathalie and so are Quebecers because she is exceptional in every regard and very focused and humble.
I also want to thank Gabrielle Meloche for finding a way to share this taped conference call with me via a link after we talked so I get all the wording right. It made a huge difference. Thank you! (I wish there was a way to embed it below)
Lastly, Gabrielle was kind enough to share a document with me which I share in embedded pictures with you to tie this discussion in:
Below, Nathalie Palladitcheff, President and Chief Executive Officer of Ivanhoé Cambridge, discusses how the organization is committed to achieving net zero by 2040 (English captions are there).
I thank Nathalie for a great discussion and look forward to covering Ivanhoé Cambridge's 2021 results once they are made public. Merci beaucoup!!
And how do we recalibrate reality to create a better, brighter future for New York? Scott Rechler, chair of the Regional Plan Association and CEO of RXR Realty, hosts a conversation series with Blackstone's President Jon Gray. Great discussion, take the time to watch it.