Energy-efficient vehicle helps drive Climate Change Capital

Fund manager aims to improve mainstream returns by cutting energy use, reports Jane Roberts.

“Ours is a mainstream property strategy with a low-carbon strategy in its DNA,” says Esme Lowe, joint fund manager of Climate Change Capital’s £160m property fund. This goes some way to explaining the aims of Climate Change Capital, which puzzled some people working in the sustainability sector when the fund was launched in 2009. Lowe and joint fund manager Tim Mockett raised £69m from six investors,  geared the equity with Deka and Santander and bought four prime offices in London, Manchester, Birmingham and Edinburgh.

“I couldn’t understand why they bought core office assets, which are hard to change and improve,” says one fund manager working on another sustainable strategy. Unlike the Threadneedle/Stanhope Low Carbon Workplace Trust joint venture, the  Climate Change fund didn’t buy assets  that needed refurbishing, but ones where energy efficiencies could be achieved.

“People are going for the badge, but aren’t necessarily driving the building performance afterwards,” says Mockett. To that end, the pair are further forward with the two buildings they bought first: electricity use at Birmingham’s St Philip’s Place has been cut by 59% and carbon by 53% (see table). When they bought it, they found that the meter for the 67,000 sq ft of offices was mis-calibrated and a shop in the building was feeding off it. Putting this right cut the tenant’s energy consumption by 20%.

“We identified it within three weeks of owning the building,” Lowe says. The problem is apparently quite common: “We’ve found similar metering issues in all our assets,” Mockett adds. Other energy-reducing improvements in Birmingham that brought a further 33% cut included ensuring that heating and cooling systems are not used at the same time, introducing low-energy lighting and controls, and water flow restrictors.

Much of the £750,000 spending on the building was defrayed by a £400,000 rebate for the tenant for electricity over-charging. The occupier also got EU funding and organised the work, which lowered costs; Climate Change paid £120,000, but they say the fund would have been prepared to fund the work, in return for some additional rent or a longer lease.

Each building has an energy monitor to  benchmark energy demand data against external temperatures and indicate where further energy/carbon gains can be made. “It’s hard work; there are no silver bullets,” says Lowe. The fund is distributing 6.5% of income quarterly and is benchmarked by IPD. “We looked at renewables in Birmingham and the payback was 10 years plus, which we, our investors and the tenants wouldn’t accept,” Mockett says.

They admit that it is hard to separate the alpha value created by carbon-reduction measures from the beta market return – but building up data and a track record is their goal before they attempt more fund raising. “People say, ‘Didn’t you do well because you invested in 2009 when the market was  down, rather than being anything to do with low carbon?’,” Lowe says. “But the only way to get an alpha return is through assets that meet low-carbon standards. We can’t prove it yet but we expect to in the future.”

Mockett says the fund’s valuer found that “assets on the right side of green issues” have 5-10% higher discounted values, reflecting the fund’s risk management approach and more sustainable cashflows. “The Carbon Reduction Commitment scheme has been a big push and is part of a legislative trend that will not go away. Display energy certificates will come into the private sector; it is just a question of time,” he adds.

Climate has proved suitable for institutional investors

Founded in 2003 by Mark Woodall and James Cameron, Climate Change Capital invests in and advises companies and investors that finance clean energy projects. s largest investors) USS, Standard Chartered and HSBC.

In the property fund with SNS are: Alliance Trust, Sydney’s Insurance Australia Group, Merseyside Pension Fund, an Irish fund of funds and Stanhope. Mockett and Lowe took their concept of a property fund to the firm about a year after they started working on the idea in 2007.