When it comes to aligning ESG goals with financial objectives in the real estate sector, Alison Harnick, SVP, general counsel, and corporate secretary at First Capital, doesn't shy away from admitting the complexity of the challenge.
“This is the billion-dollar question," she explains when asked about balancing sustainability with financial performance. The real estate giant recognizes the risks posed by climate change not only to its business but also to the communities it serves. As a retail real estate operator, those communities are integral to the company’s value proposition, meaning that ESG initiatives are not just a moral imperative, but a sound business decision.
Harnick puts the environmental challenge into perspective, noting that greenhouse gas emissions from Canada’s building sector account for about 17 percent of the country’s total emissions.
"The majority of those emissions relate to day-to-day building operations," she adds, pointing out that these emissions stem from "the mundane stuff" – lighting, ventilation, heating, and cooling. In her view, discussions about decarbonization need to shift from philosophical debates to operational goals.
First Capital has set ambitious goals – reducing emissions by 2030 and achieving net-zero emissions across its portfolio by 2050. While 2050 may seem distant, Harnick is keenly aware that it will arrive quickly, and the company is already hard at work. One key step taken in 2023 was the adoption of a decarbonization software platform. Using this tool, the company created emissions reduction pathways for over 95 percent of its assets, analyzing various components that contribute to each building’s carbon footprint.
"95 percent of our assets have decarbonization pathways,” Harnick explains.
However, Harnick emphasizes that the process is more than just about technology. Decarbonization, she says, is treated like any other investment to which the company applies its operational expertise. “We evaluate costs, tenant contributions, potential for rent growth, and what government subsidies are available for certain alternative energy initiatives and upgrades to assess the return on investment and value enhancement opportunity.”
Despite the challenges, Harnick believes that decarbonization can yield significant financial benefits, particularly in terms of operational efficiency. She acknowledges that the issue of carbon emissions can be "very intimidating" because of the scale of the problem, but she advocates for a pragmatic, incremental approach: “It’s looking at those bite-sized improvements and how they all add up.”
First Capital isn’t going it alone in its sustainability journey. In addition to internal efforts, the company has partnered with several solution providers to achieve cost-efficient decarbonization.
“We source some very interesting decarbonization software that creates dynamic net zero plans," Harnick adds, explaining that through this software, First Capital is able to update net zero plans for each asset in its portfolio in real-time as technologies improve or provincial energy grids become greener. In contrast to the old, much more costly approach of sending engineers to inspect buildings and equipment in person, the company now uses technology to provide a big-picture view of necessary improvements and to ensure information is not outdated.
"I think reliance on specific technology providers and other experts in this space is imperative," Harnick says.
Still, one of First Capital's biggest hurdles is coordinating net zero initiatives with tenants, particularly in its multi-tenant properties. Unlike other asset classes, where landlords control most of the building operations, many retail tenants manage their own spaces, making it harder to implement decarbonization efforts across the board. Larger, national tenants also have their own net-zero pathways, but the task lies in aligning these goals with the landlord’s initiatives.
Harnick points to legal agreements and infrastructure investments as potential sticking points: "It’s overcoming the hurdle of agreements that didn’t contemplate these sorts of upgrades and initiatives to ensure that landlord and tenants’ investments in energy-efficient infrastructure align with the benefits they receive and meet their respective decarbonization goals."
To address these challenges, First Capital launched the "Collaboration for Climate Change Forum" about 18 months ago, a one-day conference aimed at fostering dialogue between landlords and tenants. The forum brought together major national tenants and retail property owners to discuss challenges and solutions. An ongoing working group was established, and First Capital is planning a follow-up forum in late 2024 to review the progress made and continue this important work.
"It’s about creating a better understanding of what our risks are on both the landlord side and the tenant side and where the opportunity lies," she explains.
The internal ESG task force at First Capital plays a crucial role in driving these efforts, engaging employees at all levels of the organization. Harnick says FCR’s ESG initiatives, including the work of its not-for-profit Thriving Neighbourhoods Foundation, have "engaged a broad group of employees ranging in seniority and skillsets" and have been particularly compelling for younger employees. The company has woven environmental and social goals into every department and has made it a component of individual talent metrics and bonus achievements.
“Everyone in the organization has goals that contribute to our environmental and social initiatives," she adds.