The frequent occurrences and severity of extreme heatwaves and droughts, heavier precipitation, and super typhoons are some important examples of the current climate crisis. Anthropogenic activities result in the high production of greenhouse gases, with carbon dioxide being the most prevalent. With this being a significant influence on the crisis, global warming is in desperate need of awareness from organizations across different sectors - it is a shared responsibility among the population to preserve and manage the environment.
With the release of "Hong Kong's Climate Action Plan 2050", China's dual carbon targets and the UK's net zero target, various environmental protocols aim to provide direction to organizations in managing and recognizing significant climate-related risks, therefore mitigating the pressing influences arising from global warming. Spring Real Estate Investment Trust ("Spring REIT"), seek to engage our stakeholders actively to encourage environmental protection initiatives across our business value chains, to build our capacity for climate resilience and to reinforce our responses towards mitigation measures prior to managing climate risks.
To enhance communication with investors and other stakeholders on our overall management approaches, practices, actions and future plans for climate mitigation and resilience, Spring Asset Management Limited (as manager of Spring REIT, the "Manager" or "We") summarizes our internal process in relation to climate-related risks as below:
The Manager will continue to review, update refine our policies, risk management, investment strategies and principles from time to time, and regularly provide transparent and accessible information disclosures, as communication and updates to stakeholders, via official website and other publications.
In pursuance of our corporate strategic business objectives and sustainable operation, the Manager has a robust governance structure in place since 2020, which lays a solid foundation to move forward with our ESG-related directions, strategies, and plans and ensure sufficient monitoring and management of various aspects of risks, including ESG and climate-related issues. The following chart depicted the governance structure of Spring REIT's risk management accountability and responsibility:
The Board of Directors (the "Board") of the Manager oversees Spring REIT's environmental, social and governance ("ESG") strategy, risk management and performance in driving long-term and sustainable business development and operation.
The ultimate responsibility of the Board for the management of risks is to ensure that stringent and sound risk management and internal controls systems, are in place and the review of the effectiveness of the risk management and internal control systems is properly conducted. The Board is also to guarantee significant failings or weaknesses of the management systems identified are being addressed through the implementation of remedial actions. Based on the identified risks and opportunities to which Spring REIT may be exposed, the Board evaluates and advises the nature and extent of significant risks, including non-financial risks, that shall be taken to achieve our strategic objectives and strengthen Spring REIT's ability to respond to changes in our business and external environment. The Board committees - the Audit Committee and the Sustainability Committee have been delegated the responsibilities for the implementation of risk management and sustainability management that serves a role of distinct, independent but complementary functions.
The Audit Committee reviews Spring REIT's overall risk management processes, identifies the key risk issues that may require the Board's attention through the review of the annual risk assessment and reports to the Board regularly (at least annual basis). Risk management-related enhancement ideas as proposed by the management team will also be considered by the Audit Committee to ensure that the capability of addressing any changes in regulatory requirements and therefore full coverage of Spring REIT's key risk issues.
The Sustainability Committee is tasked to identify and assess ESG and climate-related risks through regular internal and external stakeholder engagement and day-to-day operations. The Sustainability Committee consolidates the findings and provides recommendations to the Board, through the Audit Committee, on the management responsibilities of the risks of strategic and financial significance.
There are ESG-related training sessions, conferences and webinars organized by external professionals (if any) for the Board, and for employees, with the objective of enhancing their professional capability and increasing their ESG awareness in the context of everchanging ESG market development. To better perform the necessary duties in managing climate-related risks, external consultants may be engaged to seek professional expertise and advice from time to time, to support the decision-making and the compliance with regulatory requirements.
Followed with our Risk Management Policy and the ESG policy, which outline Spring REIT's commitment to factoring ESG-related issues (including climate-related risks) in our business decision-making process and to devising corresponding mitigation actions and remedial strategies to address such risks, The Manager has developed, approved and implemented a robust Enterprise Risk Management ("ERM") system with a Three Lines of Defence model, which assesses different areas of risks (including climate risk and opportunities) under the corporate risk register. With the adoption of a 5-by-5 risk matrix, the Manager assessed each risk in two dimensions of impact and likelihood and scored the risk rating. Risks with a high likelihood of occurrence and bring high severity of impact to Spring REIT are considered risks and it is required to determine mitigation measures and/or action plans to reduce such risks at an acceptable level. Through the annual risk assessment, the Manager keeps vigilance of any climate-related issues which would cause financial implications and operational disruptions, therefore addressing relevant significant risks.
A Top-Down approach is adopted for the Manager's risk management system. This is manifested by strong oversight exercised by the Board, the Audit Committee, the Executive Directors and senior management in the establishment and maintenance of the Risk Management Policy and system. The Executive Directors, supported by the Risk Management Coordinator, work with relevant Functional Heads or their delegates (as risk owners) to identify risk issues, update the risk inventory with reference to prior-year approved risk assessment exercise, as needed, and discuss those identified significant and/or high risks with risk owners for the formulation and execution of risk mitigation plans. Upon the approval of risk mitigation plans by the Executive directors, risk owners are responsible for embedding appropriate risk management processes and practices into day-to-day operations and provide the Risk Management Coordinator with updates on the progress of the implementation of their risk mitigation plans and on the performance of these plans.
Risk owners are required to escalate the top key risks identified, together with formulate or update risk mitigation plans and measures at least annually and submit relevant details to the Risk Management Coordinator. After the aggregation of all risks from different departments or divisional units, the Risk Management Coordinator prepares the risk register and reports to the Executive Directors for review and approval. The top risks, together with material ESG-related risks (including climate-related risks) are then presented to the Audit Committee as appropriate for review and evaluation on a regular basis, and may further be escalated to the Board.
The identified physical and transition risks and our response to address their likely impacts on our business operations are illustrated as follows:
The frequent extreme weather events (e.g. superstorms, rainstorms and flooding etc.) are considered acute risks that would cause severe damage to our building structures, with examples of broken windows, damaged glass doors, or even water leakage, disrupting business operation inevitably and loss of revenue.
On the other hand, chronic weather events will increase insurance premiums and/or decrease the availability of property insurance categorized in "high-risk" locations. For example, the increase of energy consumption at our properties to maintain the room temperature at a comfort level under heatwaves, and changes in rainfall patterns may lead to flooding. Besides, lower productivity due to extreme heat or cold, including restrictions on working outdoors might also lead to reducing revenue and maintaining the quality of asset management services.
In terms of policy risks, with the continuous and stringent policy updates from the governments and institutions regarding climate change, emission regulations and relevant reporting requirements, this can increase the operating costs in compliance with the regulatory requirements, obligations and demands requested by potential investors.
Real estate development and operation are often associated with certain energy consumption, and therefore carbon emissions. For market risks, investors may shift their investment with targeted assets with mild impacts on the environment. With the increasing awareness of climate change and environmental conservation, tenants may also shift their preference for office and/or retail spaces to those with better environmental standards with green building features. Changing investors' demand and customer behaviour may result in reduced demand for traditional products and services and thereby reduce the revenue.
Apart from obtaining green building certificates for our properties, we conduct asset enhancement initiatives continuously to prevent and cushion the impacts arising from extreme weather events, focusing on improving energy efficiency and enhancing tenant well-being, in order to strengthen the building resilience of our managed assets. Besides, we also ensure our Building Managers have in place emergency response plans to prepare for and tackle critical disasters and accidents and safeguard our customers, our employees and our properties with causing minimum damages and injuries.
Moving forward, we will continue to strengthen the climate resilience across Spring REIT's portfolio by addressing climate-related risks and opportunities throughout the real estate lifecycle. Sufficient resources will continue to be injected to assess and manage relevant risks annually, both in investment management and operational asset management, to demonstrate the operational efficiency and long-term sustainability of Spring REIT in fighting against climate change.
For more information on the risk management of Spring REIT, please refer to the section on Risk Management and Internal Control of the 2022 annual report of Spring REIT.
Spring REIT aims to provide unitholders with stable distributions and the potential for sustainable long-term distribution growth and achieve long-term capital growth. As a responsible Manager, we continue to heighten our efforts in fostering sustainable development, and actively incorporates ESG issues, including climate-related risks and opportunities, into our overall business and investment strategy.
The investment strategies and objectives set out the criteria for identifying the investment preferences and restrictions on the investment portfolio, maintaining dialogue with counterparty companies, and fairly analysing and managing any conflicts of interest.
The Manager is responsible for reviewing investment proposals and considering if any climate-related risks that negatively influence the Manager's and Spring REIT's future operations. We initiate primary investment screening and preliminary due diligence processes when commencing new acquisitions and disposal of assets. The Manager conducts thorough investment analysis, processing on a case-by-case basis, before engaging a new investment or asset disposal, either by in-house staff or outsourced to external consultants under our oversight. The Executive Directors continuously review the investment strategy of Spring REIT in light of the prevailing market and economic conditions and other financial or non-financial factors, such as ESG and climate-related risks, as the Executive Directors reasonably consider appropriate, and report the findings and recommendations to the Board.
Looking ahead, the Manager will place more emphasis on factoring ESG issues at the early stage in investment analysis with applicable risk assessment for major transactions, to understand the quality and depth of the targeted asset's management, regarding both our financial and non-financial performance. We will also consider integrating the ESG considerations in our treasury management, with transition of the loans to sustainability-linked loans. For quantifying and evaluating the implications regarding climate-related risks and opportunities, the Manager will enhance the performances of relevant tools and metrics, including checklist for ESG due diligence, to establish an investment management system of greater capabilities and prepare ahead for growing regulatory requirements and investment obligations on ESG issues.
The Manager engages with various key stakeholder groups and conducts materiality assessments each year to seek their perspectives on the management of ESG issues. Together with the analysis of the results of the materiality assessment as well as the benchmarking of peer analysis, climate-related risks are deemed relevant and material to Spring REIT.
Spring REIT offers investors direct exposure to two premium office buildings strategically located in Beijing Central Business District through its ownership in China Central Place Office Tower 1 and 2 (and the relevant portion of the car park) (the "CCP Property") and to a landmark shopping mall Huamao Place in Huizhou, located in Greater Bay Area, which comprises seven-storey shopping mall and 750 carpark spaces (the "Huamao Place"). Being the first Hong Kong REIT to make an acquisition in the United Kingdom, Spring REIT’s core property portfolio is complimented by a portfolio of commercial properties in the United Kingdom (the "UK Portfolio") which are leased out on a triple-net basis.
We have assessed our carbon footprint for the fiscal year of 2022 in accordance with item 19 of the 'Circular to licensed corporations, management, and disclosure of climate-related risks by fund managers' issued by Hong Kong's Securities and Futures Commission. Our assessment includes the Scope 1 and 2 emissions associated with our portfolio.
With the acquisition of Huamao Place was only completed in September 2022, emissions data will be disclosed in the following year’s climate-related disclosure. The UK portfolio is also excluded from the climate-related disclosure due to limited data availability under respective tenant management.
We recognize the importance of transparency and accountability in addressing climate-related risks, and we will continue to take proactive measures to improve our disclosure practices. To ensure that we can provide a more comprehensive climate-related disclosure in the future, we are committed to enhancing our data collection efforts and working closely with relevant personnel to obtain the necessary data.