• Statement on principal adverse impacts of investment decisions on sustainability factors (214KB)

Product name: Mori Hills REIT Investment Corporation

Mori Hills REIT Investment Corporation promotes environmental or social characteristics, but does not have as its objective a sustainable investment within the meaning of Article 9(1) of Regulation (EU) 2019/2088 (“SFDR”). Mori Hills REIT Investment Corporation does not have any employees in accordance with the prohibition on having employees under the Act on Investment Trusts and Investment Corporations of Japan, and Mori Hills REIT Investment Corporation relies on Mori Building Investment Management Co., Ltd. (the “Asset Manager”) to manage and operate the properties in the portfolio. Mori Hills REIT Investment Corporation and the Asset Manager are hereinafter referred to collectively as “we,” “us” or “our”. References to “fiscal year” are to the 12 months began or beginning April 1 of the year, unless noted otherwise.

Summary

No sustainable investment objective

The financial products offered by Mori Hills REIT Investment Corporation promote environmental or social characteristics, but do not have as its objective sustainable investment.

Environmental or social characteristics of the financial product

We mainly invest in what we refer to as the “premium properties”, which are office buildings, residential properties and retail and other facilities with competitive advantages in terms of quality, scale and other specifications that we expect will continue into the future. In acquiring and managing these premium properties, we promote environmental or social characteristics through a host of environmental, social and governance (“ESG”) enhancement initiatives, aligned with the United Nations’ 17 Sustainability Development Goals (“SDGs”).

Specifically, we implement various environmental initiatives at our properties, including against climate change (promotion of energy saving technology such as high-efficiency air-conditioning systems and building energy management systems, switching grid lighting to LED lighting, introducing green lease provisions in lease contracts, use of renewable energy, and landscaping of open spaces and rooftops), in water resources (adoption of water-efficient equipment and use of rainwater and gray water), in recycling of waste and materials (creating awareness among tenants by improving garbage separation and collection methods at offices, and publishing a recycle hand-book), and in preservation and restoration of biodiversity (preserving and creating green areas at our properties).

Our environmental initiatives are aligned with the following SDG Goals:

• SDG Goal 7 (Ensure access to affordable, reliable, sustainable and modern energy for all)


• SDG Goal 9 (Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation)


• SDG Goal 11 (Make cities and human settlements inclusive, safe, resilient and sustainable)


• SDG Goal 12 (Ensure sustainable consumption and production patterns)


• SDG Goal 13 (Take urgent action to combat climate change and its impacts)


• SDG Goal 15 (Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss)

For social characteristics, we aim to conduct our business activities by engaging with various stakeholders including our employees, tenants and local communities, property managers, and unitholders. Specifically, our social initiatives include supporting employees (a talent development policy and program, good benefits and work/life balance, employee satisfaction surveys, a confidential reporting system, a workplace that is supportive of women, and human rights/diversity training), tenants and local communities (business continuity planning, promotion of universal designs, conducting tenant satisfaction surveys, building childcare support facilities, holding events and activities for local communities, investing in urban redevelopment projects such as installation of disaster prevention facilities, and establishment of a self-governing association).

Our social initiatives are aligned with the following SDG Goals:

• SDG Goal 3 (Ensure healthy lives and promote well-being for all at all ages)


• SDG Goal 4 (Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all)


• SDG Goal 5 (Achieve gender equality and empower all women and girls)


• SDG Goal 8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all)


• SDG Goal 10 (Reduce inequality within and among countries)


• SDG Goal 11 (Make cities and human settlements inclusive, safe, resilient and sustainable)


• SDG Goal 17 (Strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development)

Investment strategy

We contribute to the creation and development of cities by investing in competitive high-quality urban assets including office buildings, residential properties and retail and other facilities. We contribute to both the realization of sustainable society and maximization of unitholder value in the medium to long term through our investments while making efforts to address social issues through our ESG initiatives.

• Green bonds. From time to time, we issue investment corporation bonds earmarked for use in certain environmentally friendly projects, in order to promote environmental initiatives and contribute to the realization of a sustainable society (collectively, the “green bonds”).
• Use of funds procured. Our green bond framework requires the proceeds from our green bonds to be allocated to funds for (i) acquisition of the “Eligible Green Projects” (as defined below) or (ii) refinancing existing loans or redeeming investment corporation bonds (including green bonds) already issued, which was necessary for the acquisition of Eligible Green Projects.


• Eligibility criteria. Under our green bond framework, the Eligible Green Projects are defined as buildings that have achieved (i) A Rank or higher out of the CASBEE Certification for Real Estate, (ii) A Rank or higher out of the CASBEE Certification for Buildings, (iii) four stars or higher out of the DBJ Green Building Certification, or (iv) a four stars or higher out of the Building-Housing Energy-efficiency Labeling System (“BELS”) Certification. Certifications are limited to those which have been obtained or renewed within the last 24 months as of the date of the green bond issuance or at the time of reporting or those which are scheduled to be acquired or renewed in the future. As of January 31, 2023, 8 properties in our portfolio were Eligible Green Projects (as of January 31, 2023, such properties accounted for 89.2% of our portfolio based on acquisition price), and the aggregate principal amount of our green bonds outstanding was ¥ 8.8 billion.


• Process for project evaluation and selection. The Asset Manager's Sustainability Committee selects projects that meet the eligibility criteria, and the Asset Manager’s President & CEO makes final decisions on the applicability of such criteria. The Sustainability Committee is composed of the Asset Manager’s President & CEO, all General Managers, and some planning department staff.


• Management of funds procured. As long as there is any outstanding green bond, the total amount of green bonds outstanding may not exceed the total acquisition price of Eligible Green Projects. If funds from any green bond issuance are not immediately allocated to Eligible Green Projects, the Asset Manager properly manages unallocated funds until they are allocated to Eligible Green Projects.


• Reporting. Mori Hills REIT Investment Corporation discloses on its website the funds that have been fully allocated to Eligible Green Projects in accordance with the green bond framework and information showing that the total amount of green bonds outstanding does not exceed the total acquisition price of Eligible Green Projects. As long as there is any green bond outstanding, Mori Hills REIT Investment Corporation will annually disclose on its website the total acquisition price of Eligible Green Projects, total amount of green bonds outstanding, and allocation of funds including any material change. Mori Hills REIT Investment Corporation also annually discloses on its website, to the extent practicable, CO2 emissions and energy consumption as long as there is any green bond outstanding.

Proportion of investments

Mori Hills REIT Investment Corporation offers financial products which promote environmental or social characteristics, but does not have sustainable investments as its objective. As of January 31, 2023, 93.5% of our properties were Green Buildings (defined below) and as of January 31, 2023, 6.5% of our properties were not Green Buildings based on acquisition price, excluding Laforet Harajuku (Land). We implement appropriate measures to reduce the environmental impact of these properties, including by obtaining environmental certifications, promoting energy saving technology, switching fluorescent lighting to LED lighting, using renewable energy, and landscaping open spaces and rooftops.

Monitoring of environmental or social characteristics

We use the following indicators to measure the attainment of the environmental or social characteristics we promote.

• Environmental certification of individual properties. To track the environmental performance of our properties, we rely on certifications issued by third party organizations, such as the Comprehensive Assessment System for Built Environment Efficiency (“CASBEE”) Certification, the Development Bank of Japan’s (“DBJ”) Green Building Certification, and other equivalent certifications. We call our properties that receive any such certifications “Green Buildings”. With respect to the CASBEE Certification, we consider a property to have sufficient environmental certification if it received a B+ Rank or higher in the CASBEE Certification, which rates properties as Rank S (excellent), Rank A (very good), Rank B+ (good), Rank B- (slightly inferior) and Rank C (inferior). With respect to the DBJ Green Building Certification, we consider a property to have sufficient environmental certification if it received 3 stars or higher out of the highest 5 stars. As of January 31, 2023, 93.5% of our properties were Green Buildings based on acquisition price, excluding Laforet Harajuku (Land). In addition, some of our properties received high marks in these certifications. Specifically, with respect to the CASBEE Certification, Roppongi Hills Mori Tower, ARK Mori Building, Toranomon Hills Mori Tower, Atago Green Hills MORI Tower and Holland Hills Mori Tower received Rank S, and Koraku Mori Building and Akasaka Tameike Tower received Rank A. Also, ARK Hills South Tower acquired 4 stars in the DBJ Green Building Certification.


• Sustainability evaluation. In 2022, we received the highest “5 Stars” rating in the Global Real Estate Sustainability Benchmark (“GRESB”) rating (calculated based on the GRESB Overall Score and our quintile position relative to global participants, in a benchmarking assessment that evaluates sustainability performance of companies managing lease properties). We have also won a “Green Star” designation for eleven consecutive years from 2012 to 2022 by achieving high performance both in the management component, which evaluates policies and organizational structure for ESG promotion, and the performance component, which assesses environmental performance and tenant engagement.


• Climate change initiatives.
• We track and monitor CO2 emissions for the total calculated floor area of the offices of the Asset Manager and Mori Hills REIT Investment Corporation as well as the properties in our portfolio, and have established as our targets 50% reduction in total amount of CO2 emissions by FY 2030 and net-zero CO2 emissions by FY 2050, in each case as compared to FY 2019 levels. We reduced our CO2 emission amount over FY 2019 – 2021 by 6.9%.


• We aim to promote solar power generation as a measure against global warming. For example, 0.01% of electricity used at Roppongi Hills and 0.12% of electricity used at Toranomon Hills is generated by solar-power. In 2021, a total of 14,288 MJ of electricity was generated by solar panels installed on the rooftop of Roppongi Hills and on the large eaves in front of the entrance of Toranomon Hills, for lighting in the common area of each property.


• Water management initiatives. We monitor and track water consumption intensity for the total calculated floor area of the offices of the Asset Manager and Mori Hills REIT Investment Corporation and the properties in our portfolio, and have established as our target 10% reduction by FY 2030 in water consumption intensity as compared to the FY 2013 level. We reduced our water consumption intensity during FY 2013 - 2021 by 33.8%. In FY 2021, water consumption temporarily decreased significantly compared to historical trends because of the COVID-19 pandemic due to reduced human activity.


• Waste management initiatives. We monitor and track waste generated at the offices of the Asset Manager and Mori Hills REIT Investment Corporation as well as the properties in our portfolio, and have established as our target a recycling rate—which is defined as the amount of waste treated for reuse without incineration or landfill disposal in relation to the total amount of waste collected the offices and the properties—of at least 75% by the end of March in 2030. Our recycling rate was 51.8% as of the end of March in 2022.


• Greenery and biodiversity initiatives. We aim to create an environment where humans live in harmony with nature and provide space that promotes biodiversity and is rich in greenery. Specifically, we track and monitor the “green ratio” of each property, i.e., green space in each property as a percentage of total site space. As of June 2021, the green ratios of our major development properties were 42.1% at ARK Hills, 51.5% at Atago Green Hills, 29.8% at Roppongi Hills and 30.6% at Toranomon Hills Mori Tower. Toranomon Hills acquired the AAA rating, the highest rating, in the Japan Habitat Evaluation and Certification Program (“JHEP”), which is run by Ecosystem Conservation Society-Japan and evaluates initiatives contributing to the preservation and restoration of biodiversity.


• Social initiatives – employees.
• We conduct various training exercises, covering topics such as compliance, ESG training, real estate/financial training, various ability improvement training, Investor Relations training, leadership training for general managers, next-generation management training and REIT operation training in partnership with Waseda University. We also subsidize our employees’ and contractors’ acquisition of licenses and qualifications that contribute to their skills as professionals in the real estate fund business. In FY 2022, 14 employees received such subsidies (the total number of employees including contract employees was 23 at the end of March in 2023).


• We conduct an employee satisfaction survey once a year for the Asset Manager’s employees to solicit feedback about their workplace and make improvements based on it. Our target is to achieve a grade of 3.5 points (out of 5.0) or more for employee satisfaction. In FY 2022, our employees rated their satisfaction at 4.1 (out of 5.0).


• We have established a confidential reporting system that any employee or contractor can use to report conduct that violates our human rights policy and regulations, including discrimination and harassment, or file other complaints. We received no report of any labor issue, discrimination or harassment from FY 2018 to FY 2022. We aim to maintain a workplace where each employee feels free to express their individuality and abilities. We believe in creating a workplace that is supportive of women; the percentage of female managers was 14.3% as of March 31, 2023.We have and will continue to conduct human rights/diversity training between FY 2019 and 2022.


• We respect our employees’ work/life balance and care about their health. We aim to have every employee receive a subsidized annual health exam (100% in FY 2022), have at least 85% of employees take all of their paid holidays every year (99.7% in FY 2022), and keep total overtime hours at less than 15 hours per month (10.7 hours in FY 2022).


• Social initiatives – local community. Various events and activities for local communities are held at our properties, such as “Hills Marche”, a weekly market at ARK Hills where seasonal vegetables, fruits, flowers and other local products sourced directly from farmers and artisans are sold, and “Hills Machi-Iku Project”, which provides experiential learning opportunities for children to explore urban life.


• Social initiatives – tenants. We generally conduct a tenant satisfaction survey once every two years for tenants of office buildings and once a year for tenants of most residential properties to solicit feedback and make improvements in our properties based on it.

Methodologies

In order to promote sustainability, the Asset Manager has established the Sustainability Committee, which is composed of the Asset Manager’s President & CEO, all General Managers, and some planning department staff. In principle, the Sustainability Committee meets twice a year to establish sustainability policies and design the Sustainability Promotion Program, and monitors progress and deliberates on proposals received.

Sustainability efforts such as climate change-related risk management and progress in the reduction of greenhouse gas emissions are reported periodically to the Board of Directors of the Asset Manager and Mori Hills REIT Investment Corporation, which oversees initiatives related to important ESG issues as well as ESG-related compliance and risk management matters.

Data sources and processing

• Environmental certification of individual properties. The Asset Manager obtains the relevant data provided by the established third-party organizations that issue environmental certifications for the properties in our portfolio. Obtaining the environmental certifications issued by the established third-party organizations helps to ensure the data quality.


• Environmental initiatives. At the property level, the Asset Manager collects the relevant data from the property managers. At the portfolio level, the Asset Manager compiles relevant data internally. To ensure data quality, the Asset Manager obtains a verification report regarding energy consumption and greenhouse gas emissions from an independent third-party organization each year.


• Cooperation with property managers. The Asset Manager calculates the relevant data for each property through close contact with property manager at regular meetings and other opportunities. The Asset Manager can confirm the accuracy of the tracked data by referencing the raw data.

Limitations to methodologies and data

The primary limitation to the methodology or data source is the necessity of our reliance on the tenants and property management companies for raw data at the property level. Like many other real estate investment corporations and asset managers, we rely on raw data provided by the tenants and property management companies, and independent verification of accuracy of such raw data provided by the tenants and property management companies presents challenges. In addition, data at the property level provided by the tenants and property managers is generally updated on an annual basis. Accordingly, property-specific data will therefore not always be fully up to date.

Limitations to the methodology and data are not expected to affect the attainment of the environmental or social characteristics promoted by Mori Hills REIT Investment Corporation in any material way.

Due diligence

Prior to our investment in a property, we conduct due diligence on the property, including an environment assessment, covering issues such as land pollution and evaluation of the earthquake resistance of the property and probable maximum loss. Furthermore, we review each property’s Green Building certification at the time of acquisition to confirm the status. The Asset Manager’s investment decision-making process involves assessment of material ESG-related risks identified through due diligence review, including legal compliance, land pollution, environmental risks and other factors. With each acquisition opportunity, we review these ESG-related due diligence findings and conduct a risk assessment. These findings and the risk assessment are required to be considered by the Asset Manager’s Investment Committee before a final decision is made on the investment by Mori Hills REIT Investment Corporation Board of Directors.

Engagement policies

When investing in properties using proceeds from our green bonds, we do not consider properties that do not meet the criteria under our green bond framework. We also do not generally consider investing in properties that are designated as contaminated areas that do not otherwise meet our environmental standards based on their history of land usage, assessment by experts and examination of presence of harmful substances, unless appropriate measures are taken or we conclude, after appropriate due diligence review, that any ESG risks are limited. We also review whether the property we may acquire is compliant with applicable law.

Designated reference benchmark

Our investment units have been included in the MSCI Japan ESG Select Leaders Index (“MSCI Index”) since the end of May, 2022. MSCI Index is an index that includes companies with high ESG performance selected based on data from the MSCI Japan IMI Index. The Government Pension Investment Fund, a Japanese administrative agency that manages Japanese government pension plans, has also selected the MSCI Index as one of its ESG indices for its passive investments.

REMUNERATION AND SUSTAINABILITY RISKS (SFDR ARTICLE 5 DISCLOSURE)

The Asset Manager has a remuneration policy in place which aims to support its strategy, values and long-term interest, including its interest in sustainability. The Asset Manager’s remuneration policy is consistent with the integration of sustainability risks, as follows:

• The compensation rules of the Asset Manager stipulate the calculation and payment methods of the remuneration of its employees, as well as other matters, such as the process for changes to remuneration and the determination of bonuses. Remuneration is determined by considering factors as the employee’s assigned duties, responsibilities, ability and experience.


• In principle, remuneration is updated once a year based on an employee’s evaluation, which gives comprehensive consideration to such factors as the employee’s contribution to the company, the employee’s ability and attitude toward the work.


• The employee evaluation consists of a work performance evaluation, which evaluates the extent to which the goal set every six months has been achieved, and a capability evaluation, which evaluates each employee’s various skills to complete tasks. The evaluation is conducted from a wide range of perspectives, including compliance by the employee and the employee’s contribution to sustainability.


• Bonuses for the year are determined based on the employee evaluation, and an employee is promoted if the criteria for a promotion are fulfilled and the promotion is approved.

INTEGRATION OF SUSTAINABILITY RISKS IN THE INVESTMENT DECISIONS, AND THE IMPACT OF SUCH RISKS ON THE RETURNS OF MORI HILLS REIT INVESTMENT CORPORATION (SFDR ARTICLE 6 DISCLOSURE)

In order to integrate sustainability risks in our asset management while maximizing our portfolio value, we consider ESG factors in our investment and asset management processes. In particular, the Asset Manager has established a green bond framework.

As stated above, we have instituted a number of initiatives to promote environmental and social characteristics. Such initiatives include climate change initiatives and water management initiatives. We have established the Sustainability Committee, which generally meet four times a year and formulate policies and the content of the Sustainability Promotion Program, monitor progress of programs, deliberate various suggestions from departments, etc. in light of social conditions and the operating status of Mori Hills REIT Investment Corporation.

When investing in properties, we investigate the presence of harmful substances, the history how the land has been used and soil contamination. In addition, we consider it positive if a property is designed and constructed in an environmentally thoughtful way and if the property’s environmental burden is assessed to be low. As a result of the growing interest in ESG factors among our investors and other stakeholders, we believe that a downgrade in our ESG ratings or removal from any ESG index could materially adversely impact our business activities and decrease our unit price. We also recognize the impact on cash flow of a property if its environmental performance is inadequate, because its facility may be less competitive, as a result of which the rent we can charge and its occupancy rate may decline. We therefore take ESG factors into serious consideration when investing in new properties and managing our portfolio, and we believe that our ongoing ESG initiatives will contribute to our sustainable growth and improve unitholders’ value while mitigating such ESG-related risks.

While sustainability issues will severely impact our business activities, we believe that such issues may also become potential business opportunities to create new value for sustainable growth. Accordingly, we position our commitment to sustainability as a top priority in our management strategies. We also believe that integrating sustainability factors alongside traditional financial and operational metrics in our investment decision process helps us make a more holistic assessment of a property’s risks and opportunities and is commensurate with the pursuit of superior risk-adjusted returns.