SFDR Principal Adverse Impact Statement PDF

SUSTAINABILITY-RELATED DISCLOSURE

Product Name: Daiwa Office Investment Corporation

Daiwa Office Investment Corporation (“DOI”) 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. DOI has no employees in accordance with the prohibition on having employees under the Act on Investment Trusts and Investment Corporations of Japan and relies on Daiwa Real Estate Asset Management Co., Ltd. (the “Asset Manager”), to manage and operate the properties in DOI’s portfolio. DOI and the Asset Manager are hereinafter referred to collectively as “we”, “us” or “our”. References to “fiscal year” or “FY” are to the 12 months began or beginning April 1 of such year, unless noted otherwise.

(a) Summary

(b) No sustainable investment objective

The financial products offered by DOI promote environmental or social characteristics, but do not have as its objective sustainable investment.

(c) Environmental or social characteristics of the financial product

DOI and the Asset Manager focus on promoting environmental, social and governance, or ESG characteristics in the belief that emphasis on ESG contributes to the enhancement of DOI’s medium- to long-term corporate value. From the environmental perspective, we implement environmental protection measures, including those for resource conservation and energy-saving, in order to reduce the environmental impact of DOI’s properties. From the social perspective, we conduct our business based on a social mission of providing high-quality and comfortable spaces, in partnership with stakeholders, while disclosing appropriate information to such stakeholders to fulfil our accountability. From the governance perspective, we aim to make highly transparent and reasonable business decisions that are not only lawful and in compliance with regulatory requirements, but also to meet the ethical standards we have set for our business. The details are as follows.

• Energy Saving Initiatives. DOI has set the goal to reduce their energy consumption by at least 1% per year (5% over five years) by FY2024 with FY2019 as the base year. In addition, DOI has implemented eco-friendly equipment such as LED lighting, high-efficiency heating equipment and energy-saving air conditioning systems. DOI intends to install LED lighting for 100% of its properties’ common areas and areas exclusively owned by DOI by the end of the fiscal period ending on May 31, 2026.
• Reduction of Greenhouse Gas (“GHG”) Emissions Initiatives. The Asset Manager continuously makes the efforts and investment to reduce the environmental impact of our properties that emit high levels of GHG. DOI aims to reduce GHG emission intensity for the properties in DOI’s portfolio with respect to both Scope 1 and Scope 2 by 1% per year (5% over five years) by FY2024 with FY2019 as base year, and by 46% by FY2030 with FY2013 as the base year, and to become carbon neutral by FY2050. DOI has implemented equipment that contributes to reduction of GHG emissions, such as LED lighting, high-efficiency heating equipment, and energy-saving air conditioning systems.
• Water-saving Initiatives. DOI aims to maintain the same level of water consumption for the properties in DOI’s portfolio by FY2024. DOI has implemented water-saving equipment such as water-saving toilets and has promoted water-saving among tenants with posters asking for their cooperation.
• Sustainable Procurement Initiatives. The Asset Manager generally opts for products and services with the following qualities: (i) low-consumption of fossil fuels and energy, (ii) low usage and emission of substances with adverse effects on environment and human health, (iii) designed to conserve biodiversity and ecology, (iv) designed for long-term usage, (v) designed to be reusable and recyclable, (vi) uses reclaimed material and has environmental certification, (vii) easily disposable, and (viii) reduced procurement amount to reduce waste. Furthermore, the Asset Manager considered property managers and suppliers’ sustainability framework and ability to cooperate with the Asset Manager’s ESG practices, in addition to their creditworthiness, product or service quality and price in deciding whether to hire them.
• Sustainability Framework. In choosing property managers and suppliers to work with, the Asset Manager takes into consideration whether the property manager or supplier (i) has adopted an environmental management system such as ISO14001 and obtains third-party certification, or otherwise fulfills the ESG requirements established by the Asset Manager, (ii) takes into account their sustainability policy when selecting their subcontractors, and encourages them to comply with the Asset Manager’s ESG requirements, (iii) creates and maintains appropriate and employee-friendly work environment, (iv) promotes diversity of human resources and work-life balance, and prohibits unfair labor, (v) has corporate ethics guidelines including anti-corruption policy, (vi) engages in and contributes to the neighborhoods and communities surrounding DOI’s properties, and (vii) has a disaster risk management system.
• Cooperation with the Asset Manager’s ESG practices. The Asset Manager requires the property manager or supplier to engage in (i) energy-saving, water-saving and reduction of GHG emissions, (ii) appropriate waste management and recycling promotion, (iii) control and reduction of hazardous chemical substances and maintenance of health and safety including water quality, and (iv) maintenance of favorable relationships with tenants.

(d) Investment strategy

DOI invests directly or indirectly through trust beneficiary interests in real estate. Therefore, due diligence (including the assessment of good governance practices) in relation to investee companies is not applicable. The investment and due diligence policies as described below are in relation to real estate and real estate related assets.

The Asset Manager investigates the environmental and geological conditions of each property to determine the possibility of presence of environmental hazardous substances and land pollution. The Asset Manager conducts, with assistance from outside experts, financial, property and legal due diligence review to evaluate investments. DOI only invests in properties that have no environmental hazardous substances. We generally do not invest in properties that exceed the land pollution threshold specified in the Ordinance for Enforcement of the Soil Contamination Countermeasures Act (Act No. 53 of 2002) of Japan (the “Soil Contamination Act”), and when we do, the Asset Manager consults professionals to weigh their impact on the surrounding environment and people against the economic benefits they would bring before making investment decisions.

Moreover, DOI has established a green finance framework (the “Green Finance Framework”) to provide investors with investment opportunities with positive environmental impacts. This framework provides that the funds raised through green bonds or green loans must be used to acquire and/or to refinance funds used to acquire Green-Qualified Assets which are determined as follows. We use various certifications issued by third party organizations to monitor and keep track of the ESG performance at the building level. We use the Building-Housing Energy-Efficiency Labeling System (“BELS”), Comprehensive Assessment System for Built Environment Efficiency (“CASBEE”), the Development Bank of Japan (“DBJ”) Green Building Certification, and the Leadership in Energy & Environmental Design (“LEED”) rating system for environmental certification of the buildings in our portfolio. We deem each of our office buildings to be energy efficient and environmentally friendly enough if it received a certification of B+ Rank or higher in the CASBEE ranking system, which consists of Rank S (excellent), Rank A (very good), Rank B+ (good), Rank B– (slightly inferior) and Rank C (inferior), a certification of three stars or higher in the five-star ranking system of BELS, three stars or higher in the five-star ranking system of the DBJ Green Building Certification, and/or silver rank or higher in the LEED rating system, and classify such office building as “Green-qualified Asset(s)”.

While there is no third-party rating used for assessment of our governance practices, we have implemented the following measures to assess and enhance our governance systems:

• Management of Conflicts of Interest. Where we conduct financial instruments businesses or businesses incidental to financial instruments businesses that may involve conflicts of interests, the Asset Manager is obliged to comply with the relevant rules under the Financial Instruments and Exchange Act (the “FIEA”), the Act on Investment Trusts and Investment Corporations and other relevant laws. Our internal policy, Rules on the Prevention of Conflicts of Interest sets forth various measures to ensure that judgment pertaining to asset investment and other transactions are not compromised by conflicts of interests.
• Transparent and appropriate information disclosure. DOI holds management calls for its overseas unitholders and engages with a wide range of unitholders at its earnings meetings, which are held via teleconference. DOI makes ongoing disclosures in Japanese pursuant to the FIEA and other applicable laws and regulations in Japan and provides English language disclosures or translations where practicable.

(e) Proportion of investments

As of January 20, 2023, 61.9% of our properties based on total gross floor area of the buildings qualified as Green-Qualified Assets, and 38.1% did not. As described in more detail above, all of DOI’s properties are evaluated against the environmental characteristics promoted by DOI. DOI is continuing our efforts to increase the number of Green-Qualified Assets in our portfolio. As a mid- to long-term goal, we aim to increase the ratio of Green-Qualified Assets in the entire portfolio to 70.0% by FY2030.

(f) Monitoring of environmental or social characteristics

In order to monitor and track our overall performance on E/S characteristics, we rely on assessment by third-party organizations, such as the Global Real Estate Sustainability Benchmark (“GRESB”) Real Estate Assessment, Mitsubishi UFJ Financial Group ESG Rating Certificate for J-REIT supported by Japan Credit Rating Agency (“JCR”), MSCI ESG Rating.
Using an ESG evaluation framework, JCR Green Finance Framework Evaluation, we ensured that the projects we conducted under the Green Finance Framework met the certain criteria set by JCR.
We referred to various certifications issued by third-party organizations to classify potential investment targets into Green-Qualified Assets and others, including DBJ Green Building certification, the CASBEE certification, the BELS certification, and other relevant certifications.
In addition, we have set in place the following control mechanisms.

• Energy Saving Initiatives. The Asset Manager has tracked and monitored consumption of energy, including electricity, urban and propane gas and steam energy, in common areas of DOI’s properties, and measures the progress against the annual and medium- to long-term targets. These targets were shared with property managers and tenants so that the Asset Manager could collaborate with them to continuously try to reduce such energy consumption.
• Reduction of GHG Emissions. The Asset Manager has tracked and monitored GHG emissions of the parties in its entire supply chain of DOI’s properties, including direct emissions from burning fuels (i.e., Scope 1) and indirect emissions from power purchases and procurement (i.e., Scope 2) and measured progress against the established targets.
• Water Saving Initiatives. The Asset Manager has tracked and monitored water consumption in common areas of DOI’s properties. The Asset Manager received an overview of consumption volume of each property and accumulative consumption volume of all of DOI’s properties and measured their progress against the annual and medium- to long-term targets. These targets were shared with property managers and tenants so that the Asset Manager could collaborate with them to continuously reduce water consumption.

(g) Methodologies

The Asset Manager has established a management-level committee, dedicated to our sustainability goals and implemented various internal policies to improve the effectiveness our sustainability initiatives in order to continuously make progress on our initiatives on sustainability.

• Sustainability Promotion Committee. The Sustainability Promotion Committee meets regularly (once a month, in principle) to make management-level decisions on sustainability, sets, modifies, and abolishes sustainability targets for the investment corporations the Asset Managers manages and disclose the progress of the targets. The members of the committee include:
  
  • President/Representative Director of the Asset Manager as the Chief Executive Officer for Sustainability Promotion,
  • Executive Managing Director,
  • General Managers of DOI Investment Management Dept., DLI Investment Management Dept., DRP Investment Management Dept., DHP/DLP Investment Management Dept. and Private Fund Management Dept. as Chief Sustainability Officers,
  • Head of Sustainable Promotion Office,
  • Compliance Officer, and
  • Others who are appointed by the Chief Executive Officer.
• Green Finance Framework. The Asset Manager’s Finance Department will evaluate and select projects based on sustainability considerations. The project is then examined by the Asset Manager’s Sustainability Promotion Committee, which provides its opinion on it from a sustainability perspective, considered by DOI’s Investment Committee and the Board of Directors, and approved by DOI’s Executive Board.

Third Party Evaluation. A third-party organization conducted evaluation (verification) of our entire portfolio’s environmental performance data (energy consumption, GHG emissions (Scope 1 and 2), water consumption, and waste output) for the FY 2021.

(h) Data sources and processing

The Asset manager uses the following data sources:

• Environmental certifications. 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 ensure the data quality. The Asset Manager calculates and tracks the properties which hold environmental certifications.
• Environmental initiatives. At the property level, the DOI Investment Management Team of the DOI Investment Management Department of the Asset Manager collects the relevant data from the property managers regarding energy consumption, solar power generation and CO2 emission levels in our portfolio as well as water consumption and the recycling rate in our properties. To ensure data quality, the Asset Manager obtains a data-quality assurance report regarding energy consumption, GHG emissions, water uses and waste emissions from an independent third-party organization each year.
• Installation of LED light bulbs. At the portfolio level, the Construction Management teams of the Asset Manager compiles relevant data internally on an as-needed basis.
• External sustainability evaluation. GRESB is an independent organization which provides validated ESG performance data. It provides a portfolio-level assessment and the assessment is conducted through submission of our responses and relevant data to GRESB’s questionnaires on ESG matters. For the management components of GRESB assessment questionnaires, the Administration Department and Sustainability Promotion Office review relevant ESG information and policies, including employee-related information and policies such as workplace harassment prevention policies and trainings and usage rate of flexible work hours and leaves, and prepares our responses and relevant data. For the performance components of GRESB assessment questionnaires, the Asset Manager compiles relevant ESG data and information at the property level from our tenants and prepares our responses and relevant data. Before DOI submits responses to the survey by the GRESB, a consulting firm reviews the ESG-related data and supporting materials used for the responses. The consulting firm also assists the Asset Manager in identifying room for future improvement. Engaging such an well-established consulting firm helps us maintain our data quality. Also, the Asset Manager obtains assurance reports from an independent third-party organization regarding energy consumption, GHG emissions, water use and waste volume, which are used as data to be included in our GRESB reports. GRESB provides an annual assessment, and we generally start collecting and compiling relevant information and data around mid-March and submit our responses and relevant data to GRESB around the end of June each year.

(i) Limitations to methodologies and data

The main limitations to methodologies and data stem from the necessity to rely on tenants and property managers for data at the property level. Like many other real estate investment corporations and asset managers, we rely on data provided by the tenants, and it presents challenges to verify the accuracy of such data. 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.

Data at the property level is compiled internally at the Asset Manager, except for energy consumption, GHG emissions, water use and waste volume data, there is no third-party quality assurance or verification for the property-level data.

Limitations to the methodologies and data are not expected to affect the attainment of the E/S characteristics promoted by DOI in any material way.

(j) Due diligence

DOI invests only in properties that have no significant environmental risks by conducting significant due diligence review prior to each acquisition. Our ESG due diligence on a property considers the following ESG factors: (i) use of hazardous or toxic chemicals (e.g., asbestos and PCB); (ii) generation and discharge of air pollutants (chlorofluorocarbon) and air quality; and (iii) susceptibility to earthquakes (including the PML analysis) of the property. For our regulatory environmental due diligence, the Asset Manager retains reliable experts to conduct surveys including soil contamination surveys in accordance with the Soil Contamination Act and obtains an engineering report and a PML analysis report. Upon the review of environmental issues discovered through due diligence review, the Acquisition Department of the Asset Manager reports such issues to [the Investment Committee], and the Committee decides whether we acquire the property or not considering the potential for improvement in the environmental performance and comfort level of the property.

(k) Engagement policies

In accordance with the Sustainable Procurement Policy, the Asset Manager selects products and services, on a preferential basis, which meet the following criteria in addition to required quality and economic efficiency: (i) low-consumption of fossil fuels and energy, (ii) low usage and emissions of substances with adverse effects on environment and human health, (iii) designed to conserve biodiversity and ecology, (iv) designed for long-term usage, (v) designed to be reusable and recyclable, (vi) uses reclaimed material and has environmental certification, (vii) easily disposable, and (viii) reduced procurement amount to reduce waste. Furthermore, the Asset Manager selects property managers and suppliers based on their sustainability framework and ability to cooperate with the Asset Manager’s ESG practices, in addition to their creditworthiness, product or service quality and price. In addition, the Asset Manager plans to introduce various measures to promote cooperation with stakeholders of DOI, including green lease clauses, which requires tenants’ cooperation on reduction of environmental burdens through energy saving programs and improvement of the residential environmental in lease contracts between tenants and DOI.

(l) Designated reference benchmark

DOI has no benchmark index designated as a reference benchmark to meet the E/S characteristics promoted by DOI.

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.

Employees of the Asset Manager receive remuneration according to their relative contribution to and expectations for the achievement of management targets, including, in some cases, sustainability targets.

Remuneration, methods of calculation and payment, timing of payment, and increases in remuneration are determined according to the Asset Manager’s compensation rules, which are established based on statutory requirements.

Monthly remuneration is composed of base salary, overtime payment and midnight work allowance. Employees may receive increases or reductions after twelve months of their current pay based on personnel evaluations during the year. Such increases or decreases will be set based on a pay table determined for each job category.

Incentive pay is calculated based on performance of the Asset Manager as well as the employee’s performance and contribution to the performance of the Asset Manager. Moreover, such evaluations take into consideration the employee’s contributions and conduct with respect to sustainability efforts and compliance requirements.

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

• Scenario analysis is based on currently available information and objective forecast data from third-party organizations and does not necessarily guarantee the accuracy of the information due to the inherent uncertainty of known and unknown risks.

DOI and the Asset Manager address sustainability risks by taking into account environmental, social and governance factors in our investment decision process and on a continuous basis.

From the environmental perspective, DOI and the Asset Manager implement environmental protection measures, including those for resource conservation and energy-saving. For example, we will continue to implement new facilities and equipment that help us reduce the environmental impact of DOI’s properties. From the social perspective, we conduct our business based on a social mission of providing high-quality and comfortable spaces in partnership with stakeholders, while disclosing appropriate information to such stakeholders to improve our accountability. From the governance perspective, we continually aim to make transparent and reasonable business decisions not only to meet the applicable legal and regulatory requirements, but also to meet the ethical standards we have set for our business.

The Asset Manager’s investment decision-making process involves assessment of material ESG-related risks and opportunities to ensure that DOI’s sustainable investment strategy is implemented on a continuous basis. With each acquisition opportunity, DOI and the Asset Manager review ESG-related due diligence findings. These findings are required to be considered by the Asset Manager’s Investment Committee before a final decision is made on the investment.

As part of due diligence review prior to investment, the Asset Manager investigates the environmental and geological conditions of each property to determine the possibility of environmental hazardous substances and land pollution. The Asset Manager conducts, with assistance from outside experts, financial, property and legal due diligence review to evaluate potential investments. DOI invests only in properties that have no environmental hazardous substances. We generally do not invest in properties that exceed a certain land pollution threshold specified in the Ordinance of Enforcement of the Soil Contamination Act. If a property exceeds the land pollution threshold, the Asset Manager consults professionals to weigh its impact on the surrounding environment and people against the economic benefits it would bring before making an investment decision.

In addition, the Asset Manager has established a sustainability promotion system and designated its President & CEO as the Chief Executive for Promoting Sustainability, in addition to establishing a Chief Sustainability Officer who is responsible for executing sustainability measures and managing progress, and the Sustainability Promotion Committee. Meetings of the Sustainability Promotion Committee are held regularly (once a month, in principle) to discuss sustainability related matters, including policies, goals and measures, and social finance framework. Furthermore, the Asset Manager tracks the sustainability measures including energy-saving initiatives, reduction of GHG emissions initiatives and water-saving initiatives.

As a result of the growing interest in ESG factors among our investors and other stakeholders, we believe that insufficient engagement in ESG-related issues could materially adversely impact our reputation, business activities and our unit price. Having established the Sustainability Policy, we will take ESG factors into serious consideration when investing in new properties and managing our portfolio in accordance with such policy. We believe that our ongoing ESG initiatives will contribute to our sustainable growth and improve unitholders’ value while mitigating such ESG-related risks. In addition, we believe that such initiatives also contribute to reduction of the environmental impact on the Japanese economy while contributing to local communities and regional economies and at the same time, generating sustainable growth in unitholder returns.

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 part of the agenda that DOI needs to address 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.