Summary

No sustainable investment objective

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

Environmental or social characteristics of the financial product

We strongly believe that promoting ESG initiatives is essential for our medium-to-long term competitiveness and the continued growth of our unitholder value. As a member of the Hankyu Hanshin Holdings Group (the “Group”), we have established a Sustainability Policy based on the Group’s management philosophy and concept of social contribution and environmental conservation. More specifically, our Sustainability Policy is focused on how we can realize sustainable city development, contribute to the environment, improve our work environment, ensure effective compliance and governance, achieve transparent ESG disclosures and collaborate with each stakeholder on ESG matters.
HHR does not have a specific index designated as a reference benchmark to determine whether HHR is aligned with the environmental or social characteristics that it promotes.
In order to advance ESG initiatives, the Asset Management Company has established Sustainability Promotion System Rules that contain our basic policies concerning ESG, collaboration with stakeholders, and transparency of disclosures. The Asset Management Company has formed a Sustainability Promotion Committee composed of the President and Representative Director acting as the Committee Head, the full-time Director in charge acting as the Committee’s Operating Officer, other full-time Directors, and General Managers of Departments. The Sustainability Promotion Committee meets at least once every three months.

We have implemented various environmental initiatives including the following.

• Establishing Energy Conservation Policy and Water Conservation Policy. We established the following environmental targets, pursuant to which we will work toward carbon neutrality and net-zero emissions by FY2050, at a meeting of the Sustainability Promotion Committee held in December 2022. Our targets are: (i) reduction by 1% annually of energy consumption (intensity) (total consumption of electricity, gas, heavy oil, light oil, LP gas, and DHC (District Heating and Cooling) that were converted to primary energy consumption), (ii) reduction by 35% of greenhouse emission (intensity) by FY2030 and (iii) reduction by 10% of water consumption (intensity) by FY2030. Each of the above targets uses FY2018 as the baseline year for comparison. For the properties with low energy efficiency, we will consider operational improvements and capital investments, aiming to continuously reduce energy consumption of our entire portfolio. Such measures include equipment renovation (e.g., installing LED lights bulbs and high-efficiency air conditioners and/or water-saving devices) and operational improvement (e.g., requiring the property manager or tenants to ensure that electricity and gas are turned off after store hours and set appropriate temperatures for air-conditioners, and reusing rainwater or waste water after purification) for our properties.
• Participation in the 2018 CO2 Reduction Promotion Project Organized by the Ministry of Environment. In 2018, we participated in the CO2 Reduction Promotion Project through Facilities Optimization Repair, sponsored by the Ministry of Environment, and installed highly efficient air conditioning units in HANKYU NISHINOMIYA GARDENS, based on which our business was recognized as cost-effective business in reducing CO2 emissions and we were awarded a subsidy by the Ministry of Environment.
• Reducing CO2 Emissions. The urban heat island effect, which refers to the urban condition of experiencing higher temperatures due to buildings absorbing and re-emitting heat, is increasingly a serious environmental issue. To mitigate this effect, we have installed a fountain and mist spray in the rooftop garden, and water sprinklers on the roofs of cinema complexes, of HANKYU NISHINOMIYA GARDENS, a mist spray at the main entrance of HEP Five, cascades and a mist projection system at the Umekita Plaza of GRAND FRONT OSAKA and heat barrier coating at Kita-Aoyama 3 Cho-me Building. These new facilities have led to decreased usage of air-conditioning and reduced CO2 emissions.
• Utilization of Renewable Energy. At HANKYU NISHINOMIYA GARDENS, we have installed solar panels on the rooftop of the south parking lot and a hybrid generator that combines a Savonius wind turbine with solar panels. We have also installed solar panels on the rooftop of HEP Five to power the ferris wheel.
• Promotion of Green Walls and Planting Vegetation in Urban Areas. GRAND FRONT OSAKA has a 500-meter-long “Icho Namiki” (a row of ginkgo trees) that encircles the building, “Keyaki Namiki” (a row of zelkova trees) that runs east-west of the site, and a rooftop garden spanning more than 10,000 m² in the South Building and the North Building. HANKYU NISHINOMIYA GARDENS has a green garden called Sky Garden on its rooftop. We believe that increased greenery at our properties helps to ease the urban heat island effect.

• Promotion of Green Lease Agreements. We strive to increase the number of green lease agreements that require tenants to cooperate with us on taking environmentally-friendly actions, including reducing energy and water consumption at leased areas and reducing overall garbage.

  We have implemented various social initiatives at our properties including the following:

• Connection with Local Community. To improve channels of communication with tenants and local residents, we offer space for local events including exhibits and music and other events. We participate in local events such as Umeda Yukata Matsuri, a dance event that people participate in wearing yukata, a traditional Japanese costume. Hankyu Hanshin Holdings Inc., our sponsor, has also initiated and promoted Hankyu Hanshin Mirai no Yume Machi Project, which involves a series of culturally stimulating and environmentally-friendly community events such as volunteer clean-up activities, a candle night campaign (to promote turning off electricity in buildings and on streets to save electricity) and providing services such as 100% biodiesel fueled buses. We hope that these projects offer valuable learning experiences for children who will shape their local communities.
• Initiatives to Enhance Tenant Satisfaction. At HEP Five, HANKYU NISHINOMIYA GARDENS, and GRAND FRONT OSAKA, we offer training sessions for tenants’ employees, including on basic manners and protocols, customer services and visual merchandising. We conduct various online, video and in-person training sessions at HEP Five, aimed at making the site attractive to and frequented by customers. In order to create a pleasant working environment for users of our properties, we have enhanced amenities at some of our properties. For example, we renovated the cafeteria of HEP Five in 2019, added female powder rooms at HANKYU NISHINOMIYA GARDENS, and installed vending machines that sell food and drinks recognized by the Japanese government as healthy at Shiodome East Side Building. At SHIBAURA RENASITE TOWER, employees can easily purchase lunch within the building, and we work to improve tenant satisfaction.
• Creating Healthy and Pleasant Working Environment. The Asset Management Company offers training programs to improve its employees’ knowledge and skills, ranging from human skills to compliance and on sustainability issues. The Asset Management Company also offers counseling options in and outside the company to help employees with their mental health and workplace relationships. To enable employees to achieve proper work-life balance, the Asset Management Company introduced flextime in August 2019, which allows eligible employees to choose different times to start and end work.
• Ensuring Safety and Security. We regularly obtain and review engineering reports on our properties, and conduct necessary repair to prevent accidents and minimize damage caused by disasters. We also conduct disaster drills twice a year at each of our properties in order to assist tenants with their business continuity planning and help them return to normal operations as quickly as possible while minimize property damage. To ensure that the Asset Management Company’s employees remain safe, the Asset Management Company has established a business continuity plan (BCP) and initial response manuals for large-scale disasters, including earthquakes and typhoons. The Asset Management Company participates twice a year in disaster drills conducted at the building where the Asset Management Company’s office is located.

Investment strategy

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

We mainly invest in retail properties, office properties and mixed-use properties that include retail and/or office space located in major cities all over Japan.

In particular, we focus on retail space for which we can effectively leverage the planning and management expertise of Hankyu Hanshin Holdings Group, a leading railway company and real estate developer in the Kansai region. At the same time, the Asset Management Company closely studies the impact of our properties on asbestos and soil contamination, and on tenants concerning issues with respect to antisocial forces, and in some cases, the Asset Management Company also looks into work environment and relationships with the community. Such impacts are considered for every investment decision, along with the profitability of the property.

In order to conduct ESG-friendly management while maximizing the value of our properties, we integrate ESG considerations into our investment and asset management practices. In particular, we have established a green finance framework (“Green Finance Framework”) in accordance with the Green Bond Principles 2018, the Green Bond Guidelines 2020, the Green Loan Principles and the Green Loan and Sustainability Linked Loan Guidelines 2020.

• Green Finance Framework. In October 2020, our Green Finance Framework obtained Green 1(F), the highest rank in the JCR Green Finance Framework Evaluation, which is conducted by Japan Credit Rating Agency, Ltd. (JCR) according to the Green Bond Principles 2018, the Green Loan Principles, the Green Bond Guidelines 2020 and the Green Loan and Sustainability Linked Loan Guidelines 2020.

  1. Use of procured funds: The funds procured through green finance will be used for the acquisition of Eligible Green Assets (as defined below) that meet the Eligibility Criteria as specified below, or renovations that meet certain criteria listed below, or for the repayment of borrowings (including green loans) or the redemption of investment corporation bonds (including green bonds) for the abovementioned purposes.

  2. Eligibility criteria:

     • Eligible Green Assets
       Properties that have obtained or are expected to obtain any of the following certifications:
       1. DBJ Certification: 3 stars to 5 stars
       2. CASBEE Certification: B+ rank  to S rank
       3. BELS Certification: 3 stars to 5 stars
       4. LEED Certification: Silver rank to Platinum rank
     • Renovations
       Renovations that have been completed within the past 36 months from the date of payment of the bond or date of the loan or will be completed, and that meet any of the following criteria:
       1. Improvement in the number of stars or rank by one or more Eligible Green Assets.
       2. Reduction of CO2 emissions, energy consumption, or water consumption by 10% or more at the property where the renovation is performed.
       3. Other environmentally beneficial improvements, expected to reduce usage or emissions by 10% or more, compared to previous levels without renovation.
       4. Installation or acquisition of equipment creating renewable energy

  3. Fund management: We set the maximum amount of green finance (the “Eligible Green Debt Amount”) equal to the sum of the total acquisition price of Eligible Green Assets and the total expenditures for Renovations, multiplied by the ratio of interest-bearing debt to total assets. We manage the total amount of funds procured through green finance not to exceed the Eligible Green Debt Amount.

     We ensure the investment strategy is implemented on a continuous basis. The Asset Management Company keeps track of the funds raised under our Green Finance Framework to ensure that they are used only towards Eligible Green Assets and Renovations.

     In order to promote ESG initiatives, the Asset Management Company’s President and Representative Director, the full-time Director in charge of the Committee, other full-time Directors, and General Managers of Departments convene the Sustainability Promotion Committee generally once every three months to review our Sustainability Policy, goals and initiatives and the performance of our investment under our Green Finance Framework.

Proportion of investments

HHR offers financial products which promote environmental or social characteristics, but does not have sustainable investments as its objective. The certified properties represented 60.0% (by total floor area) as of November 30, 2023, and we aim to improve the number of our properties that have obtained green building certifications. As of November 30, 2023, 11.0 % of our properties (by acquisition price) were Eligible Green Assets acquired using our Green Finance Framework. We intend to continue using our Green Finance Framework for acquisitions of new assets, and will continue integrating ESG considerations into our investment processes.

Monitoring of environmental or social characteristics

We use the following indicators to measure the attainment of the E/S characteristics we promote. More specifically, we use certifications described above as part of our Eligibility Criteria under our Green Finance Framework, which was established to enhance ESG-friendly management. In addition, by recording energy consumption, water consumption and greenhouse gas emissions consumption and their intensity on-going basis, we have visibility into our achievement against established targets described below.

• External Certifications. We are evaluated under the Global Real Estate Sustainability Benchmark (“GRESB”), which is an annual benchmarking assessment to measure the level of ESG integration achieved by real estate companies and funds. It was initiated in 2009 by a group of European institutional investors that played leading roles in launching Principles for Responsible Investment (PRI) advocated by the United Nations. We have received 2 stars in 2023 and the Green Star designation for five consecutive years through 2023, which reflects our excellent 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 with respect to properties owned.
• Environmental Certifications. To evaluate the environmental performance of our properties, we use certifications issued by third-party organizations such as Development Bank of Japan’s Green Building Certification (“DBJ Certification”), the Comprehensive Assessment System for Built Environment Efficiency (“CASBEE”) certification, Building Energy-efficiency Labeling System (“BELS”) certification (“BELS Certification”), and Leadership in Energy and Environmental Design (“LEED”) certification. With respect to DBJ Certification, we had received 5 stars for one property, 4 stars for one property and 3 stars for four properties as of November 30, 2023. As to CASBEE, we had received an S rating for two properties and an A rating for one property as of November 30, 2023. The properties that received green building certifications account for 60.0% (by total floor area) as of November 30, 2023. We aim to improve the percentage of green building certification on our properties.
• Climate change initiatives. We believe that earnest efforts to address climate change issues will contribute to securing our sustainable profitability on a medium-to-long-term basis, and maximizing unitholder value. In December 2022, the Asset Management Company announced its support for the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and joined the TCFD Consortium, an organization consisting of Japanese supporting companies, thereby further promoting the initiatives concerning climate change and improving information disclosure based on the TCFD recommendations.

• Energy, Water and Greenhouse Gas. The following environmental targets toward carbon neutrality and net-zero emissions by 2050 were established at the Sustainability Promotion Committee meeting held in December 2022. (The intensity, and base year is FY2018)

  • GHG emissions: To be reduced by 35% by FY2030
  • Energy consumption: To be reduced by 1% annually
  • Water consumption: To be reduced by 10% by FY2030
  For the FY2050 target (long-term target), we will accelerate various initiatives for carbon neutrality and net-zero emissions.

Methodologies

The Asset Management Company has established the "Sustainability Promotion System Regulations," with the purpose of establishing various policies concerning sustainability. Within this system, the "Sustainability Promotion Committee" has been set up for decision-making processes related to sustainability. The Sustainability Promotion Committee is comprised of the President and Representative Director, who acts as the Committee Head, the Director in charge, who acts as the Committee's Operating Officer, full-time Directors, and Department or Office General Managers. The Committee meets at least once every three months. In addition to considering and drafting various policies, goals, response to climate change and measures concerning sustainability, the Sustainability Promotion Committee also reports appropriate information to the Board of Directors of HHR.

• External Certifications. The Investment Planning Department of the Asset Management Company collectively prepares draft responses to the questionnaires for GRESB, which are then entrusted to a consultant for comprehensive checking and feedback. The responses are submitted to GRESB after final confirmation at a meeting with the Director responsible for sustainability operations.
• Environmental Certifications. In the same way as “External Certifications” above, the Investment Planning Department of the Asset Management Company collectively prepares drafts for submitting to the third-party organizations for obtaining environmental certifications, which are then entrusted to a consultant for comprehensive checking and feedback. The drafts are submitted to the third-party organizations after final confirmation at a meeting with the Director responsible for sustainability operations.
• Climate change initiatives. The Investment Planning Department of the Asset Management Company prepares drafts of disclosure related to climate change initiatives based on the TCFD recommendations, taking into account our portfolio composition and risk assessments. These drafts are prepared in cooperation with a consultant. The Sustainability Promotion Committee of the Asset Management Company makes final confirmation of the contents of the disclosure.
• Energy, Water and Greenhouse Gas. The Investment Planning Department of the Asset Management Company collects information and data once every three months to monitor the status of achieving reduction targets for GHG emissions, energy consumption and water consumption. The status and progress towards achieving the targets are reported to the Sustainability Promotion Committee. The progress for each fiscal year is reported to the Board of Directors of the Asset Management Company and HHR.

Data sources and processing

We use the following data sources:

• External Certifications. Information and data for preparing draft responses for GRESB are collected from property management companies, as well as from the relevant internal departments of the Asset Management Company, such as the investment management section, business operations section, and compliance section. In order to improve the accuracy of the data, we have a system to double-check the data within the property management companies.
• Environmental Certifications. In the same way as “External Certifications” above, information and data for preparing drafts for submitting to the third-party organizations for obtaining the environmental certifications are collected from property management companies, as well as from the relevant internal departments of the Asset Management Company, such as the investment management section, business operations section, and compliance section. In order to improve the accuracy of the data, we have a system to double-check the data within the property management companies.
• Climate change initiatives. The information and data for preparing the drafts of disclosure related to climate change initiatives based on the TCFD recommendations are collected from the investment management section and business operations section of the Asset Management Company.
• Energy, Water and Greenhouse Gas. The information and data for monitoring for the status of achieving reduction targets for GHG emissions, energy consumption and water consumption are collected from property management companies. In order to improve the accuracy of the data, we have a system to double-check the data within the property management companies.

Limitations to methodologies and data

The primary limitation to methodologies and data is the necessity of reliance on tenants and property management companies 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 the property management companies. In addition, data at the property level provided by the tenants and property managers is generally updated on an annual basis or quarterly basis. Accordingly, property-specific data will therefore not always be fully up-to-date.

In order to improve the accuracy of the data, we have a system to double-check the data within the property management companies. The data at the property level is compiled internally at the Asset Management Company, but the data is confirmed by the relevant departments.

Limitations to the methodologies and data are not expected to affect the attainment of the environmental or social characteristics promoted by HHR in any material way.

Due diligence

Prior to our investment in a property, the Asset Management Company conducts due diligence review of the property, including building review and regulatory environmental due diligence. Our due diligence on a property, the Asset Management Company closely studies the impact on our properties regarding use of hazardous or toxic chemicals (such as asbestos and Poly Chlorinated Biphenyl (“PCB”)), soil contamination, generation and discharge of air pollutant emissions (such as chlorofluorocarbons) and susceptibility to earthquakes (including the probable maximum loss (“PML”) analysis). The Asset Management Company retains a reliable expert to conduct surveys on above and obtains an engineering report. In addition, the Asset Management Company studies the impact on tenants concerning issues with respect to antisocial forces. In some cases, the Asset Management Company also looks into work environment and relationships with the community, as well as water submersion levels according to various hazard maps. Such impacts are considered for every investment decision, along with the profitability of the property.

Engagement policies

When considering investment in properties using our Green Finance Framework, we rule out properties which do not meet the Eligibility Criteria for Eligible Green Assets.

We conduct soil contamination surveys before acquiring properties, and do not consider investing in properties that fails to meet the standards for soil contamination and other environmental contamination in accordance with the Soil Contamination Countermeasures Act of Japan and other environmental laws and ordinances, unless the land can be purified or corrective actions under the Acts can be taken.

Designated reference benchmark

HHR has no benchmark index designated as a reference benchmark to meet the environmental or social characteristics promoted by HHR.

REMUNERATION AND SUSTAINABILITY RISKS (SFDR ARTICLE 5 DISCLOSURE)

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

• Employees of the Asset Management Company 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 Management Company’s compensation rules, which are established based on statutory requirements.
• Employees receive remuneration that consists of monthly base salary and additional wages. The base salary is determined based on the level of education completed, qualifications and work responsibilities.
• Bonuses are determined by the Asset Management Company’s internal rules. Bonuses take into account issues including Hankyu Hanshin REIT Inc.’s performance as well as the employee’s evaluation and contribution, including the employee’s contributions 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 HANKYU HANSHIN REIT, INC. (SFDR ARTICLE 6 DISCLOSURE)

We have established the Sustainability Promotion Committee, which generally meets once every three months. Each person responsible for fund operation reports to the Sustainability Promotion Committee the status of ESG initiatives, and submits any proposal for amendment of rules related to ESG initiatives, new ESG initiatives or ESG targets. The Sustainability Promotion Committee discusses ESG promotion matters including any amendment of the Sustainability Policy, as well as establishment of ESG targets. When we select assets for investment in connection with our Green Finance Framework, the relevant property or renovation must meet our Eligibility Criteria explained above.

Under this organizational structure, we have instituted a number of initiatives to promote E/S characteristics. Such initiatives include climate change initiatives, initiatives for saving/reducing energy consumption, local community initiatives, and initiatives for employees’/tenant’s initiatives.

In order to conduct sustainable asset management while maximizing the value of our properties, we have taken into consideration ESG factors in our investment and asset management processes. In particular, we have established our Green Finance Framework.

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 one of top priorities 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.

The following table presents the key climate-related risks that may have financial impacts on our real investment management business.

* This table can be scrolled horizontally.