Environmental Risk Management

We understand that climate change is creating new and escalating financial risks to tangible assets. In addition to the direct effects of climate change, transition risks, such as the strengthening of regulations and shifting market demands, are also impacting investment management and outcomes. As we work to make our portfolio resilient for the future, it’s also crucial to consider long-term trends caused by climate change and to address and factor in climaterelated risks.

In FY2023, we have set out to adopt TCFD recommendations for the first time to implement a phased approach towards climate reporting. This is also in line with the MAS Guidelines on Environmental Risk Management for Asset Managers as well as Singapore Exchange Regulation requiring listed companies from the material and buildings industry to provide climate-related disclosures based on the TCFD recommendations from FY2024 onwards. In FY2024, AA REIT has embarked on the process of quantifying the identified risk from FY2023 and evaluated the exposure of our portfolio to physical and natural hazards.

The following section demonstrates AA REIT’s approach to managing climate-related risks that may impact our business, with close reference to the four primary pillars of TCFD.

Key Components of TCFD Recommendations	AA REIT’s Response
Governance Describe the board’s oversight of climate-related risks and opportunities. Describe management’s role in assessing and managing climate-related risks and opportunities.	The Board provides strategic directions and oversees the determination, monitoring and management of material ESG factors of the REIT. This includes: Considering the environmental risk profile in setting the firm’s strategy plan Approving an environmental risk management framework and policies to assess and manage the environmental risk of assets managed Setting clear roles and responsibilities of the Board and senior management relating to oversight of environmental risk Providing oversight in relation to building environmental risk management competency at the Board and management level Management, represented by the Sustainability Council, manages sustainability strategy and objectives, oversees the implementation of initiatives, and set targets for continuous improvement. This includes: Ensuring development and implementation of Environmental Risk Management framework and policies, detailing how AA REIT incorporates environmental risk considerations in investment research, portfolio construction, risk management and stewardship practices Ensuring ESG commitments align with the environmental risk profile set by the Board through short-, medium- and long-term targets Establishing an internal escalation process for managing environmental risk Providing regular updates to the Board on material environmental risk issues Please refer to the “Sustainability governance” section on page 90 for more information.
Strategy Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term. Describe the impact of climate related risks and opportunities on the organisation’s businesses, strategy, and financial planning. Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.	Management has integrated environmental risk into the existing Enterprise Risk Management process and accounts for environmental risk considerations in its investment process and at a portfolio level, which are monitored and appropriately managed where the risk is material. Concurrently, the following opportunities have been identified over the short, medium and long-term: (a) engaging in renewable energy programs alongside key industry players such as SP Group and GoNetZero which would potentially lower operating expenses and increase revenue, while also embracing smart technologies to enhance the energy efficiency of its properties and lower operating expenses; (b) responding to the market’s shift towards eco-friendly products by focusing on the acquisition of properties with sustainable building certifications and by adding EV fast charging infrastructure both of which would have potential increased revenue impacts. Management has conducted a qualitative assessment of climaterelated transition and physical risks for all its properties, considering short-term, medium-term to 2030 and long-term to 2050 time horizons per the SGX recommendations for a phased TCFD approach. Please refer to pages 97 to 98 for more information on the scenarios considered. Management and third-party consultants have conducted a quantitative climate scenario analysis to identify potential physical and transition risks and assessed their impacts on the business across our countries of operation. In assessing transition risk, we have considered both Net Zero (1.5°C) and business-as-usual (4°C) warming scenarios. Increased pricing of GHG emissions (i.e., a carbon tax) was identified as the key transition risk. When assessing the physical risks to our operations, we focused on the business-asusual (4°C) warming scenario, as physical risks are most significant under this scenario. Across our portfolio, the most significant physical risks observed are extreme heat and flooding.
Risk Management Describe the organisation’s processes for identifying and assessing climate-related risks. Describe the organisation’s processes for managing climate-related risks. Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.	The Board will periodically review the existing enterprise risk management policy to ensure that environmental and climate-related risks are being appropriately captured and assessed to manage potential and actual impacts of environmental risk. AA REIT acknowledges that achieving our sustainability goals will require building sustainability capabilities across our organisation. Consequently, we have initiated training and development programs to enhance the environmental and climate-related risk expertise of our employees and Board members. Please refer to pages 97 to 98 for more information on AA REIT’s climate-related risk identification and assessment process.
Metrics and Targets Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (“GHG”) emissions, and the related risks. Describe the targets used by the organisation to manage climate related risks and opportunities and performance against targets.	Climate-related and environmental metrics such as energy consumption and intensity and Scope 1, Scope 2, Scope 3 GHG emissions are disclosed in the Energy and Emissions section of this sustainability report. Please refer to page 99 for more information on AA REIT’s target for energy and emissions. AA REIT currently has long-term emissions reduction goals and is exploring additional metrics and targets to measure relevant environmental risks and opportunities.

In FY2023, AA REIT has conducted its first risk assessment and scenario analysis exercise to identify and potential impacts of:

Transition risks³ , under the Network for Greening the Financial System (“NGFS”) Net Zero 2050 Scenario and a business-as-usual (“BAU”) scenario with ”Current Policies” scenario
Physical risks⁴ , under the Network for Greening the Financial System (“NGFS”) Net Zero 2050 Scenario and a business-as-usual (“BAU”) scenario with “Hot House World” scenario

The identified transition and physical risks were assessed for the whole portfolio of AA REIT (28 assets located in Australia and Singapore) for the following time horizons:

Short-term: Within the next 1 to 2 years (by 2025)
Medium-term: Within the next 2 to 6 years (by 2030)
Long-term: Within the next 6 to 26 years (by 2050)

These are the specific physical and transition risk exposures for AA REIT’s portfolio:

Risk Type	Description	Examples of Possible Impacts	Response
Transition Risk
Regulatory and policy Medium to High Risk	The risk of loss resulting from failure to comply with laws, regulations, contracts or court decisions relating to the impacts of climate change.	Mandatory climate-related disclosures (and stricter sustainability reporting requirements) would result in additional cost as regulated companies create and maintain processes for carbon emission monitoring. Mandatory national carbon tax scheme that would result in additional operational cost as higher carbon price would lead to increased fuel, energy, and waste disposal cost especially in Singapore.	AA REIT is already capturing relevant data and working with stakeholders to improve the quality and timeliness of that data. AA REIT has embarked on installation of more energy efficient equipment and solar panels at AA REIT Assets. AA REIT striving to meet the BCA Greenmark standard for a higher number of AA REIT’s properties to align with BCA Green Plan 2030.
Reputational Low to Medium Risk	The risk of damage to an organisation’s image and brand as a result of its actions or perceived inaction on climate-related issues.	A perceived lack of climate action could dampen investor confidence and decrease in availability of funding.	AA REIT is managing potential reputational risks through regular and robust stakeholder engagement (Please see pages 90 to 91 for more information on AA REIT’s stakeholder engagement efforts). AA REIT is constantly assessing and implementing new initiatives (e.g. more energy efficient equipment and development of smart metering) to reach its SBTi target.
Market Low to Medium Risk	The risk of financial loss resulting from market changes.	Less desirable properties in locations vulnerable to climate change may lead to reduced occupier/ tenant demand, reduction in customer base, and reduced asset value. Inability to meet or keep up with market expectation for green technology may result in losing competitive edge.	AA REIT is incorporating risks associated with market changes into the investment approach. AA REIT has executed an agreement to install EV fast chargers at four of its properties in Singapore to cater to tenants’ and visitors’ requests for having EV charging stations.
Technology Low to Medium Risk	The risk of obsolescence or increased operational cost resulting from the failure to adopt new technologies or business practices that address the impacts of climate change.	A delay in implementing new technologies that have the potential to address energy/emissions/water/ waste demands in the operations may lead to loss in market share and stranded assets. Neglecting the adoption of sustainable and eco-friendly technologies in the long run may lead to increased energy and operational expenditures.	AA REIT continues to collaborate with ecosystem partner to implement new technology (i.e., increase solar capacity to 11.22 MWp by end of FY2025, install EV fast chargers and smart metering system).
Physical Risk
Acute Medium Risk	Extreme weather such as flooding and fire caused property damage and business disruption.	To avoid significant interruptions to business operations from floods or fire events, higher costs may be incurred to weatherproof the assets and business.	AA REIT is carefully monitoring the risks and reviewing insurance plans and processes to ensure adequate coverage for critical assets. AA REIT is incorporating risks associated physical risk in the Due Diligence (DD) process for future acquisitions.
Chronic Medium Risk	Long-term, persistent impacts of climate change on an organisation’s assets, operations, and supply chains.	Extreme weather and rising temperature lead to higher cost of refurbishments and expense of up-front countermeasures and property insurance premium.

³ Transition risks arise from the process of shifts towards a low-carbon economy, and can include regulatory changes, disruptive technological developments, and shifts in consumer and investor preferences.
⁴ Physical risks arise from the impact of weather events and long-term or widespread environmental changes and can include increased severity of extreme weather events such as floods, and rising mean temperatures, sea levels, and weather patterns.