Task Force on Climate-related Financial Disclosures (“TCFD”)

We are committed to implementing the relevant recommendations of the TCFD, providing our stakeholders and investors with insight into the key climate-related risks and opportunities that are relevant to our business, and how these are identified and managed. We report against the eleven recommendations of the TCFD in this year’s disclosures.
 

Governance

Our Chief Executive has overall responsibility for climate-related risks and opportunities. Day-to-day management of climate-related issues is carried out by our Sustainability Group and is co-chaired by two members of the Executive Management team (see sustainability governance section). The Group meets quarterly and is the forum for determining our sustainability strategy, reviewing performance, identifying emerging sustainability issues, and determining their materiality for reporting and escalation via the Group risk management process.

The Board has oversight of climate-related risk via the Group risk management process. The Board takes climate issues into consideration during the investment appraisal process where it scrutinises major investments including acquisition, development and refurbishment plans which may include climate-related aspects of design. Ongoing risk identification and management are through the relevant functional teams, for example through proposed or actual response to changes in regulation such as the Minimum Energy Efficiency Standards (“MEES”) in the UK.

Our commitment to address climate-related risks is embedded across the business, through a carbon intensity KPI. The performance against this KPI is linked to executive remuneration, aiming to incentivise progress against carbon emissions reduction targets. The Board reviews progress on carbon reduction alongside other strategic initiatives annually as part of the annual targets and remuneration cycle.
 

Risk management

The Sustainability Group is responsible for identifying general climate-related risks that are managed by the Board via our corporate risk management process (see the Audit Committee report for details of our approach to risk management). In addition, the Property function is responsible for identifying risks specific to new development projects as part of the investment appraisal process. The Sustainability Group has conducted workshops incorporating inputs from internal and external experts and climate model data to explore the relevance and potential financial impact of the six risk themes identified in the TCFD framework over the short (to 2030), medium (to 2050), and long (beyond 2050) term.

These themes remain under review, particularly the physical risks to the Group portfolio as we expand into new markets, climate models evolve, and governments and municipal authorities develop their own mitigation strategies.

The completed climate-related risk register is reviewed and approved by the Audit Committee during the financial year such that the significance of climate-related risks is considered in relation to risks identified in the standard risk management process. This ensures the management of climate-related risks is integrated into the Group’s overall risk management framework. The climate-related register is reviewed annually to incorporate ongoing refinement and quantification of risks and to ensure the register reflects any material changes in the operating environment and business strategy. Once identified, further details related to each key risk and opportunity, such as a quantification of the financial impact, the appropriate strategic response and cost of response and the variance of key risks in relation to climate-related scenarios, are developed where possible. These details help to determine the materiality of each risk and, alongside the impact assessment outlined above, this allows the Group to prioritise resources in managing the most material climate-related impacts, determine the best management response or highlight areas requiring further investigation.

An example of day-to-day management of risks would be the incorporation of mitigations for high exposure sites into construction designs before submission for planning approval.
 

Strategy

Our business is exposed to both risk and opportunity from climate change primarily as a consequence of owning and operating real estate assets in the UK and Western Europe. We seek to understand and mitigate the physical and financial risks that could be material to the business. Our analysis currently focuses on the UK which accounts for most of the Group property portfolio by value and floor area. These findings can likely be generalised for Northern European markets which will experience similar physical consequences.

Climate-related risks and opportunities are assessed over multiple time horizons because we expect that transitional risks are likely to be ‘front-loaded’ as the international community attempts to meet the goal of keeping warming to 1.5 degrees Celsius or below. Physical risks to our assets are likely to increase over time, particularly if the global economy does not decarbonise at the rate required to keep warming below the target level. Accordingly, we assess climate-related risks and opportunities over the short (to 2030), medium (to 2050) and long (beyond 2050) term. Risks were deemed to be low impact where the potential annual EBITDA impact is estimated to be below £100k, and high impact where either the potential EBITDA impact is greater than £150k, or a balance sheet (valuation) impact would exceed £20 million (1% of property valuation).

The assessment of resilience of the business, specifically the asset portfolio, was guided by a range of scenarios published by external agencies, such as the UK Met Office UKCP18, and looked at both physical and transitional risks under two climate warming scenarios: one within 1.5 to 2.0 degrees Celsius (RCP 2.6); and one up to 4.0 degrees Celsius (RCP 8.5).

Risk type	Description	Potential impact	Timeframe
Physical risks
Chronic	Physical disruption as a result of longer term shifts in climate patterns (e.g. sustained higher temperatures or rainfall) that may cause sea level rise or chronic heat waves	Low	Medium–long
Acute	Primarily flooding risks (Northern Europe markets) triggered by changes in frequency of extreme rainfall events (based on mm/day thresholds) which are projected to increase in all warming scenarios, especially in summer and late autumn. Costs that may be incurred for the few stores exposed include mitigation capex, operational disruption, physical repairs, clean-up, insurance premia increases, and reduced customer demand as a result of reputational damage	Medium	Medium–long
Transition risks
Policy and legal
Regulation relating to stricter environmental standards	Increased stringency of building and planning requirements in support of national net zero targets. Local authorities will seek to use planning systems to deliver progress against climate goals which will impact on build specification and associated costs. MEES standards also increasing for commercial lettings (office locations only) which will drive upgrade expenditure	Medium	Short
Climate change litigation	Claims brought by stakeholders (e.g. investors, public interest organisations) perhaps due to failure to mitigate impacts of climate change, failure to adapt, or the insufficiency of disclosure around material financial risks	Low	Medium
Reporting obligations	Additional reporting burden on carbon emissions, including Scope 3	Low	Short
Technology
Electric vehicles	To deliver net zero targets, electric vehicle use will increase and drive demand for charging point infrastructure for customers and colleagues. May be mandated by some local authorities as part of planning process. This will impact capital budgets for new builds and retrofits. However, this could also be a revenue opportunity in high traffic locations with an appropriate commercial arrangement	Low	Short
Market
Valuation of properties with lower efficiency rating	Risk of valuation impairment of assets with low efficiency ratings. Only heated areas of storage facilities are rated – these can usually be cost-effectively improved	Low	Medium
Supply chain resilience/ cost of materials	Risk to development costs due to demand versus supply of key materials such as insulation and cost of inputs which may incur carbon premium (steel and cement)	Medium	Short-medium
Cost and availability of capital	Risk of downgrading/cost premium as ESG considerations are incorporated into credit ratings and other lender/investor screening	Low	Short
Reputation
Stakeholder risk	Increasing public awareness of and appetite to tackle climate change could create reputational risk if there is failure to reduce operational and embodied carbon. This could manifest in delays to planning processes	Low	Short-medium
Employee risk	As colleagues become increasingly engaged with climate change issues, perceived failure to make progress on decarbonisation could impact talent recruitment and retention	Low	Short-medium

We expect some physical climate-related risks to have an impact on our business. Specifically, the impact of more frequent intense precipitation events is deemed as relevant in the medium to long term. We also expect the transition to a low carbon economy poses some limited financial risks in the short term as we respond to changes in regulation and incur costs associated with decarbonising our building development and operations. However, there may also be opportunities that arise from the transition as well as the physical impacts of extreme weather.

Regardless of the scenario we believe the Group and its assets have limited exposure and vulnerability to climate-related risk and accordingly there are limited implications for its strategy and financial plans in its current markets. The Group will therefore continue to grow its portfolio, assessing each investment for climate risk in addition to financial considerations and making necessary physical and financial allowances for mitigations where appropriate as it already does today. The Group will continue to work with local authorities and its development partners to ensure any new buildings and conversions are built to a high operating efficiency standard that meets current and likely future regulations and supports the Group’s effort to achieve net zero emissions from its operations.
 

Physical risks

The primary physical risk to our business relates to the increasing likelihood of extreme weather events (particularly intense precipitation and flooding). Based on current data, our insurer’s flood assessment at the last renewal indicates that 91% of the Safestore portfolio by floor area (90% by insured value) has little to no exposure to river/coastal flood risk (the chance of a flooding event occurring annually is less than 0.5%). This corresponds to just twelve current locations in the UK with an elevated risk. There is a slightly higher exposure to surface water flood risk - 71% of floor area and value is in stores with less than 0.5% Annual Exceedance Probability.
Research focused on the physical climate risk posed to Edinburgh’s World Heritage sites² using the most recent granular climate models confirms this projection of extreme rainfall events and demonstrates the elevated risks are in the autumn and summer seasons specifically. Spring and winter events are rarely projected to exceed any impact threshold out to 2080 even in the low mitigation (RCP 8.5) scenario. This pattern is expected to be similar across the UK. This research implies that the probability of these extreme events will rise in autumn by 5-10% by 2040 and by 20-40% by 2080. The summer season shows the largest change, especially towards the end of the century, with probability close to 50% higher for a 1-in-200 year event, i.e. despite overall summer drying trends in the future, increases in the intensity of summer rainfall events are projected. It should be noted, however, that projections for rare events have a high degree of uncertainty, especially in the outer years of a projection period.
 

Projections of low, medium, and high impact rainfall days in the UK per year under different warming scenarios¹

 

From prior experience, the main consequences of these intense precipitation events are clean-up, repairs and maintenance costs, and short term impact on asset availability (temporary closures preventing new move-ins). Costs are usually recovered from insurers so over time it is reasonable to expect insurance premia and flood-related excesses will increase if extreme events occur more frequently. There is also the longer term risk of lower occupancies in exposed stores – although customer goods are also insured to their declared value there is the possibility of a reputational impact. A reasonable assumption for the cost (P&L impact) of remediation after an extreme precipitation event is £100k per event regardless of the warming scenario.

It should be noted that where Safestore does invest in property in higher risk areas, risk mitigation measures are usually proactively deployed. As such, even in extreme weather scenarios the majority of the UK portfolio is not likely to be impacted from an ongoing operation, insurance risk premium or valuation basis. Mitigation measures (where deployed) should minimise disruption at higher risk sites and these locations may in fact experience increased demand from impacted local communities as they seek temporary storage for their belongings.
 

Transitional risks

Our primary transition risks are policy and regulatory changes which may increase building specifications in an effort to meet net zero objectives. Local authorities will continue to use planning processes to deliver against their own objectives and policies such as Minimum Energy Efficiency Standards (“MEES”) will impact landlords in the residential and commercial sectors. Requirements for new projects to meet more stringent energy efficiency standards and include features such as solar photovoltaic panels and electric vehicle charging facilities will add to the capital costs of new developments; however, these would represent a small portion (1–2%) of a new development project and would be likely be recovered through lower ongoing operating costs over the lifetime of the building. A related market risk of carbon taxes on core building materials such as steel could have a larger impact; however, where possible, Safestore will convert existing structures and is therefore less exposed to these increases in cost and embodied carbon.

To ensure relevant UK assets meet MEES minimum standards by 2030 an estimated capital investment of £650k will be required. To ensure readiness with MEES, we identified UK locations with offices that would fall under the new regulations. We have conducted energy efficiency assessments on these locations. At 31 October 2022, 38 relevant UK stores have been assessed with seven properties requiring improvements before 2027 and a further fourteen requiring action by 2030. Should any of our facilities with offices be unable to cost effectively meet MEES standards by 2030, we would likely convert the office spaces into storage which does not have the same requirement.
 

Opportunities

The transition to a low carbon economy is likely to present opportunities as well as risks. In general, businesses that build and operate sustainable facilities are well-positioned in a world where both local planning departments and end consumers are making decisions with climate change in mind. In addition, reducing the energy intensity of the business and reliance on gas is financially advantageous, particularly in an era of volatile energy prices. Removing gas-burning appliances from facilities also reduces associated fire and carbon monoxide exposure risk. However, it should be noted that the business is not an intensive user of energy (energy costs were 1.5% of revenue in FY2022) unlike other more intensive usage sectors, so the variability of power prices is not considered a significant risk. Nevertheless, it is likely that buildings with lower operating costs and carbon emissions intensity will attract a valuation premium and lower cost of funding. Sales of excess power generated from rooftop solar installations could over time become a revenue stream in addition to supporting decarbonisation in our communities and the wider economy.

Provision of electric vehicle charging facilities could deliver a customer benefit whilst also reducing associated Scope 1 (business travel) and Scope 3 emissions (customer travel to/from stores) and provide another ancillary revenue stream.

It should also be noted that well-positioned self storage facilities could be seen as adding ‘system resilience’ to supply chain disruptions and facilitating recovery post-extreme weather events via temporary storage of business or consumer goods.

Metrics and targets

To assess climate risk we internally record and monitor a range of construction and operational impact metrics such as development cost trends, unit availability (offline units) and damage claims relating to water damage. We also monitor and report our absolute and like-for-like energy consumption and greenhouse gas (“GHG”) emissions in line with the EPRA sBPR recommendations. In addition, we monitor our use of water, generation of waste including the proportion diverted to landfill and the emissions associated with business travel. These are disclosed in the Our Environment section. Supplementary data can be found on our corporate website. Scope 3 emissions which relate to ongoing operations (water, waste, electricity transmission and distribution and business travel) are measured and actively managed. Scope 3 relating to purchased goods, capital expenditure and downstream use of our products (primarily customer journeys to our stores) are not measured but we actively engage with our suppliers to ensure these are being considered, for example, through consolidation of deliveries to our stores or the proportion of recycled material used in development projects.

Through a range of energy efficiency initiatives and a switch to 100% renewable electricity, we have reduced our absolute carbon emissions versus 2013 baseline by 54%. This progress in absolute emissions reduction is despite a c.50% increase in portfolio floor space. As a result, emissions intensity is currently 70% below 2013 levels (calculated according to the location-based methodology) which is significantly ahead of the 2022 target of 58% below the 2013 baseline.

The self storage sector is not a significant consumer of energy when compared with other segments of the real estate landscape.

As a result, operational emissions intensity per unit of floor area tends to be far lower versus other real estate sectors. According to a 2021 report by KPMG and EPRA³, self storage generates the lowest greenhouse gas emissions intensity of all European real estate subsectors, with emissions per m2 less than 30% of the European listed real estate average.
Reflecting the considerable progress made on efficiency measures and waste reduction to date, Safestore’s emissions intensity (3.9 kg/m2) for that year is considerably lower (-32%) than the self storage subsector average.  

Strategy for operational net zero

We will achieve operational net zero by 2035, through:

a) Reducing and optimising what we use		b) Using only zero carbon energy
Completion of lighting efficiency programme (external signage and customer unit lighting) Voltage optimisation at selected sites Decommissioning of gas appliances Installation of building management Systems for remote monitoring and power management (business case dependent)		Installation of solar photovoltaic on new-build stores where viable Securing certificated green electricity through PPAs and/or ‘high quality’ tariffs Transition of company car fleet to PHEVs* and BEVs* and introducing charging points Retrofit of rooftop solar photovoltaic to selected stores (business case dependent)

Total investment of c.£3m spread until 2035

* PHEV = Plug-in Hybrid Electric Vehicles; BEV = Battery Electric Vehicles.

Note
1 – Hanlon, H.M., Bernie, D., Carigi, G. et al. Future changes to high impact weather in the UK. Climatic Change 166, 50 (2021). https://doi.org/10.1007/s10584-021-03100-5).
2 – Shane O’Neill, Simon F.B. Tett, Kate Donovan. Extreme rainfall risk and climate change impact assessment for Edinburgh World Heritage sites, Weather and Climate Extremes, Volume 38, 2022.
3 – KPMG/EPRA: Overview of real estate companies’ environmental performance, October 2021 (based on EPRA sBPR data sets for 88 listed companies).