Demands for ESG property advisory are complex and rising fast | Commercial
Property investors and corporates alike are under huge pressures to prove their ESG credentials and that they are on a net zero trajectory. Tenants need their buildings to perform to the highest possible environmental standards to meet demands from clients, staff and community.
And both want to qualify for sustainability linked loans that come with lower costs, something that’s keenly sought with today’s high interest rates.
For each of these goals clients need highly informed professional advisors and strong verifiable data to prove their environmental, sustainability and governance or ESG performance. Much of this comes through rating tools such as Green Star, NABERS and WELL.
This means clients need highly qualified and experienced advisors who can step them through what’s often unknown territory and guide them on how to improve their performance.
According to Natasha Mulcahy who is Pacific Director ESG at CBRE and her fellow Director Shane Blight, who have a combined 40 years’ of experience in ESG and property, there are a lot of ESG requirements impacting clients, that they need to be across.
The team’s top advisors also need to understand where the industry is moving so they sit on industry committees that design the tools and plan for their future evolution.
At the top of this agenda for most clients now, says Mulcahy is how to move to net zero buildings and align with global net zero goals.
Companies like GPT or Dexus all have their plans in place, capex (capital expenditure) allocated and dates they need to adhere to.
A big driver for the industry is the new Green Star Performance V2 tool that’s pushing out many of the goals and ambitions, creating some big challenges for property owners and managers.
The transformation in the industry is huge and there’s a big demand from clients to understand what’s happening, Mulcahy says.
“They want to know how to transition to net zero and move from the older form of Green Star Performance to V2 and they want to understand their minimum expectations around that.”
As part of the transition they need a to set a target date for when they’re decarbonising their assets and portfolio.
“It‘s stepping out a timeline for when you’ll be purchasing renewable energy for your assets. At what point will you be electrifying your buildings?”
And some are coming off a low base. Their ultimate investors don’t much care about how low the base is – even if it’s just a two star NABERS energy rating – she says. What they want to see is the pathway for improvement.
For many asset owners, this is a “very new experience to be thinking about.”
Industrial property owners can now take part
According to Blight, the Green Star Performance tool is also making it much easier for industrial asset owners to become part of the Green Star program.
One of the reasons for that is asset owners can get into the program without having to access their tenants’ electricity data to begin with. Which has been a big stumbling block for Green Star in the past.
“V2 makes it a lot easier. So we’re seeing a lot of demand from industrial property owners and they want to be part of it.”
Sustainability linked loans are an attraction
Industrial property investors – as with commercial investors – are also very keen on improving their GRESB sustainability benchmark ratings, Blight says.
“It gives them access to sustainability linked loans, which offer cheaper interest rates.
“It can save them hundreds of thousands of dollars.”
ESG certifications and ratings are an increasing requirement for those sustainability linked loans, chips in Mulcahy. Investors ask, “how do we achieve a cheaper interest rate; can we hit these ESG targets?
“it’s a big driver. The reward is really substantial versus the investment.”
Then there’s the “S” in ESG
Green Star Performance v2 also casts a bigger spotlight on the “s” in ESG, Mulcahy says.
“There’s a much bigger focus on places and people. It looks at buildings in a more holistic manner, not just in isolation but whether it adds real value to the surrounding community and users.”
Going all electric
A part of achieving net zero is the opportunity to fully electrify buildings so this too is another – quite complex – part of the ESG solution that the team has needed to master.
The process might be relatively straight forward for new buildings, but it’s sometimes very difficult for older buildings.
Blight says owners need a lot of support when it comes to the big switch they want to make.
“The first step in the process, if we’re looking at gas is to first optimise the existing systems to reduce demand and the size of plant and equipment required”.
“At that point, there are other variables to consider, such as spatial requirements for the replacement heat pumps, which are larger than gas boilers, and the existing electrical capacity of the building to support the transition. This will also have a large cost impact on an electrification project.”
The Fifth Estate’s Festival of Electric Ideas masterclass series, in part supported by CBRE, unearthed challenges and some of the solutions such as part electrification at lower cost but big savings on emissions.
A proxy for due diligence
Another interesting trend is that Green Star, NABERS and other sustainability ratings are increasingly used by investors as a quick way to evaluate an asset’s quality.
Blight, who does a lot of due diligence work for clients says ESG assessments are now “absolutely” part of the due diligence process.
“Basically, this is an assessment of the current performance of the building, how it measures up against a client’s internal targets, and then what opportunities are available to enhance building performance to meet those targets, and the associated costs involved. This may relate to certain NABERS ratings or ability to achieve net zero carbon, or it might be around Green Star performance.”
The picture also includes climate risk impacts such as heat stress, or high intensity rainfall events, flooding “all those climate risks” and the cost of adapting to future climate stresses.
In other words all the factors that can impact on the purchase price assessment of a property and the implications around property insurance.
