Australia’s “big six” ESG themes

In the world of real estate, one might be forgiven for feeling that the conversation has become increasing cluttered with acronyms, issues, frameworks and competing priorities. The following is a summary of the six big themes that we have identified for Australian investors in the next 12 months. We have referenced the predictions made by Knight Frank’s UK Head of ESG Research, Flora Harley, and how they are playing out in the Australian market. Although the issues that make the top six are subject to debate, one thing is true – 2024 will be described by the phrase “action replaces ambition”.

Buildings need to be optimised for operational net zero

Our team has seen interest in investors at all levels and especially amongst owners of secondary grade assets to decarbonise their portfolios including via electrification. As regulation, mandatory reporting, changing stakeholder (capital, occupier and employee) expectations become further embedded in the sector, we are seeing investors across all grades now actively tackling programmes to reduce the operational carbon emissions of their portfolios. Demand for decarbonisation pathways and general sustainability reviews is growing strongly as 2030 - a popular Net Zero target date amongst property managers and investors - is only 66 months away. In a highly competitive construction and building labour market, the industry has legitimate concerns about being able to access the design and construction skills, materials and trades necessary to effect these upgrades (as well as managing their associated costs).

Data has entered the chat

Although this theme was not expressly listed in our UK team’s predictions, data makes the Australian list for this reason: a recent snap poll of Knight Frank’s clients identified that access to quality data was the biggest challenge to achieving a net zero portfolio (65%). The Federal Government has recently delayed the introduction of Mandatory Sustainability Reporting by six months to commence in January 2025 and we have felt a collective sigh of relief across our client base who are grappling with the issue of data collection and capacity to deal with reporting and are using the time extension wisely to get prepared. Our team has itself recently launched its ESG data management and reporting solution to assist in the monitoring, management and reporting of ESG energy, waste and water data.

Nature has (also) entered the chat

The topic of nature-related risks and biodiversity was also a real focus at GBCA’s Transform Conference and we predict momentum in this area, reflecting nature’s incredible role in combatting climate change. However, the Federal Government last month signalled its openness to compromise on nature safeguards in its budget, prompting The Australian Land Conservation Alliance (ALCA) to state that “the accelerating loss of our unique biodiversity and ecosystems will also have far-reaching consequences for the economy and society unless urgently addressed”. In the meantime, investors with the means and motivation are actively building nature roadmaps for their organisation. The GPT Group is looking carefully at nature withdrawals and investments in nature to create a “Net Positive” nature outcome. These considerations are site-specific but also extend into the procurement/supply chain and considering how the organisation’s suppliers and purchases impact nature.

The lion’s share of emissions is expected to shift to embodied carbon from 2035*

Embodied carbon was a key subject at this year’s GBCA Transform conference and is fast becoming a reality with the introduction of NABERS Embodied Carbon tool (expected in mid-2024) and the NSW Government’s Sustainable Buildings SEPP (introduced in October 2023). Owners, developers and occupiers are now grappling with measuring, designing and sourcing low-embodied carbon fitouts, refurbishments and buildings – at a time when reduction of operational carbon is an increasing priority in the sector (see Theme 1 above). Returning resources to re-use with a circular economy approach is also part of the hard but necessary work required to conserve resources in our resource-hungry industry. New skills and talent in this area will be required to tackle circular and sustainable design and demolition. Our UK team calls this a “retrofit revolution” and can report that 58% of investors they surveyed were targeting poor ESG-performing assets in order to upgrade, recognising a growing market distinction between “the best” and “the rest”.

Climate resilience

Insurance premiums are predicted to rise in 2024 and beyond as climate-related natural disasters and weather events continue in Australia. Eighteen months ago, a climate risk assessment conducted by our team for an institutional owner flagged an office basement flooding risk which unfortunately eventuated during a major rain event. By 2060 costs [of natural disasters in Australia will] reach $94 billion, representing a 29% increase relative to the low emissions scenario. Over the next 40 years the different trajectories will lead to a $125 billion difference in cumulative cost in present value. Even if a low emission scenario is achieved, the cost of natural disasters is forecast to be $1.2 trillion in cumulative costs over the next forty years**. In addition, "flooding is one of the costliest extreme weather events in Australia and, right now, there are around 230,000 properties in Australia that face a one-in-20, or 5 per cent, risk of a catastrophic flood each year***. We see physical climate risk assessments as essential to inform owners about their climate risk and as an input ahead of any strategic upgrades/capital spend.

The built environment plays a pivotal role in the health and wellbeing agenda

Despite the continued impetus and urgency associated with energy efficiency and environmental factors, wellbeing and the 'S' aspects are gaining prominence in the minds of investors, operators, and occupiers. The February launch of the GBCA and Hassell’s Social Value in the Built Environment report signalled the industry’s commitment to setting, measuring and managing the social impact of the built environment but it is apparent that Australia still has some way to go when compared to its UK and European counterparts. Over recent years, great progress has been made in defining targets for Australia’s built environment sector to achieve net-zero emissions, demonstrate climate resilience and create positive environmental impact. The momentum is now building to establish an equally robust, industry-wide framework around the social impact of our work. There is much to learn from global best practice but an industry-wide, local framework is only still in development. Our team is increasingly being asked to support owners in the assessment and creation of social strategies for their assets.

*UKGBC
**The Business Roundtable, in partnership with Deloitte Access Economics, 2021
*** Insurance Council of Australia (ICA)

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