Financial analysts may well be the dinosaurs of a sustainable world. They are holding back the global drive for more sustainable practices by failing to factor in sustainability issues when valuing companies. As a result, there is a serious mispricing of companies and the buildings they occupy.
For this to change, companies must find a way to push sustainability onto the analysts’ agenda.
These were some of the strongest messages to emerge from the Green Cities 09 conference.
Held in Brisbane in early March, the Green Cities conference was jointly organised by the Green Building Council of Australia and The Property Council of Australia and brought together a vast range of property professionals and sustainability experts.
Amanda McCluskey, head of sustainability & responsible investment, Colonial First State Global Asset Management, told attendees at the conference that unless the investment sector changed some of its traditional reward systems and ways of thinking sustainability would be held back.
“People are traditionally driven by a desire to make money and the reward system for analysts does not scope for looking at sustainability. A lot of valuation is really based on whether the analysts think the CFO is a good bloke. There is an incentive problem down the supply chain,” said McCluskey.
The session, chaired by Siobhan Toohill, general manager, corporate responsibility and sustainability for Stockland heard that companies are not doing enough to change the situation either; while analysts are not asking about sustainability, companies are also not pushing it in front of them.
“There is a massive opportunity for listed companies,” said McCluskey. CFOs need to have a good story to tell and action on sustainability is a good story. It will drive stronger share price.”
Nick Edgerton, analyst with AMP Capital Investors, one of the few investment houses to factor sustainability into its valuations, agreed. There was an opportunity for the property industry to raise awareness with analysts, he said
“The property industry needs to go to investment companies and get them to understand the value of sustainability.
“Property CEOs don’t focus on sustainability when reporting – they say analysts are not asking the question. Mining companies are more likely to focus on sustainability.”
According to Edgerton, to achieve a longer term vision of company value the incentive system for analysts must change. He pointed out that unlike most investment companies, where analysts are rewarded on a one to three month basis, AMP Capital rewards its analysts on a three year basis.
Mispricing of green buildings
The mixed messages around sustainability are now impacting on the green building market. The result is inconsistent pricing across different markets.
According to Marcia Bowden, national leasing manager, United Services Group, it is now cheaper in Brisbane and Perth to lease a green building than a B grade building.
In Canberra, where there is a lot of vacancy and a strong focus on sustainability, buildings with anything lower than a 4.5 NABERS energy rating face vacancy.
Adam Murchie, funds manager with Drapac, which has a strong emphasis on sustainable property investment, said it was important to find a new way to describe sustainable buildings so that there was less emphasis on environmental factors.
“The driver in a sustainable fund is not environmental. Green is one component of a very broad piece that includes social and governance – staff retention and productivity are very important.”
The cost to a company of not having a sustainable building should be highlighted, particularly considering that the building it occupies accounts for 7-10 per cent of a company’s costs.
“Putting a cost on a building’s performance makes sense financially, said Murchie.
“Right now, today, a premium is not being paid for green buildings but in the long term it is a form of risk reduction and a premium will be put on it.
“In five to 10years we’ll look back and say something was very wrong in the market that green buildings were going so cheap. It is a fundamental mispricing.”
Building owners also needed to consider the very real risk of their tenants being poached if they didn’t have a green building, particularly with the cheap rents currently being paid for six star buildings.
There was also far too much focus on numbers and too little understanding of the long term and very real positive effects on a business of moving into a well designed sustainable building.
“Analysts do not rely enough on gut instincts and common sense. There is far too much focus on numbers,” said Murchie.
Survival is not about strength, it is about flexibility (apologies to Charles Darwin)
Francis Grey, head of Australian research, Sustainable Asset Management Australia (SAM), said the occupation of a sustainable building is part of company’s risk management strategy.
“Looking down the track climate change acceleration has been understated as has the growth (across the board) in countries such as China and India. The implications for Australia are enormous.
“The question to ask companies is how are they placed for these future changes. We delight in asking questions that very few people can answer because we are looking for leaders,” said Grey.
The implications of not factoring in climate change as part of a risk strategy, said Grey, was glaringly apparent in the recent heat wave that hit Melbourne and Victoria, exposing the Victorian government’s lack of preparation.
“The Victorian government showed that an ability to cope with change is paramount.
“When Melbourne had three days over 43 degrees the transport system stopped working. Then when it hit 46 degrees things got even worse – trees were dying, power was failing, the impact of people trying to get around the city was obvious.
“Adaptation to climate change is already here as an issue in Melbourne. It is not in the future any more – it is here.”