TFE Special Report – 17 October 2010 – Not so long ago sustainable investment was very much a fringe term in investment circles. These days the tools and schemes for proving a business’s sustainable credentials are many and varied. But just how applicable are these to property and do investors really take them into account?
The short answer to this, based on the opinions of industry players who spoke to The Fifth Estate for this story, is a definite yes. The long answer is more complicated, mainly because the industry is in rapid transition and data linking environmental, social and governance, or ESG, factors with property values has not yet caught up with the anecdotal evidence.
It seems that most brokers, analysts and valuers are still working to old paradigms, while investors and property owners are operating in a world where energy efficiency, carbon emissions and water use all matter to the bottom line. Schemes and indices to measure these things are increasingly relevant to their business.
So what are the main sustainability measurement schemes out there and just what do they mean? We took a look at them and the relevance they have to both sides of the industry – property owners and investors.
There are a number of international schemes that measure sustainable practices, many of which Australian property companies are signed up to. These include:
Dow Jones Sustainability Index (DJSI) – these global indexes provide asset managers with benchmarks to manage sustainability portfolios. To participate companies must fill out a comprehensive questionnaire from Sustainable Asset Management (SAM) and are then ranked according to the information they provide. GPT is currently ranked number one out of the 21 global real estate companies on the index. Other Australian property organisations on the index include Mirvac, Stockland, Lend Lease, Dexus Property Group, CFS Retail Property Trust and Commonwealth Office Property Fund.
FTSE4Good – this series measures the performance of companies that meet globally recognised corporate responsibility standards to facilitate investment in them. It focuses primarily on the creation of responsible investment products.
United Nations Principles of Responsible Investment (UNPRI) – a set of principles that provide a framework for investment professionals when considering the environmental, social and corporate governance (ESG) issues that can affect the performance of investment portfolios.
United Nations Environment Programme Finance Initiative (UNEP FI) – the UNEP FI (and its property working group) has focused on socially responsible investment. It recently produced a set of case studies on responsible property investing divided into 10 elements:
- energy conservation
- environmental protection
- voluntary certifications
- public transport oriented developments
- urban revitalisation and adaptability
- health and safety
- worker well being
- corporate citizenship
- social equity and community development
- local citizenship
UNEP Sustainable Building and Construction Initiative (UNEP SBCI) – a new item in the SBCI business plan is to “develop global benchmarks for sustainable buildings and construction.”
Gobal Reporting Initiative (GRI) – The GRI provides a framework for sustainability reporting. A supplement for property is currently being developed and is targeted for release by mid 2011. UNEP is on the working group for this, as is Lend Lease.
Carbon Disclosure Project – the CDP is a database set up by an independent not-for-profit organisation through which 3000 organisations in some 60 countries measure and disclose their greenhouse gas emissions and climate change strategies. This data is available to institutional investors, corporations, policymakers and their advisors, public sector organisations, government bodies, academics and the public.
In addition to these global programs there are schemes specific to Australia:
NGERS – The National Greenhouse and Energy Reporting Act 2007 (the NGER Act) introduced a national framework for the reporting and dissemination of information about the greenhouse gas emissions, greenhouse gas projects, and energy use and production of corporations who reach specified emissions thresholds.
Green Star ratings – the Green Building Council of Australia’s Green Star tool ranks commercial buildings according to key sustainability criteria.
NABERS (National Australian Built Environment Rating System) – a performance-based rating system for existing buildings that rates a building on the basis of its measured operational impacts, such as energy and water use.
So what do investors think?
So far there has been a lack of hard data to prove that investors are prepared to pay more for green properties.
Two recent studies that attempted to provide this data include Doing Well By Doing Good, by Nils Kok and Piet Eichholtz of Maastricht University and John Quigley of the University of California, Berkley, and Citigroup’s Does “Green” Pay? led by Elaine Prior.
The US study, which collected data from the two US green ratings schemes, concluded that buildings with a “green rating” command rental rates roughly three percent higher per square foot than otherwise identical buildings and that premiums in effective rents were above six per cent. Selling prices of green buildings were higher by about 16 percent.
This project has been extended to Australian properties, with data currently being collected across the country. The project aims to compare Green Star, NABERS rated and non-rated office buildings with their rental rates and selling prices. Participants include the Green Building Council of Australia, NABERS, industry groups and investors such as superannuation funds.
The Citigroup study, which looked at five listed property companies, did not find conclusive evidence of a link between Australian property values and sustainability. Some who spoke to TFE for this story said they believed that the key reason for this was that property valuers were not factoring in sustainability as they should be.
One superannuation fund insider said that valuers were afraid of litigation when it came to adding value for sustainability but that litigation “may end up coming from the other direction” if sustainability continues to be ignored. Eventually pressure from investors such as superannuation funds would push values up.
Certainly super funds are demanding more information from the market. Last year major industry funds, HESTA, UniSuper and VicSuper, launched a new initiative to encourage and promote Australian research that takes into account the impact of environmental, social and governance (ESG) issues on investment returns.
Called ESG Research Australia the initiative involves a group of super funds and fund managers allocating a percentage of their brokerage to brokers that will undertake research on ESG. This essentially rewards brokers for focusing on sustainability and is designed to increase awareness of the importance of ESG to investment returns.
The group held its first awards this year with Citigroup voted the best broking firm for ESG research in 2009 and Andrew Gray from Goldman Sachs JBWere, winning the best individual piece of research for his paper Good ethics & culture = good investment returns.
According to a report from the group, judges of the awards wanted to see brokers be more brave and bold in their approach to ESG. Panel member David Paradice of Paradice Investment Management said:
“There is still a lot of work to do. We haven’t yet been able to put ESG into a share price and say ‘this is worth 20 cents per share’, but I think it will come. Goldman Sachs JBWere is at the forefront of building ESG into the share price, and the others are catching up.”
There has been progress though – when ESG Research Australia was launched last year there were only two brokers involved in ESG research, now there are eight. One of these, JP Morgan, recently launched its ESG Snapshot, which provides summaries of companies’ sustainability initiatives. Property companies have been included in these.
VicSuper uses Colonial First State Asset Management, Investa and Eureka Funds Mangement for its property investment. Areas of focus for the fund’s property investments include energy efficiency, waste reduction and water use. It has also begun to measure the carbon footprint of its property investments.
Similarly HESTA, which won Sustainable Super Fund of the Year in the 2009 Ethical Investor Australian Sustainability Awards, uses 14 different property managers for its property investments. The fund uses a “best of sector” approach to invest in companies that have demonstrated “superior environmental /sustainability practices within their industry sector relative to their peers.”
Pablo Berrutti, Manager – Responsible Investment and Sustainability, with Perpetual told TFE that Australian property trusts were still not good at disclosure.
“We don’t invest in direct property but in both listed and unlisted property trusts. Companies like Investa and Stockland are very good at disclosure but that is not true across the industry,” said Berrutti.
Perpetual also has mortgage funds which are targeted at the mid to lower end of the property sector. At this end, particularly in warehouses and factories that Perpetual lends to through these funds, Berrutti says there is little interest in green buildings.
He believes this will eventually change with greater government regulation requiring more sustainable buildings but he says it will take more than mandatory disclosure of energy efficiency to affect the lower end of the market. It would need legislation along the lines of the Greens’ proposed Energy Efficient Non-Residential Building Scheme Bill, which if introduced would regulate all types of commercial property, not just the top end.
Perpetual signed up to UNPRI last October and aims to apply socially responsible investment (SRI) principles across all its investments.
“We’re building our policy and investment framework and part of that is to feed in good quality research.”
However it doesn’t look at global indices such as DJSI as it is focused on the Australian market. The company uses research from SIRIS in Melbourne, Canberra based CARE and RepRISK, a web based research facility.
According to Berrutti, Perpetual is looking at creating a green mortgage fund in the next 12 months that would lend money to building owners for sustainable retrofits.
“Successful property companies such as Investa are showing that retrofitting existing buildings is where you get the best returns,” says Berrutti.
“Nobody is offering this at the moment and we think there’s a space for it.”
What property companies think
The importance of ratings and indices to various property companies varies.
Siobhan Toohill sustainability manager for Stockland says the global indices and surveys are important for benchmarking Stockland’s performance and the company participates widely in them.
“We need to know what investors and sustainability analysts expect of us. We don’t necessarily agree with all the measurements in all the different programs but we feed this into our sustainability strategy and report publicly on sustainability,” says Toohill.
Up to 50 people at Stockland are involved in contributing to responses for the Dow Jones Sustainability Index, with the bulk of the responses coming from the company’s sustainability report, which in turn is well supported by its annual report, says Toohill.
“The Dow Jones Index gives us a good idea of how we perform against ourselves year to year and against our peers as well as how we perform globally.”
And it is clear from the results that Australian property companies are performing very well indeed when it comes to sustainability.
In this year’s index of the 18 Australian listed companies on the index seven are real estate companies. Globally, the picture is even more interesting – in total there are only 21 global real estate companies on the list – seven are Australian, six are from the UK, two from the US, one from Hong Kong, two Singapore and the remaining three are European.
“Australian property companies are clearly doing something interesting. It’s pretty much an Australian and UK game. When you consider our size we are punching above our weight,” says Toohill.
Other indices such as the FTSE4Good are not as relevant to property and set minimum standards – “you’re either in or out,” says Toohill.
The Global Reporting Initiative provides a reporting framework. A property supplement is currently being developed and the Australian property sector is working with the Property Council to set reporting standards.
“We’ve jumped the gun on that together with the PCA to work out the material issues,” says Toohill.
Stockland has used the GRI guidelines in its reporting for some time and has produced sustainability reports for the past five years, all using GRI guidelines. The key, says Toohill, is to selective in how you apply the guidelines as they are very detailed.
“It’s critical to determine what’s material to stakeholders – that includes investors, employees, government, customers and the communities we impact. We do this through things like media monitoring and employee surveys and we focus on our priority areas in the reporting,” says Toohill.
Stockland is also involved in the Carbon Disclosure Project and UNPRI. What Siobhan Toohill would like to see is harmonisation across all the various schemes and surveys.
“If there was more commonality across the different reporting mechanisms and surveys it would streamline our reporting – we’d like to see more alignment.”
But is all of this benchmarking of sustainability relevant to investors?
Toohill believes it is. She points to recent research on the link between property value and sustainability such as the Nils Kok and Citigroup studies.
“All of these are adding weight to sustainability in investment. We are just beginning to see mainstream analysts and investors ask about our targets for sustainability. And with more investors now signed to the UNPRI [United Nations Principles for Responsible Investment] they have a responsibility to understand environmental performance.
“There is a growing awareness of climate risk.”
Caroline Noller, sustainability manager with Australand, and previously sustainability manager with GPT for many years, told TFE she believes the importance of indices such as the DJSI is growing.
Australand’s main shareholder, Singaporean REIT Capitaland, has maintained it position in the group of real estate leaders in the index for the past two years.
For leading property companies, being on the index is particularly important as it provides guidance to large investors that are signatories to the UNPRI as they can be sure all the necessary criteria has been met.
And with the weight of money in superannuation funds, ticking all the right boxes does make a difference to investment decisions.
“Elaine Prior’s report on NABERS highlighted the risk of not having ratings,” says Noller. “I think we’ll find the effect of mandatory disclosure [of energy efficiency in commercial buildings] will work in a similar way – people will ask why a building only has one star.”
And once disclosure embraces other buildings by 2015 the effect will be even greater as there will be plenty of information available.
Noller believes information on carbon emissions is also sought after with project like the Carbon Disclosure Project providing very useful information to investors.
She would like to see more clarity around NABERS and Green Star.
“There is still a lot of confusion out there over the difference between the different schemes. Having both NABERS Energy and NABERS Water has just added to that.
“In terms of frequency of questions from tenants we know they want star ratings but they aren’t always sure exactly what it means. It is now embedded in the supply chain and I can only imagine people’s sophistication will increase. And if we could get more clarity around star ratings it would help the industry.
“If the two systems [NABERS and Green Star] were combined that would be great. Questions are being asked by project managers about the cost effectiveness of some of the requirements in these schemes,” says Noller.
Craig Roussac, sustainability manager with Investa, agrees that too much focus on ratings and rankings can distract property companies from the main game.
Investa has not been able to participate in the Dow Jones Sustainability Index since it ceased being a publicly listed company when purchased by Morgan Stanley in 2007. Before that, says Roussac, it was top of both the financial services and real estate sectors in the list.
“We’ve turned not being on the list into a positive. Our sustainable platform has always been based on good business sense and we only do things that are directly related to our business.
“Transparency of our sustainability data is an important part of this which is why we launched the Green Buildings Alive tool (see our story on this). We were out there early putting in sub meters. Up until 2006 analysts were critical of Investa because we were too focused on sustainability. We had to prove it made good business sense,” says Roussac.
Going private was the most obvious proof of this, says Roussac as the company sold for such a large premium above net tangible assets.
As a private company it was also more possible to take the longer term view and not get caught up on ratings and rankings.
“You can take the portfolio much further when private. When a company is publicly traded it becomes very focused on share price,” says Roussac.
A danger in chasing indices such as the DJSI and star ratings for buildings was that companies lose the focus on their core business. For example, buying the right assets for its portfolio might get a company more points but it won’t necessarily be the most financially prudent thing to buy 6 Star buildings at a high premium.
“It is important to drill down into the real data,” says Roussac. “ You won’t necessarily get credit in such schemes for buying a whole lot of cheap buildings that aren’t sustainable. But it is more likely to be financially prudent to do so and then refit them to make them sustainable and to add value.”
“Once things start to be measured activities can start to drift towards it. You need a very robust decision-making framework and governance structure to make sure things aren’t done just for the purposes of ratings. They need to make good business sense.”
The same should apply to Green Star, says Roussac.
“People shouldn’t be designing just to get Green Star points. They should design a great building and then rate it afterwards. It should not be about trying to get the most points for the least money. In the end buildings will perform well because they’re designed well and have got a good building manager looking after them.”