The thing about climate catastrophes – floods, fire, famine and the like – is that you can’t argue with them. You can’t politick them out of existence via a language cleanse, you can’t even properly pay for them.
If you have assets hit by them, there they will be on the balance sheet, in scary red text – or even a big blank zero.
Like a hotel sitting on a beach in Thailand or almost anything in the Maldives. Or a Brisbane office building with plant and equipment on the ground floor, if the address is anywhere inside the biblical flood zones, marked out by the actual modern floods.
Because the pain being felt by people in Australia’s recent mammoth floods is the same pain that’s afflicting the investment, finance and insurance world.
It’s what makes asset owners’ blood run cold. That’s the underlying driver, but the erosion of value happens much earlier.
Ali Ingram, head of capital markets, sustainability, for JLL, told a salutary tale at our Show Me the Green Money forum on Tuesday about her recent time in the UK, where she’s spent a good chunk of her recent 16 years abroad working in real estate capital markets.
It concerned a huge office property set to sell for a cool $1.2 billion, which was found at the last hurdle to include a gas boiler. The deal came close to collapsing. No negotiation, no excuses. End of story.
When institutional buyers commit to such assets, the assets are considered core and the commitment is for 10 years or more, she explained.
In this case, some quick manoeuvring brought the deal back online. It involved a capex (the capital expenditure clause to get rid of the gas boiler and electrify the building.
But not before the news ricocheted around the markets and left the indelible imprint of evidence, not theory.
“When this started happening, it was massive”, Ingram said.
“We can talk as much as we want about electrification and the value of sustainability, but when it starts to impact your exit value, and you’re trying to sell a building, and you have fewer buyers, or buyers asking questions when they’re in exclusivity, wanting to deduct capex, they might not even look at it. If it has a gas boiler, they might not even participate,” Ingram said
“It was truly fantastic when we started to see the impact on transactions, because that’s when the investment market woke up. It wasn’t just about achieving that green premium it was about retaining value.”
So while investors might be cleansing their language on green-related actions and ambitions thanks to the Trump agenda in the US, they’re not editing their actions, Ingram said.
You can swap out words such as ESG, energy efficiency and even DEI (diversity, equity and inclusion) but the programs will live on. (Maybe undercover like sleeper agents, waiting for the sunlight to come again.)
Ingram said there was no end of attention-seeking sustainability metrics that demand to be met – and in Australia now reported on – but topping them all was material climate risk from climate catastrophes.
In a way it’s this threat that is increasingly making its way through the entire economy.
In his opening scene-setting presentation, Committee for Sydney head of policy Jeremy Gill said the definition of green business was shifting and expanding at scale.
Most businesses would probably argue that they are in the business of the green economy, he said.
“This isn’t just about organisations that build renewable energy or global batteries; there are supply chain, professional services, and R&D elements that feed green industries. I think that conversation about how broad the green economy is still to come.”
The underlying drivers are global and they will inexorably shift Australia’s trajectory from its past traditional reliance on things like coal towards a new cleaner future. When clients such as Japan who currently buy roughly half of NSW’s coal signal they’re decarbonising, that’s inevitable.
And Australia is decarbonising itself.
A huge part of the emerging green economic boom will be buildings and the part they play in this process, said Frankie Muskovic, policy director for the Property Council of Australia.
These were incredible times, she said, referring to the recent federal election that had decisively rejected the coalition’s agenda against decarbonisation, sustainability and in favour of a more Trumpian agenda, and had instead chosen stability and serious climate action.
“We’re not going to have an opportunity like this for bold, decisive action, probably like in the next 10 to 20, years,” she opened in her address.
This was “an extraordinary election result. It’d be very surprising to think that the coalition would be in a competitive position to form government in three years’ time. So realistically, you’re looking at six years. That’s an incredible mandate with which to put in place the next suite of really bold reforms that we need to meet climate targets.”
The Climate Change Authority, headed by Matt Kean who spoke at our first leaders forum in March, will soon advise the government on what the 2035 net zero target needs to be. Australia’s pitch to host COP31 next year will add fire to those ambitions, Muskovic said.
This is an opportunity to “seize some of the competitive advantages” that Jeremy Gill had outlined, Muskovic said.
“This is particularly exciting for those of us working in the building sector. We have the necessary technology and are ready to advance. What we need is large-scale deployment and a substantial upskilling and expansion of the workforce to deliver these changes.
“This means millions of upgrades to poorly performing older homes across the country, focusing on insulation, draft proofing, and full electrification.”
We’ll need to improve commercial building stock too, (which is still by and large very poorly performing out of the premium and A-league buildings.)
It’s a “massive undertaking,” she said.
Are we ready?
Not quite.
It will take time to build up.
An imminent move was to expand the remit of NABERS and the CBD disclosure program from office buildings to other sectors – in the end most sectors.
But each had its own pattern, challenges and needs, Muskovic cautioned. We needed to understand that the trajectory would not be uniform.
In the residential sector, judging by the address from Richard Smith director at quantity surveyors MBM, there was immense frustration and impatience.
“We are still working on assumptions and processes that are relics from an ancient past,” in fact, Roman times, Smith quipped.
“It seems preposterous to me that we still stand on scaffolding in the rain and construct buildings when my car can park itself, which is ludicrous. We haven’t moved on at all, which is shameful.”
Costs, of course, have underpinned the profile of housing and the building and construction across most sectors.
“Right now, post-COVID, my job is probably the most challenging it has ever been,” he said.
But the cost escalations were not uniform.
“We see escalation in costs, but these are aggregations of many different factors. Every sector, be it commercial fitout, or train station building, has its own underlying data. Commercial fitout, for instance, has not escalated at the same rate as residential construction. Some regions show different escalation rates because there isn’t as much work there, so builders might take a different profile on margin and prelims because they specialise and need to fill order books.”
We should be building at half the current costs, he said. “Everything else has gone down in price – TVs, laptops, everything. Yet building costs have doubled because every building is bespoke.”
Modern Methods of Construction (MMC), or offsite construction, offered solutions and disruption, he said, but the waves were emanating not from the industry but from outsiders such as financiers and technology experts.
This was starting to impact on his business.
Most recently has been a project where Infrastructure NSW canvassed building all its facilities out of prefabricated materials.
“We used to have five or six jobs in the office doing this; now we probably have 50 or 60 who are all pursuing MMC as an option.”
Jeremy Gill said none of this was news to people “who live and breathe it…there were factors now driving responses at both domestic and international levels, and the ways we are responding domestically are really starting to shape economic policy.
“Climate change, and net-zero in particular, in relation to green industries, is a major driver of decarbonisation efforts and the associated growth of green industries.”
It was time now for Australia to consider its future and not rest on its laurels.
This would centre on industry policy, mostly through the Future Made in Australia, and that, he said, was a future made in cities.
Not just Sydney but all of Australia’s cities.
What we need now is a planned, coordinated national approach.