Leaky warehouses and energy-sucking factories might seem a big challenge to turn green. Not so, says the Dexus subsidiary that just took its workplace and real estate portfolio carbon neutral, but a lot depends on the fund manager.
APN’s Industria REIT (real estate investment trust), which manages 39 properties across Australia, has achieved carbon neutral certification in its own operations as well as a $1.1 billion property portfolio of mostly industrial workspaces.
Dexus, which manages $42.5 billion worth of property in Australia, officially acquired APN last month for $320 million.
Industria fund manager, Alex Abell told The Fifth Estate that going carbon neutral across the industrial assets was not as challenging as it may seem — but added that overall, Australia’s current systems largely relied on property owners choosing to do the right thing by the environment.
While you might expect warehouses to be energy efficiency nightmares, Abell explained that depending on their function, many actually use small amounts of energy. Most are not conditioned throughout and in many cases, tenant’s heaviest energy usage falls outside the Scope 1 and 2 emissions profile of landlords.
“A lot of the energy that’s used within warehouses is coming from a small office component, which often sits with the warehouse, as well as forklifts,” Abell said.
Industria’s initiative of adding solar power to many of their properties did end up having an impact on the manufacturing emissions of their tenants, despite having no net benefit for them in terms of achieving carbon neutrality with Climate Active.
Over the past four years, around $2.5 million of investment in on-site solar, totalling around 2.5 Megawatts, has saved an estimated 2.4 million kilograms of carbon dioxide emissions entering the atmosphere.
“It was a meaningful capital outlay, but we took a view that we needed to do this because, first of all our investors will expect us to do this and second of all our tenants are really on the journey too,” Abell said.
“And frankly society expects us to do it as well. So we did it with those things in mind, and also we are generating an economic return on it now, which helps our numbers.”
As well as solar, other initiatives to reduce energy usage were installing LED lighting and replacing older air conditioners, some of which used Ozone depleting R22 refrigerants. They also worked with tenants to improve waste outcomes.
“We’ve been very hands on, and it’s literally ‘ground up’, our property managers talking with our tenants, particularly in buildings where we’ve got a lot of small tenants and educating them on what we’re doing and why we’re doing it,” Abell said.
Solar a great option, but not without hurdles
The solar panels installed by Industria now generate roughly double the power actually being used across the workspaces, allowing the company to create its own Large-scale Generation Certificates (LGCs).
“We’re generating our own [carbon credits] and we’re also buying others, which supports some projects that wouldn’t necessarily get up otherwise,” Abell said.
“I know it can be a bit of a challenging topic for some people around buying offsets but the way I look at it is we’re effectively taxing ourselves for our emissions footprint that we can’t otherwise offset.”
The company sells the power it generates to its tenants, including to a manufacturer of double-glazed windows in Knoxfield, Melbourne, which prior to the installation of PV panels on its roof was paying more for the annual energy bill than it was on rent.
As part of a lease agreement with the company, the fund installed a 640 kilowatt solar system, reducing its energy bills by around 16 per cent and greatly cutting reliance on the grid.
“That’s probably a really good example of us achieving a win-win outcome, but it’s very bespoke, it’s a conversations you’ve got to be having with your tenants and it’s from the ground up,” Abell said.
The danger of “backseat landlords”
While it may seem like a no brainer for industrial sector landlords to be working with tenants to reap the benefits of solar power, according to Abell it can be easy for some properties to fall through the cracks.
“The challenge with a lot of industrial warehouses is lots of them are just one tenant, and that tenant might have a 10 year lease. So if you’re a kind of backseat landlord, you may not particularly care too much about the emissions that tenant spews into the atmosphere or what their energy use is,” Abell explained.
“The way that I look at it is, ultimately energy is a cost of operation. And if you can help reduce the tenant’s cost of operation, the prospects of them staying in your shed are much higher therefore the costs of your downtime are much lower.”
“There’s kind of that real win-win. But you do have to be proactive about it and that’s the challenge.”
Another blindspot of the system is the difference between emissions types. For instance, the energy used by the double-glazed window manufacturer at the Knoxfield warehouse would come under its Scope 3 emissions, as so is not included in the fund’s carbon neutral profile.
“Because it sits outside operational control, it’s technically not part of our emissions footprint.”
However, helping energy intensive operations cut down on their emissions is an area that can actually have a major impact on the environment, which led the fund to pursue the solar option regardless of the benefit to their Climate Active emissions profile.
“In terms of Climate Active, because it’s carved out of our operational control we don’t actually get a net benefit for putting that huge system on the roof,” Abell said.
“So it’s an area where it’s important that as a business you’re making decisions that are right for the environment in totality, as opposed to just ticking a box with Climate Active.”
Dealing with Scope 3 emissions and the dilemma they create for companies and investors seeking a green profile could have the potential to create unforeseen and “perverse” outcomes, Abell says.
“If I was exclusively focused on ticking a number of certification boxes, I wouldn’t even buy a warehouse that was occupied by a manufacturing facility that uses a heap of power, because it goes against everything that I’m trying to achieve in being a squeaky clean, green fund,” he said.
“But by buying that warehouse and by reducing their emissions footprint, I’m actually making a material difference to the environment.”
“It’s an easy win to go buy a brand new Green Star warehouse that kind of ticks all those green boxes. Whereas in reality, you’re probably going to have a greater environmental impact by buying a warehouse where you can significantly reduce emissions to start with, and you’re keeping all of that embedded carbon in the existing warehouse.”
The Industria fund is a trailblazer in terms of achieving carbon neutrality, with Dexus publicly committed to achieving net zero across the rest of its property portfolio by June 30, 2022.