Sustainability increasingly became a focus for both investment managers and institutional investors in the early 2000’s. The 1999 launch of what is now the National Australian Built Environment Rating System (NABERS) and the Green Building Council of Australia in 2002 are two examples of this focus.
When the US sub-prime crisis hit in August 2007, with the full impact following from 2008, we saw sustainability issues fall down the list of primary concerns for investors, managers and tenants.
Why was this? Sustainability improvements in real assets were generally perceived to come at a cost and therefore a hit to performance. Few, if any, investors and managers were prepared to accept a hit to short-term performance unless return on investment was high and certain. In fact, many changes to improve energy efficiency in real assets had a good return on investment. There were and still are a lot of savings to be made in building operations that can significantly reduce energy use, but without a strong business case and high return on investment it was hard to get support for making a difference.
At EG, we’re believers in the principle that sustainability initiatives and energy efficiency can add rather than detract from investment returns. In 2016, we launched a fund to acquire energy inefficient offices with a commitment to reposition them to high efficiency with low-cost capital works while outperforming office market returns. As an example of the scepticism around sustainability initiatives at the time, when we were first marketing our fund, one potential institutional investor pushed the pitchbook back across the table saying, ‘I won’t waste my members money on anything Green’. While that surprised us, at that time there was robust public debate about the science behind climate change and the cost of change, resulting, at least in part, in a change of Prime Ministers on more than one occasion.
What has changed from 2008 to now and why am I confident that the commitment to sustainability is here to stay?
Earlier predictions of the environmental impact have largely eventuated. While debate about the science continues from time to time, there is now mainstream popular acceptance of concern about the climate and what we need to do to minimise further impact. Denial has been pushed to the fringes.
Institutional investors have noticed where popular support now sits. Investment managers have noticed. Corporate tenants have noticed. There is less doubt and more certainty and finally there is a strong and general will for change.
But can this momentum be sustained through a post COVID-19 recession?
Professor Ross Garnaut wrote his book ‘Superpower – Australia’s Low Carbon Opportunity’ in late 2019. In part, his book provides the latest update on his work for the Australian Government in the Garnaut Climate Change Review of September 2008 and May 2011. In Superpower, he notes that the 2008 estimations of future detrimental environmental impact are proving to be correct, but that he overestimated the cost of meeting the reduction targets. Reducing carbon in our environment and moving to a decarbonised economy is increasingly possible as the cost of energy from renewables (wind, solar etc) falls below the cost of coal-fired power generation. The cost of energy storage to manage intermittency is also falling and equally important is that, in a low-interest rate environment, acceptable returns on investment are far easier to achieve.
There is still much to be done to improve energy efficiency and reduce greenhouse gas emissions from our built environment, but unlike the post GFC era, this can now be done without a detrimental impact on investment returns. Far more has yet to be done to improve equality and social issues, but I feel optimistic that the will is now strong to see progress on these challenges too.
The post COVID-19 era is still in the future, but I am confident that when it arrives, investment in sustainability and social initiatives will be central to real estate investment decisions.