Hosted by Amanda Steele, guests include Davina Rooney, Ruben Langbroek and Emma McMahon
Thursday 20 August 2020
AS:
Welcome to Talking Property with CBRE. A podcast in which our team of experts share their commercial real estate insights and industry leading perspectives. My name is Amanda Steele, I’m Executive Managing Director of Property Management for CBRE Pacific and I'm your host for today's episode.
In this two-part episode, we'll be talking about the future of sustainability, a topic that is very dear to me and many others throughout our industry. Over the coming weeks, I sit down with industry experts to discuss how Australia’s global leadership in sustainability can drive change in the future and why technology is one of the driving forces for this change. We will also cover off why responsible investment is good for business, how it can ensure digitisation in real estate happens sustainably and drive the green recovery. We will also touch on the impact of COVID-19 on key environmental sustainability measures such as NABERS ratings, energy prices and the climate change conversation.
In these episodes, I'm joined by some very special guests, including;
-
Davina Rooney, CEO of the Green Building Council of Australia
- Ruben Langbroek, Head of Asia Pacific GRESB, the Global Real Estate Sustainability Benchmark; and
- Emma McMahon, National Director of Sustainability at CBRE.
So to frame up the debate, there's been a lot of discussion recently around sustainability, and we've seen some very significant leaders in the corporate world and the government world talking about the importance of sustainability, now more than ever. We've also had some commentators say this is the end of sustainability - “We can't afford this”, “it's too expensive”, “we've got a lot going on”, “let's not focus on sustainability, Let's just get the economy going again”, and then there are those that see this is the great opportunity for a reset. So, spoiler alert - our panelists don't think this is the end of sustainability. I'm sure you're all shocked to hear that, but we're going to talk to them about why that's the case.
The environment we're operating in is very different, it's the new normal. The benchmark for us around this new normal is how we can adapt to this current environment, both the physical environment but also the economic environment, to ensure that the recovery and the new economic climate is the best we can possibly have. We're often seeing a comparison at the moment, people are looking at the past to see how we can get to the future - it's human nature. We've had people comparing this current epidemic to SARS and MERS, but also the downturn to the GFC. I find that really interesting because the GFC was a very fascinating time for sustainability practitioners, and that's what we're going start with - the conversation around sustainability so Davina, I'm going to start with you, particularly with your view on the current situation and how it compares to the GFC in terms of sustainability? Because I know that you were still a practitioner. Although you look very young, Davina, you were working in sustainability also.
DR:
Absolutely, so I see this is totally different to the GFC in a number of ways. First of all, the crisis itself was a financial led crisis, so you were actually looking at the financial data to see what was going to happen next. This is a health led crisis, so the strategy is a very different. You know, when we talk about getting through this we reference protect, pivot, rebound.
So, protect obviously the first stage where it was all about health and, you know, short term fiscal stimulus, the pivot phase, which we reference, we're in now where we engage differently in these phases and then the rebound, how we do the recovery, the stagings very different. But I think this is fundamentally different from a sustainability perspective. In the GFC, there were certain organisations who were saying, “I'm under a lot of financial pressure. Not now, not yet”. Whereas I think the thing that's really different about COVID-19, for 20 years in sustainability, I've been trying to explain vulnerability. You know the fact that climate change is inherently going to make us more vulnerable. You know that biodiversity loss, what that means in the long term. When we look at the World Economic Forum, we pull out the top 10 risks and six of them relate to sustainability and everyone would say, “we're going to be OK. We've got technology, we've got plans.” But guess what? Number 10 was on that list, a global pandemic, and no one was paying attention to it either.
I think coming through this scenario we've got a far greater understanding of vulnerability and what that could look like in a context, and that's going from the vulnerability of health systems even to the vulnerability of toilet roll distribution has been in topic of discussion and debate. But I think one of the things that's exciting out of this is people have been willing and able to reimagine a new normal. So, I think the thing that's exciting, is people have said, “I never thought that we could do this much engagement digitally”, “I never thought we could bring in the fourth industrial revolution digitally”, I never thought that I could engage internationally to everywhere, including Romania in this context”. So all the challenges that I've heard of things I can't do to work through the sustainability challenges, are actually a quite different and to be frank, if we don't change, I can see that this is going to be a dress rehearsal for what things look like more frequently in 2030. If we don't change our ways.
AS:
It's interesting Davina, isn’t it? In Australia, we're a pretty small player in the global market but we've done very well in sustainability in the property industry. How many Green Star certifications?
DR:
Over 2,715.
AS:
Which is phenomenal considering the market here and then when you look at our National Australian Built Environment Rating System (NABERS). We've got an average of 4.5 for energy, which is a great achievement. So, what is it about green building design and operations and that broader sustainability piece, why are Australians so good at it when you compare us to the rest of the world, or are we good at it?
DR:
Well, you know, if you look at the global indices, if you look at the Dow Jones Sustainability Index or our key partners with GRESB, Australia has been leading at that forefront for a long time period. But one of the things that we see that’s quite unique is collaboration in our marketplace. So I'm sitting here with Ruben from GRESB, we’re together even in the tough times which I think is telling. But one thing in the Australian marketplace, when I speak to our global peers that I do extensively through the World Grain Building Council, the key alignments where the Property Council and sustainability property industry really lean in together, launch joint advocacy, the idea that they our self and our government partners at NABERS see ourselves is aligned peers, delivering different pieces of the same strategy, the way we really seek to lean in and work together with GREBS, to lean in and make our industry better and our key partners.
I think also we've got Goldie Locks size in the market, the markets big enough to run scale and impact, but small enough that we can get the key players around a very large board table if we need to make decisions of how to drive change. When talking to some of the global markets, you couldn't get people around that board table in the States, and then there's other jurisdictions where you couldn't really get the scale. So, the fact that so many of those groups lean in and run joint strategy together with the long term aims to drive the global agenda. I think that's something that's really quite unique in our market and when I speak to international peers, that's a reflection. Ruben, I know that's a discussion that we've had in the past.
AS:
So, there's a little bit that's the industry but there's a lot that's the culture as well by the Australian culture, but the culture of the Australian property industry. When I talk about sustainability and you know I have a lot of conversations, as you all do globally. A lot of the sustainability conversation on buildings goes to, the big new developments. The shiny new towers coming out of the ground, new retail developments, new homes. But of course, there's huge opportunity with existing stock and the B and C grade stock. Davina, I would be interested in your perspective on what that opportunity might look like from the Green Building Council.
DR:
So, we see this is the biggest opportunity. Let's be frank. The game in sustainability in the built environment is going be won and lost in existing assets, they’re more than 99% of what we currently have. I would say, you know where the GBCA started, 18 years ago was in the new and shiny assets with the leading players. But as we see the scale of change we need to make, with very much been leaning in to performance with the existing buildings, and I'm actually really pleased that over 1000 buildings that we have are in the existing space, which is really exciting. And also we've seen the movement from you know, the leading partners with the shiny developments you know, which we used to characterise, as the Lendlease’s, the Stockland’s. You know, that kind of cohort. We've actually seen that mainstream across property portfolios and you know, really consistency of approach and driving that through existing buildings.
Now the thing that's really exciting is that we then start to see scale outside the shiny A-grade assets and to the property councils credit their guide office property talks about sustainability requirements in A grade, B grade, C grade and D grade. So how do you actually work across that whole spectrum? And the thing that's exciting is with same far more diverse property holders working with us in the existing building space. I’ll particularly shout out to groups like QIC Cromwell. We're seeing more government partnerships and very excitingly, we're seeing Woolworths lean in on the performance portfolio side because we've got a look at the non-traditional property players. But I think part of this is our showing the financial value. We know buildings that cost 1-3% more to do Green Star on these developments, but they instantly get over 5% better value, 13% better returns and the tenants want to stay longer, 25% longer weighted average lease expiry or WALE. So, I think it's a real combination of being willing to talk the financial metrics of the market and really being able to own the value proposition of property at a time and then really seeking to scale and part of that is partnering with key indices like GRESB and how do we take that from property to portfolio to group and make that a seamless that journey as possible.
AS:
It's really interesting, the return conversation. It's something that I think the Australian industry have done very, very well, understanding what those valuation drivers are around sustainability and really seeing the benefit for both the occupiers of those buildings, but also the landlords and shareholders and how that's driving really solid returns.
I know that a lot of our REITS in Australia are focusing on 2025 net zero targets, and there's been lots of discussion about the cost of that as well, Davina. That’s a significant cost, it’s a big commitment. What are the initiatives that you're seeing that will drive that outcome, but also are you seeing a shy away from that outcome as we're now facing this downturn in the economy? Are people nervous about those targets?
DR:
Well, I think one of our roles in industry is seek to demystify net zero. For a long time in industry, it was this amorphous black magic and so when we're talking about Net Zero buildings we’re talking about highly efficient buildings powered by renewables. I think one of the lessons that we can take from the GFC too that I think is still relevant is efficiency led projects and programs that lead to strong cost savings. This is the time to absolutely lean in to those. We're seeing that across industry, we’re talking to partners with capital being tighter, how do you have tighter capital filters and lean in into some of your sustainability projects that might actually have higher returns in this market then some of your conventional development projects? Then I think the other aspect is the renewables. And so we’re, in fact seeing some groups lean in and actually say in this marketplace, the renewables market, we want to lean in to our procurement in that space because there's actually some cost savings to be had.
So I think it's actually hard to make long term commitments in this market. You know, boards as we know we’re trying to a three-year strategy review, and then someone says, “I can’t tell you what's going to happen in three months?”, and you reference the Victorian lockdown in three days. So I think there is a challenge for people of how do I publicly reference the future. However, there’s never been more commitment to green recovery, having a vision of what the future looks like.
So what I really encourage people to do who were battling that long term uncertainty is do the piece that you can do now, drive those efficiency projects look at your procurement opportunities and enhancements, and it might be you do the ground work and the thinking now and you actually launch that, you know at the rebound stage. But I would say keep driving along and the thing that we've been seeing is we have new partners, QIC announcing net zero right now. So, what's really encouraging is, I think in a crisis, individuals who lean in and corporates who lean in become far more visible. So, I think now is the time, we launched a home strategy in May, you know, and we set it up for an industry launch. We didn't actually expect to have national media attention and international enquiries, but I think there's a space that for those who were leaning in and being forward looking, there is a key part of the market that wants to imagine what a recovery and a new future looks like and now is the time to differentiate yourself by leaning into that new future.
AS:
So, Davina with that new future. There are some macro trends that we're seeing on the back of COVID and one is digitisation and the rapid move towards digitisation, the way we run our businesses, is there a trade off? Will we see a trade-off between “I’ll invest in the digitisation of my business rather than sustainability”? Will we get that horrible value engineering, it's a terrible oxymoron.
DR:
Well, I think one of the things that sustainability professionals, particularly in this time have to lean in to is value engineering. I'll put my value on the table and let's talk about it rather than the euphemistic value engineering where we just cut cost from all areas without understanding what that means for the future. So I think digitalisation is really critical. But I think it should be the true digitalisation where we look across the entire spectrum of smart buildings, optimised environments and reimagine what the future looks like, rather than a little bit of ‘zoom gloom’ on the side and whatever you always did, now. There is a genuine opportunity to bring in that, fourth stage industrial revolution. And when we look at that digitalisation, there's really smart process enhancements. There's AI, there's a whole new world of opportunity that comes there now that needs to be tightly managed. But I think thinking strategically rather than you know, the poor cousin knows cost cutting at the expense of large value.
AS:
I guess, as we're talking about value Ruben, it's probably good time to address you as well. I mean, GRESB provides an investor led approach to the environmental, social and governance performance of assets. So how and why is that kind of responsible investment leading to value for businesses?
RL:
I think it's important to understand that in itself, responsible investment is not so much focused on saving the planet. I mean, I haven't seen any responsible investment strategy that says “we need to save the polar bears”. But it is an investment strategy that focuses on risk and return and those are probably the main two traditional investment dimensions for investors. At the same time it does recognise that, say, the challenges that we face both socially, environmentally and from an organisation perspective to governance challenges because they will affect investment outcomes.
Looking very close by, look at what COVID is doing as acute risk or stressor and how it effects how buildings are operating and also what it means in terms of getting a rental income and so on so the two are very closely linked but I would say traditional responsible investment is mostly about managing risks by also better understanding those risks and then on the back of that, creating more sustainable returns and trading value. And I would say currently or in a traditional response for investment strategy, that value also is very much ingrained around economic value. But I think what we’ll see going forward is it is increasingly about creating value for society, for industry stakeholders in the community.
AS:
And do you think that that has been expedited because of COVID Ruben or is that a trajectory we were already on?
RL:
I think it's both, as I already mentioned some organisations right now are really focused on sitting through the current crisis. Of course, it's about human health protection, job protection and so on. But at the same time, we do see that actually it gets more radar screens of different kind of stakeholders, both investors as well as managers in terms of material risk so it’s about materiality about saliency and while we are trying to cope with the current acute issues, we also focus on the more chronic issues and see how we can solve them. So, I would say it's a combination.
AS:
Interesting. Ruben with your focus on GRESB being a global organisation, I'm interested in your perspective on how different it is in the Asia Pacific region and the responses, you get in comparison to the rest of the globe, and I think that that's a really interesting consideration at the moment when we're so hyperlocal - I do not want to be in my home again. Compared to that global perspective of just last year when we were comparing ourselves to regions across the globe.
RL:
I would say it very much, depends on the local context of the markets in which we all operate right. As we know, real estate is very local business, so it depends on the local situation of course, what's very important. What kind of policies and programs are being put in place for legislation around energy efficiency increasingly around the resilience of assets? But also, I would say indeed the extra mindset, an awareness that it is in the end about managing risks, all kind of risk that will impact your tenants, your supply chain, your community in which you operate and so on. So if we look at what's happening around the globe, I would certainly say that Australian, owners or institutional investors in Australia, they are very aware they are managing their risks and are also expecting their investment managers, property managers to show how they are identifying those risks. What kind of prospectus management issues have been put in place around identifying, managing and mitigating those risks. But I guess the true leaders again, among some of the institution investors here in Australia. They know that it's no longer just about managing risk and getting appropriate return, but actually about solving some of these longstanding issues such as climate change, such as a transition to a more inclusive, resilient economy on the build environment. So what I see is that the true leaders, also in APAC within the investment industry are shifting from traditional response for investment practices to what you would call impact investing which is really about how do we ensure that the investments we met in property portfolios for companies or individual assets that they provide solutions, to these challenges, environmental and social and where the managers can show what positive impact and outcome they do provide. I think that’s the sort of the next frontier of responsible investing and some of the investors in Australia are already at that frontier.
AS:
Ruben, we were talking before, you know risk is a critical factor, of course it’s the factor – it always has been around sustainability from a corporate perspective. One of those risks is this digitisation, which Davina referred to before, but I guess I'm interested in your perspective on sustainable digitisation. What does that mean and what are the benefits from this approach?
RL:
It's a fascinating topic. As a disclaimer, I'm involved in sustainable digitisation projects, which is chaired by and mostly driven by Simon Carter here in Australia, where we are trying to look at sustainable digitisation as a double edged sword, right? We all look at technology and digital technology deployment creates great benefits. I mean, here we are talking to you guys by a webcam, we have mobiles etc. So, it's about recognising those benefits, but at the same time also being very aware that there are adverse impacts let’s say, unintended consequences. That result from the deployments of digitisation or solutions in our buildings and cities. So, what we're trying to do is create awareness about, let's say, the negative in impacts of unintended consequences and making sure that when digitisation happens that it happened sustainably, ethically and responsibly.
AS:
What are some of those risks. When you talk about ethically and responsibly, what are the risks around that digitalisation do you think Ruben?
RL:
I think risks are multiple and pretty omnipresent so sometimes it's also difficult to say what exactly are the risks that will impact, for example, buildings and how to operate or how tenants use buildings. But I would say some of the more obvious risks are around data privacy, cyber security but I also think digital inclusion being able to use digital products in a way that they're meant to be, and then a little, also again a little bias that perhaps unintended building into the utilisation systems. Think about workforce conclusion as in we come up with increasing solutions for company built environments, construction you name it. It's what do we do with the workforce that's being left behind? So all those things are, I would say, are crucial to better understand the impact, but also again from responsible investments perspective. To understand the materiality and saliency off those issues and how they can be solved, or at least be treated in a way that is beneficial to the users, to the owners and to the ones implementing those technologies.
AS:
Yeah, great. That term digital inclusivity, is one that has come up over and over again in recent months. And, of course, it's a lot to do with the fact that we're on Zoom and Teams and all kinds of different digital formats, and I think it really warrants more exploration on a variety of parameters. The other term of course, that’s coming up this green recovery, and that's what we're talking about today. So I'd be interested in your perspective on what a green recovery might look like and what role property could play in that green recovery.
RL:
I think we're just seeing first contours of the green recovery and what that might mean. I think, if anything, COVID and current pandemic has shown is that there is an intrinsic need for the property sector and for real estate to provide environmental and social solutions and at the same time also, let's say, having economic purpose right? And I think the interesting thing is that those are not mutually exclusive. They can all be part of the green recovery. But it does mean whereas perhaps now governments and also corporates are very much looking at, say, protecting jobs and human health and so on it doesn't mean we need to take a wide if you look at the impact that our businesses, our buildings are having on society and community.
It's about building back better – I love that term. It really requires us to stay, to step back and also at the same time acknowledge that it's no longer is business as usual. We need a different approach. We need to look at these long-term externalities and how they might impact our businesses in the short term, COVID and on the long terms such as climate change. I mean, we all know that climate change as a wide range of issues or created issues or exacerbated them in terms off again human health, infrastructure, food and energy security and so on. I think the built environment can be a great driver towards a more inclusive and just built environments, but also economy and how building owners, tenants, supply chains etc. look at it. So, it's very promising to see that some governments have said it's not just about that short-term stimulus of economies and creating protection for citizens, but also to make the transition and make it happen more, more quickly and more inclusive. Typically, what you might expect from the institution investors that indeed have that sort of responsible lens, which is now more about creating long term on lasting impact, is that they know that they can be part of that transition. They can accelerate the transition. They can allocate capital in ways that is aligned to this transition and indeed help create an increased momentum towards sustainable assets. So I think, if anything, all stakeholders are aware of the risks and yes, it is still about managing risks and outcomes, but also still it’s possible or can go hand in hand with providing long term and sound investment returns and there is already very large body of evidence based on multiple studies and data that show doing well and doing good can go hand in hands. We've seen again in global stock markets during COVID that those companies or listed equities that relatively well on ESG, I mean, they were still hit in terms of their stock value, but less hard than those that do less well. So again, it’s a data point, right? But I think it shows that we are starting to recognise that it is for the long term. It's about long-term value, creation but only can happened with resilience, inclusivity and environmental and social consciousness in mind.
AS:
Ruben, I mean, you're a popular man for a lot of reasons, your dance moves, your intellect. But also, you’ve got the ear of the investors and the investor market is in turmoil at the moment. Of course, the work that GRESB does is absolutely critical for this industry. I'd be really interested to know what you're hearing from investors of the big macro trends. And we've had a big focus on environment for a long time. They have been organisations that have focused more broadly on the ESG areas outside of just environment. What are those being macro trends that you're seeing will be important for the investors going forward?
RL:
If anything climate change and the risks, so physical risks, transition risk but also how climate change affects society. So that's called social risk, which perhaps might, be caused by the physical risks and transition risks. It’s about transparency around how are different investments, property managers as well, coping with those risks – in terms of identifying them, are you managing them as well? What kind of governance have you built around that, which is pretty much aligned with the TCFD recommendations – a task force for financial climate change disclosures and we see that that is becoming the norm. TCFD alliance reporting, which means that some companies really have to delve very deep into not just what those risks are, for some, property types that might be very apparent, but also for their long term business strategies and how potentially revenues might be effected, which, of course, again, impact their investment portfolios and real asset investments. So that's certainly one.
It's about resilience so creating resilience and as I mentioned impact. If you look at the evolution of responsible investing, it starts with disclosure. Tell us what you’re doing, then it’s as well what are you doing? It’s actions. What are your true commitments? It's great to have a policy or mission around sustainability but if you don't have the appropriate actions to implement those policies effectively, then it can still be paying lip service.
I think the next evolution again is about impact and outcomes. It’s great that you’re reporting on all kinds of things that you're doing. It's great that you’re actually doing those things on the ground. But if they don't have any positive impact or they don't lead to less negative impact i.e. not doing any harm, then what was the purpose? I think investors, increasingly, are looking for specific standardised and real estate specific metrics that shows them, and that allows them to compare how different property managers are coping around the very large number of environmental issues.
DR:
And that's where collaborations really important, we have to set up the tools so they feed the indices, you know, multiple double reporting has actually been the bane of sustainability in the last decade. And to be frank, we’re very open that we want to see less reporting and more impact and that's where some of the digitalisation alignment, collaboration comes in so we can lean in to those spaces together. So you do it once and then you scale it up rather than you know what we're saying has been so many different investor surveys, the same queries, the same questions asked five different times. You know, this is a real role for collaborating so that we can actually see something from a tool, like a resilience approach that we're using, like a Green Star being the building block for TCFD, reporting across your portfolio, scaling up to your investor response and cut rolling up and rolling down because we need to move.
People don’t want to say a high-level strategy that's not implemented, they want to see it go from asset to portfolio to entity, meaning to make that more seamless for groups.
RL:
Yeah, that’s one of the challenges there is to allow everyone to speak more or less the same language because that's often where within organisation is a disconnect between the Board where “this is our mission around sustainability” and the people on the ground who actually have to make it happen. Yeah, work to be done there.
AS:
I think we have come an incredibly long way, though, when you look at the vast teams of sustainability reporting that we used to have 10 years ago, and now all of those responsibilities sit with people in the field who are very passionate about sustainability now and are really driving those outcomes. I think there's no question in my mind at least, that we have come an enormous way and Ruben, I think you just gave everyone some great insight into what I should be, including in their GREBS survey responses. I think some people are madly writing down notes and submitting different responses, which is fantastic.
RL:
Well perhaps a note regarding sustainable digitalisation, so what we’re doing within the project is developing a set of investment indicators for investors that might in a not too distant future actually for part of the scope off the GRESB assessment. So it's really about being mindful off say the underpinning principals of that kind of technology employment, and I think it's probably still a bit of a blind spot, but I think it's also lets say a major hot spot in terms of being aware of what the impact is on different stakeholders in the industry. So take note.
AS:
Fascinating and really exciting for the industry as a whole. Well, a big thank you to Davina and Reuben for sharing your insights and how we can build a more sustainable future in the property industry. We will continue part two of this discussion in the next episode, where Emma McMahon, National Director of Sustainability at CBRE, discusses the impact COVID-19 and reduced building occupancy has had on sustainability measures. So, remember to look out for part two of this episode of Talking Property. In the meantime, if you like the show and want to check out more, visit cbre.com.au/talkingproperty or subscribe through Spotify or Apple podcasts.
Until next time.
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