【MARS Blog】Do the right thing

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.(1)

‘HOW DARE YOU’ were the words that Greta Thunberg blasted out several times to the leaders at the UN Climate Change Summit in 2019.(2) She mentioned then that changes are coming whether they like it or not and the leaders of the world were all talk and no action. No matter what your opinion is of Greta, three years on from that day of the UN conference, the world is starting to move and the green revolution is gaining momentum.

In fact, regardless of your opinion on whether humans are causing climate change or not, changes at the economic and government levels are happening anyway. The Paris Agreement was put together by the United Nations Framework Convention on Climate Change (UNFCCC) in 2015 and 193 countries are now legally bound to this agreement.(3) The agreement included an ultimatum for the members to reduce carbon emissions by 45% before 2030 and be NET ZERO by 2050!(4)

‘Net Zero’ means that we will only produce the same amount of carbon dioxide into the atmosphere as we are taking out of the atmosphere (via trees). Whew! A big ask!

This means by the time the teenagers in 2022 are 50, there will be no more vehicles running on petrol or diesel, all coal mines will be extinct (forget about charcoal on your BBQ), the modern house will come with solar panels, a battery storage area and every new house will most likely have electrical facilities to charge your car, both in the garage and on the side of the house.

The NZ govt has taken the Paris Agreement very seriously and is one of only a few countries to date to actually pass legislation (Climate Change Response Amendment Act 2019) to bring these changes into reality. The government is trying hard to establish a good rating with the global ‘Climate Action Tracker’. Our last rating came up with a result of ‘Highly Inefficient’(5) so with this slap in the face we are left red faced and a lot to prove.

Like a school boy missing out on a place on the honours board, the govt have gone head down, tail up in showing the UN and indeed the world that we are in fact worthy.  In the 2021 budget the government allocated $300m to the Green Investment Finance Fund and a further $100M for other climate change initiatives(6). Prudent property developers will be going with the flow and may have already engaged NZ Green Investment Finance to discuss the requirements to obtain government funds.

One of the hot topics in NZ at the moment is the Healthy Homes Act where we see a drive to increase the heating efficiencies in NZ homes. Not only does 40% of our energy usage come from energy use and if this is not made more efficient then we will need to produce more energy and the production of more energy creates more carbon in the atmosphere (7).

The MBIE (Ministry for Building, Innovation & Employment) has increased the zones in NZ from 3 to 6 in order to pinpoint the areas where insulation requirements must be increased. The new zones can be seen below (8):

So, you may ask, how does this fit into the ESG philosophy and does it actually mean anything in real terms?

Environmental

As far as the building industry is concerned, the govt funded EECA (Energy efficiency and Conservation Agency) have followed Australia to create a rating tool for ‘green’ buildings. This is called NABERSNZ. Note that this rating is compulsory for all buildings above 1000 m2 in Australia but it is voluntary here. While the previous ‘Green star’ rating measured energy efficiencies in the design and construction phase, the NABERSNZ (National Australian Built Environment Rating System) rating is given in true ESG fashion by measuring the actual results after a year of occupation.

The NABERSNZ website states that research from participants in Australia lead to this conclusion:

‘A building with a high NABERSNZ Certified Rating has the potential to attract high value tenants who would pay a premium for an energy efficient building – research in Australia, where NABERS is well established, shows up to 8% more. Highly rated buildings also have better occupancy rates and longer lease terms.’ (9)

The govt has further supported innovation in this regard in an offer of 40% co-funding (up to $35,000) for energy saving initiatives (10) in the Environmental sector.

These higher ratings will naturally attract investors wanting a long term investment with happy tenants. When we live in a world of highly competitive yields derived from the surplus of product ion the market, a developer needs to think carefully on what else determines value apart from the yield.

Social

Doing the right thing is not a new concept and various forms of encapsulating moral concepts have been around for decades. The difference with ESG is that now we have measurable actions, auditors to measure the actions and rating agencies to provide a score on how well a company is doing.

With the ripples of the global financial crash still reverberating around the globe, institutional plus Mum & Dad investors are hesitant to jump into an investment just because it offers a good return. The definition of the term ‘value’ has shifted as a result of the current threats. If anything adverse happens in the world, people on the opposite side of the world know about it in milliseconds. Young people are scared about the effects of climate change and any company that is not bending over backwards to mitigate climate issues will be economically hung, drawn and quartered..possibly in milliseconds.

The ‘woke’ individual who is already sensitive to global issues, will naturally be concerned about modern slavery, the manufacturing of cigarettes/vape, gambling issues, gun sales and anything else that will see the world up in a less than desirable situation. Any company that dares to engage in these activities will be rated as such and left at the bottom of the investment pool. Such as it is in 2022 with our baby boomer/millennials and this will likely continue into the future.

Adeline Diab, Head of ESG and Thematic Investing EMEA & APAC at Bloomberg Intelligence, said: 

“The pandemic and the global race to net zero carbon emissions have put ESG criteria into orbit – from niche to mainstream to mandatory. ESG is fundamentally reshaping the financial industry, becoming part of financial reporting. This is in part due to mounting  scrutiny from regulators, markets being more sensitive to ESG-related news, and asset owners appointing managers on the basis of ESG across asset classes.”(11)

CBRE global research has also highlighted the importance of the ESG principles that have been reverberating around the world since the GFC. Their findings report the following:

2020 was a watershed year for Environmental, Social and Governance (ESG) investing in real estate as pandemic- and climate-related disruption, along with growing recognition of social inequity, prompted investors to adopt a more robust approach to sustainability-related risks. With ESG now playing a much more prominent role in how companies operate, investors are embedding ESG considerations into every stage of the property lifecycle, from due diligence to acquisitions and from leasing to asset management.(12)

People (investors) like to know that they are doing the right thing and as the fear of climate change is hitting home with the millennials The clean green movement seems to have spread and encapsulated anything that is dirty, including human behaviour. The NZ Government in late 2022 is now acting on forced labour and slavery issues through legislation and it will be up to the leaders in the various industries to make sure change actually happens.

Governance

In some countries it is mandatory and NZ will likely follow suit. Investment companies will then need to start sending reports to their ESG regulators in order to obtain a ‘score’ or rating. If their score is low, the worldwide trends have already shown that the investors will look elsewhere to another investor with a higher score.

RIAA (Responsible Investment Association Australasia) (13) have a score range of 1 – 20 to apply to their members and then they will publish the results in their newsletter. Those entities that score 15 or higher will be highlighted to their customer base and their other members as being stand-up responsible human beings. No doubt investor equity will then flow toward these companies.

Science

Like so many of the energy creation alternatives such as solar, battery, wind energy and wave power, the problem too date is the level of efficiency to compete with the burning of fossil fuels with the latter being annoyingly efficient. Similar to being thrown in the ocean from a boat without a flotation device, the global climate issues are not waiting around and we are left to swim to safety or die. If we fail or don’t end up with positive results in our endeavours then either the climate will kill us or we will be put in the corner with a dunce hat and no one will trade with us. So, we are facing Armageddon either physically from the sun or economically by our peers. We must therefore take on the attitude ‘when the going gets tough, the tough get going’ as we now have been provided with an ultimatum to sort it by 2050.

There is another climate friendly alternative to oil that has been around since the start of creation and that would be Hydrogen. Given the availability of it is massive and free (H2O – water), it is only the efficiency of the oxygen extraction from the Hydrogen that is holding development up in this area. With the huge amount of electricity needed to undertake the extraction, you may wonder if it is worth it.(14)

The reason hydrogen has not taken off in the building construction to date relates to a chicken-egg scenario, ie where does one re-fill? In the past, a potential re-filling station wants to see the customers lining up before they go to the expense of building a plant. However, very recently (2022) we have seen NZ’s first hydrogen manufacturing plant in Taupo, powered by geothermal energy.(15) On the back of this, also planned this year, is a hydrogen refuelling station in Palmerston North. Further stations will be planned/built in Hamilton, Tauriko and Auckland in 2023.(16)

Source: Conrad hydrogen

Summary

 So how does all this relate to the future construction of our houses/buildings in our fair country?

Along with other ESG-type actions being undertaken as already discussed in this blog (Legislation on climate change, upcoming legislation on modern slavery, budget allocation to green buildings, MBIE Insulation zones, NABERSNZ), the Government have created a National Adaption Plan which outlines the high level attitudes that NZ needs to undertake in order to reach our Net Zero goal by 2050.(17)

These changes are being undertaken to keep NZ up with the world movement of rectifying the sins of our forefathers from their methods of getting us to where we are today. I believe the Millennial movement, although considered soft and over emotional by some, will change the world on a scale equivalent to the industrial revolution in the 18^th century.

References

1. https://home.kpmg/nz/en/home/services/kpmg-impact/esg-environmental-social-governance-sustainability.html
2. PBS Network(2019)., https://www.youtube.com/watch?v=KAJsdgTPJpU [Video]
3. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
4. https://www.un.org/en/climatechange/net-zero-coalition#:~:text=Currently%2C%20the%20Earth%20is%20already,reach%20net%20zero%20by%202050.
5. https://climateactiontracker.org/countries/new-zealand/
6. https://nzgif.co.nz/about-us/who-we-are/
7. https://www.eeca.govt.nz/insights/energys-role-in-climate-change/
8. https://www.level.org.nz/site-analysis/new-zealand-climate-and-environmental-zones/
9. https://www.nabersnz.govt.nz/about-nabersnz/types-of-ratings/
10. https://www.eeca.govt.nz/co-funding/
11. https://www.bloomberg.com/company/press/esg-assets-rising-to-50-trillion-will-reshape-140-5-trillion-of-global-aum-by-2025-finds-bloomberg-intelligence/
12. https://www.cbre.com/insights/reports/esg-and-real-estate-the-top-10-things-investors-need-to-know#introduction
13. https://responsibleinvestment.org/
14. https://www.greaterauckland.org.nz/2022/02/17/hydrogen/
15. https://www.thinkgeoenergy.com/first-green-hydrogen-plant-in-new-zealand-starts-operations/
16. https://www.hiringa.co.nz/post/ground-to-be-broken-on-new-zealand-s-first-green-hydrogen-refuelling-site
17. https://environment.govt.nz/what-government-is-doing/areas-of-work/climate-change/adapting-to-climate-change/national-adaptation-plan/

  Jeff Brill - Author of "The Sophisticated property Investor"