Why sustainability needs to pay

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Matt Clifford

Why sustainability needs to pay: Interview with Matt Clifford, Cushman & Wakefield’s Head of Sustainability & ESG for Asia Pacific

If we have the technology to make buildings green, why are so many still brown? Our Head of Sustainability & ESG for Asia Pacific, Matt Clifford, shares his thoughts on the current approach to sustainability – and how it can be re-aligned with investor interests.

Q. Matt, let’s start with the hardest question first. Does green pay?

It’s a nuanced field. I think where some of our peers have fallen down – and certainly those outside of real estate – is because a lot of consultants approach sustainability like it’s a technical problem or an engineering problem. Say you have two buildings, and one consultant might come in and give the owner a list of things they can do – change the lights, put solar panels on the roof – and say, ‘it will cost you ‘x’ million’. That’s what’s possible. Now they’re not necessarily wrong, but they haven’t thought about the investment strategy. Is that building in a core fund? An opportunity fund? Is it a value-add – are they going to sell it in two years’ time? If you take a one-size-fits-all approach, there’s a pretty good chance that you’ll apply solutions that don’t pay. If, on the other hand, we know that the building is held in an opportunity fund, I know straight away the investors are not going to spend big capital. They’re thinking about selling the asset in two- or three-years’ time, so we need to right-size our solution to meet their strategy. In short, the sustainability strategy should look different depending on the investment strategy.

Q. Could it be argued that yours is a superficial approach to sustainability? Prioritizing returns over the environment?

This might sound controversial but hear me out. Scientists have been talking about climate change for 30 years now, banging their heads against the wall and not getting anywhere. Fear mongering about melting ice caps doesn’t motivate people; fear is not a great motivator. You know what does motivate people? Money. The way to make investors green their buildings is to make sustainability pay.

Q. You talked about matching the sustainability solution to the investment timeframe. Could you give some examples of short-term and longer-term solutions?

Sure. So a lot of the shorter-term solutions are more operational expenditure rather than major capital items – maybe optimizing or tuning the building automation or control systems. A really classic example is heating and cooling the building at the same time. It’s just dumb, but it happens all the time. Or running the lights overnight when nobody is there. You wouldn’t expect it, but it still happens, even in modern buildings. There’s almost always some of these low-hanging fruit, quick wins, that don’t cost a lot of capital, that can probably be addressed through better maintenance or OpEx budgets. Lighting is now at a point where it’s probably around the two-year payback – it’s one of the best capital items you could spend money on.

Then you get into bigger capital items, like elevators, chillers and boilers – fairly high-cost items that might be a six, seven, eight-year payback. Here, the approach is not to unnecessarily rip out a chiller that’s perfectly good just because there is a better one. But if it’s old and needs replacing anyway, then let’s replace it with a more sustainable option. Let’s say it’s $1 million for a new chiller, and $1.1 million for a really efficient chiller. The incremental spend is only $100,000 since it was going to cost $1 million anyway. And the payback on that $100,000 could be really attractive.

Q. As we near 2030, do you expect to see companies rushing to hit their net zero targets?

There are some really challenging conversations that investors are going through to reach their net zero goals. They’re not necessarily all moving at the same speed. Some want to be there by 2030. Others want to reach it by 2040. Other groups have already done it – LendLease and GPT down in Australia have been net zero since around 2020. So there is a segmentation going on in the market where leaders like LendLease can say, ‘Hey, come and be in my building because it’s already net zero’. Others may not get there for a decade or more, but in general everyone is headed in the same direction.

For groups with a 2030 target, they’ve started to realize that it’s honestly not that far away.  It’s really only one investment cycle. So do they need to double or triple their efforts to make up for years of slow progress, or do they sell underperforming assets now, and reconfigure their portfolio with net zero assets as the target deadlines approach?  These are the kinds of debates going on in the investor community. They know sustainability is important. They want to move fast. They know the clock is ticking.  They also want to maximize their returns, and in some cases these goals are starting to clash and misalign.

The big questions they come to us with are, ‘Am I actually going to take this asset all the way to net zero, or do I sell it before we get there?’ And, ‘What is the optimal amount of CapEx I should spend, to exit with the greatest possible value in hand?’. These are really challenging conversations, and investors are looking to navigate all of this without dropping the ball anywhere.

 Q. Do we know yet what the consequences for companies that miss their net zero deadlines will be?

I think there’s a range of answers. If it were you or me, if we own a building and we made a public commitment to be net zero and we miss it, we have a bit of egg on our face. The reputation takes a bit of a ding, but maybe that’s about it. If it’s private or a small cap, unlisted, that’s probably what it looks like, unless you’ve made the same commitment via leases to your tenants – that might be more significant.

Where it starts to have more material impact is, say you’re a listed entity and you’ve made a public disclosure that is now proven to be incorrect. You’ve breached your investor responsibility. In Europe they have very tight regulations around green-washing, and the same is being rolled out in Australia and other Asian markets. It’s quite possible you may violate your listing rules or be liable under civil penalties – depending on the market you are in – if you’re found to be misleading the public. For these groups, it is really, really serious. Missing the deadline is just not an option for them, because they can’t say one thing and then do something else.

There’s also the Task Force on Climate-Related Financial Disclosures (TCFD) and some other reporting frameworks which are really driving a lot of behaviours around integrating sustainability thinking into financial reporting. In the past they were separate – sustainability was reported over here, and finances over there.  But that doesn’t really fly anymore, particularly if you’re one of these listed companies or major corporates. Their sustainability and financial disclosures are treated the same, and the two are intrinsically linked. And if you’re misleading the public in your disclosures, then hey – you’re in big trouble.

Q. Let’s go back to those landlords that have already achieved net zero. What’s in it for the occupiers?

Major occupiers are asking which landlords are going to help them on their journey to net zero. These buildings are certainly lower carbon, which is good for occupiers with their own net zero targets. Whether it’s cheaper depends on the owner – do they just pass on the power at cost? Or will they use it to recover their investment? In a few years’ time, the early adopters of solar will have paid off the capital cost. So we might actually see a bifurcation where some of these owners might take the better margins from rent, and others could actually drop their rent because they’re getting their power for free.

And remember: if you’re talking about professional services occupiers – say a tech company, or a bank, or an insurance company – then up to 80 or 90 percent of your carbon footprint probably comes from real estate. For these occupiers, a building is going to make or break their ability to meet their net zero goals. If I’m a bank and I sign a lease in a building that is net zero, I’m well on the way to where I need to be. Whereas if I sign a lease in a building that’s not net zero or has no plan to be, it’s making it harder for me, the occupier, to reach my goals, and I will likely need to stick my hand in my own pocket to pay for more decarbonization work, because the landlord is such a pivotal part of my overall story.

Q. Any final thoughts on how commercial real estate should be approaching sustainability?

Sustainability can be incredibly complex. This puts people off because they don’t understand the detail and it makes them feel stupid. We want to do the opposite. It’s our mission to make sustainability easy to understand – simple, practical, actionable. Let’s give people motivation to get started, not reason to look away. We need to keep thinking ahead to give clients as much commercial advantage as we possibly can. I guess at its simplest, it’s about being returns-driven. It’s about linking sustainability to the value of the asset because, at the end of the day, that’s what real estate investment is all about.


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