Businesses and people, not just assets, are at risk of being stranded as both public demand and regulation swing towards a low-carbon future.
Stranded assets are properties that diminish in value or become unsellable as a result of changes in sustainability requirements or any of the other environmental, social and governance (ESG) pillars.
Speaking at JLL’s The Future of Real Estate event last week, NZ Super Fund’s director of real estate Toby Selman said the fund was already turning down otherwise lucrative investment opportunities because they didn’t meet its high ESG standards.
“I do think you’re going to have stranded assets, but you’re also going to have stranded managers and developers who aren’t up to the level that capital wants them to be before giving them a cheque.”
Selman said the fund, worth more than $61 billion, wasn’t just looking at the environmental credentials of a build, but also measures like diversity. “We’re doing more with majority female-owned groups.”
As an added risk from an investment standpoint, he said younger employees weren’t interested in working with groups that didn’t have integrity, conviction and direction.
JLL’s capital markets head for Australia and New Zealand, Luke Billiau, said companies needed a pathway to net zero.
He said it wasn’t that long ago since a potential client had told one of the company’s division heads that ESG wasn’t something the business needed to adhere to or felt applicable to them.
“Fast forward six months, they’ve come back to us and said: ‘We need help with our ESG strategy because our biggest client has asked us for our ESG strategy’.”
While ESG is still considered by some to be a nice to have, not a need to have, Selman said higher valuations for sustainable or low carbon assets feed through to a higher future return. “I’m interested what the value is tomorrow, not today.”
“We do want our cake and eat it. I don’t buy the argument that people should compromise on return to get the ESG outcome.”
Speaking to Newsroom, New Zealand Green Building Council chief executive Andrew Eagles said mandatory climate reporting had been introduced for large listed companies and investment schemes, but it didn’t just impact the big end of town.
Downstream, climate reporting will sway which businesses they choose to employ, be that real estate agents, construction businesses, manufacturing firms or others.
“More importantly, the building code is changing and energy labels are coming on existing buildings, so then it’s everybody.
“The building code is going to change in 2025, then it’s going to change in 2028 and then it’s going to change in 2032. And each step is going to be bigger than the change we’ve just seen, which got everyone scared and worried when it was a minor insulation improvement.”
“If they’re a small family business right now, they think, oh that’s just Argosy or Stride [large NZX-listed property investors], but in the next two or three years everybody’s going to need to change what they do.”
Eagles said transition risk was ‘do or die’. “People right now saying this doesn’t affect me will be out of business in two or three years.”
While hiring an ESG expert is out of the question for smaller businesses, Eagles said there were online training programmes and resources provided by NZGBC, Homestar and BRANZ that only took a few hours.
“There’s quite a bit of training out there, but just choose someone in your organisation to train up and start to learn about carbon. it’s going to be bigger than health and safety, it’s really fundamental.
“If you’re a supplier or an engineer, or an architect or a real estate agent, and you don’t know this stuff, you’re just going to look pretty weak next to the competition, and I’ll tell you what, your competitors are doing it.”