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Peter Rose

Accounting for ESG impacts: When will local property players start factoring this into the investment equation?

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4 minute read

Heard the one about the start-up property fund that hired an environmental expert as its third employee, to ensure it had ESG requirements squared away to financiers’ and investors’ satisfaction?

In the UK, this is no joke but rather, cold, hard reality for organisations that want to play in the commercial property space. 

ESG compliance has become the property conversation du jour in those parts and ticking every box around climate is fast becoming part of the DNA of raising money, for institutional investors and developers of all stripes and sizes. Opting out is not an option, at least not for organisations that want to contain their capital costs.

Making measurement and reporting mandatory 

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Meanwhile, across the ditch, the New Zealand government has gone on the ESG front foot with what’s been billed as world first legislation. In October 2021, it passed a law to compel around 200 financial institutions and publicly listed companies to begin making climate related disclosures.

According to the country’s Climate Change Minister James Shaw, the object is to bring climate risks and resilience into the heart of financial and business decision making.

“It will encourage entities to become more sustainable by factoring the short, medium and long-term effects of climate change into their business decisions,” Shaw announced in a statement. 

Coupled with the New Zealand Reserve Bank’s announcement earlier in 2021 that climate change stress tests for financial institutions may soon make their way onto the agenda, it sends a strong message to the sector that the status quo is set for a serious shake-up.

Taking a long view

That shouldn’t come as a bolt from the blue, at least not to anyone who’s been paying attention these last few years. Insurers – who must necessarily take the longest possible view – have been warning for some time that climate change considerations will have a growing impact on the insurability of real estate assets, both residential and commercial. 

Those that fall short of acceptable ESG benchmarks, i.e. the benchmarks the insurance industry in its considered view determines to be acceptable, can expect to be slugged with higher premiums or, in a worst-case scenario, denied cover altogether. 

That alone should be a powerful spur for property owners to start getting their “houses in order on the ESG front.

Catching up with the crowd

Whither Australia, as our friends and neighbours put climate considerations squarely on the agenda? It’s a fair bet we’ll eventually have to do likewise, in a way that has a very real impact on property businesses and their backers.

With the government under ongoing pressure to take decisive action on the climate front – witness the Morrison administration’s unexpected embrace of the net zero emissions by 2050 goal, prior to the COP26 climate summit in Glasgow – demanding banks and their major customers start measuring and monitoring climate risks would send a clear signal of commitment. 

Moreover, it’s a move which could be made without betting the farm because the costs involved fall primarily to the private sector, rather than the state. That makes it an attractive proposition for a government for which perception, rather than action, often appears to take priority.

Against that backdrop, it makes sense for local companies to start factoring climate change into their strategic plans and ensuring they have the operational expertise to respond when, not if, changes are enacted.

Those that fail to do so may find themselves facing an unexpectedly inhospitable investment climate.

Peter Rose is chief revenue officer at Forbury.

Accounting for ESG impacts: When will local property players start factoring this into the investment equation?

Heard the one about the start-up property fund that hired an environmental expert as its third employee, to ensure it had ESG requirements squared away to financiers’ and investors’ satisfaction?

Peter Rose
Peter Rose
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Neil Griffiths

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily. 

Neil is also the host of the ifa show podcast.

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