Great expectations for ESG in Australia’s property sector

ESG is driving change and creating new risks and opportunities for property and real estate worldwide. In the Australian property sector, it’s time to embed ESG at the corporate level, tackle the sector’s environmental and social challenges, and prepare for disclosure.

To really improve ESG performance, ESG needs to be fully embedded into corporate strategy and operations, and it needs to be championed from the top. Rather than a compliance focus on what “must” or “should” be done, consider what “could” be done to really show leadership. Instead of “ticking a box”, there’s opportunity to create long-term value, strengthen relationships with stakeholders, and build an authentic, trusted identity.

But to do so, ESG can’t just be bolted onto the side of an organisation. It’s not a function or an officer. To really embed ESG into everyday operations, some operational changes are likely to be required — and perhaps even digital transformation.

Increasingly, stakeholders will expect a high level of ESG reporting using clear, relevant environmental and social performance indicators. Voluntary frameworks are rapidly being surpassed by regulated non-financial disclosures, so it’s time to put tracking and reporting methodologies in place, aligned to respected industry standards and indicators. To protect against “greenwashing”, be sure that your ESG claims are genuine and verifiable.

What ESG in the property sector looks like

In the property sector, ESG can include a wide array of environmental, social and governance factors — although the “E” has often received the most focus, with embodied and operational carbon a major challenge for buildings.

Environmental considerations should also extend to energy efficiency, energy sources, sustainable construction materials, circularity, waste, pollution, water and biodiversity. Another increasingly urgent factor is a property’s resilience to a changing climate and extreme weather events.

From a social perspective, consider workforce conditions throughout the supply chain — such as fair payment, safety, diversity, equity and freedom from coercion. Impacts on communities are important too — such as housing supply, cost burdens for owners and users, local economic development and employment, First Nations rights and empowerment, and a building’s accessibility, inclusivity, safety and health impacts. Ultimately, these considerations build the sector’s “social licence to operate”.

Governance is where all these considerations come together — in corporate values, implementation, reporting, risk management, value creation, policy and compliance. Institutional investors are setting the benchmark on ESG as consumers drive a greater focus on this space. This focus will filter down into all facets of property.

ESG actions set the parameters for others

A unique additional challenge in the sector is that it is typically the tenants and future owners of property assets who have to live long-term with the sector’s ESG choices — for better or worse. The sector’s ESG choices for, say, an industrial park, residential subdivision or office tower, set the ESG parameters for its owners, tenants, users and community.

Embracing ESG brings opportunities to create value all along the chain of investors, customers, owners, tenants and end-users. What value would it have for end-users if they had access, for example, to reduced electricity and water costs due to efficient design and onsite renewable energy generation?

Properties with better sustainability credentials will leave a positive legacy, and they’ll also be likely to achieve higher premiums. On the other hand, investors will increasingly shun properties that do not match up to their ESG ambitions.

More regulation and mandatory disclosure is on the way

Another challenge for Australia’s property sector is its significant scope 3 carbon emissions, upstream (from goods and services consumed, including their transport, disposal and treatment of waste, and any leased assets) and downstream (from goods and services sold, and operation of owned and leased assets).

Reporting of scope 3 carbon emissions is becoming a priority internationally. Although a reporting framework for Australia isn’t yet clear, scope 3 emissions are tipped to be included in Australia’s climate-related financial disclosure framework for companies and financial institutions when this comes into operation in 2024 — so it’s time to get started on understanding, tracking and reducing them.

It will also be important to stay alert to changes in all ESG-related laws and regulations (e.g. building codes, the Safeguard Mechanism, the Modern Slavery Act, and more). Stepping up internal readiness to report on ESG in line with international standards will make adjustment easier when new requirements come into force in Australia.

In such a dynamic ESG environment, there’s a lot for the property sector to get to grips with and many challenges to overcome. Despite the unknowns, it is crucial to get on the front foot with ESG now to attract responsible investment, support the net zero journey, and build a more sustainable future.

Amy Lomas is an Integrated Infrastructure Partner for PwC based in Perth. Ross Hamilton is an Integrated Infrastructure Partner based in Melbourne and PwC Australia’s National Real Estate Advisory Leader.