News from the front desk: Issue No 239 – On leadership and raising the bar – two out of the starting blocks
9 March 2017
The news from AMP Capital on Wednesday was good. Excellent in fact.
The Clean Energy Finance Corporation, being the good corporate citizen that it needs to be, and following the mandate it has been set – to invest in the transition to a low carbon future – placed a $100 million into the AMP Capital Wholesale Office Fund.
The move was a stunner, a great wake up call to the other property companies who are waiting in the wings … for leadership.
Investa was first out of the starting blocks late last year in a dramatic call to low carbon arms not seen since the start of the green building movement, when it staked out its goal to be net zero emissions by 2040.
With the CEFC announcement came a similar promise from AMP Capital that here was another behemoth prepared to answer the challenge.
AMP Capital Wholesale Office Fund, or AWOF, said it would reach carbon neutrality by 2030 for its entire portfolio.
In the meantime it would bring the average portfolio NABERS rating to 5 stars by 2020 and to 5.5 stars by 2030, achieving Green Star Performance ratings for all wholly owned assets in 2017.
As Investa’s group executive Michael Cook said at our Mad Men for the Planet event in November, it had raised the bar – who would be next?
It didn’t take long to find out. Mind, tying up all the investments loose ends on a $100 million deal was always going to take a bit of time, so it was clear that AWOF has been champing at the starting gates for some time.
Chris Nunn, head of sustainability, real estate at AMP Capital said the CEFC deal means AWOF will go harder and faster to achieve its goals than it might have otherwise and, interestingly, it will be required under the deal terms to share its learnings with its peers.
By Wednesday afternoon it became clear that the immediate thought that this would mean a lot of work for consultants in the energy efficiency and renewable energy space might have been a tad ambitious.
There would probably be “slightly more work than otherwise” around elements such as energy audits, and upgrades to BMS and HVAC systems, but in general the deal means a more stringent set of outcomes to a pathway that was already set.
But there will be more work. Lifting the NABERS profile in addition to the “big energy efficiency upgrades” needed to achieve carbon neutrality by 2030 makes this most probable, especially when you consider what’s involved in improving BMS and HVAC and general ongoing energy efficiency.
“So I think there will be ongoing work for the consulting community,” Nunn said.
But to be clear, what this deal means is tighter targets and frameworks, not $100 million in additional spend.
As Nunn put it, it’s “an extension of the existing program to continue to do energy audits and continuous improvements”.
There would also be some strategic work to find the most cost effective pathway to 2030 and what the mix is between energy efficiency, on site renewable energy, and renewables through power purchase agreements, with “indeed some offsets”.
“So there is a bunch of work to focus on.
“The CEFC was attracted to work with AMP because we’re already doing some high performance work,” Nunn said, pointing to the 700 Bourke Street, 6 Star Green Star NAB headquarters.
Also attractive was the pipeline of new buildings such as Quay Quarter, “which is clearly going to be an exemplar sustainable tower.
“The investment is like that of any other investor in the AWOF portfolio but it came with the mutually agreed requirements that we work towards a mutually agreed sustainable target.
“It’s not a direct $100 million investment in energy efficiency and renewables per se, but it’s going to go towards greening that portfolio.
“It’s an investor that says, ‘I would only invest in your fund if you are prepared to invest in these ambitious sustainability targets.’”
Where the kicker comes in is that with the AWOF’s 10 year capital planning process there is now “a strong pathway” to a range of initiatives that take the portfolio to a 5.5 star average NABERS rating “and we know when we will do the work on the chiller or the LED lights and BMS.”
Nunn said much of the industry was now far more focused on energy efficiency since the surge in electricity prices became apparent. These ranged from 10 per cent for those owners with clever forward contracts to up to 40 per cent rises, he said.
In AMP Capital’s case the portfolio was reasonably well protected by “talented” energy consultants who locked in reasonable prices for 2017 but arguably contracts for next year could be significantly higher, he said.
“It means we’re still seeing rising energy prices, but not as big.”
The company uses energy analysts to buy on the energy futures market – typically up to one year on “a quarter by quarter basis”.
But it was “really a volatile market”.
“We know that people have faced 40 per cent price increases. It hasn’t happened to us but we know it’s happened to others in the market.”
Surging gas prices, particularly in Victoria, especially for heating, have been the other factor at play. Nunn thought the markets could see a move away from gas in cogeneration and trigen.”
One thing we need to be wary of, however, is CEFC Investment Funds lead Rory Lonergan’s hope that there will be a trickle down effect of AMP’s work to buildings in the B and C grade class.
We know after nearly 20 years of green building outperformance by the leading property owners, that this “ain’t necessarily so”. In fact, secondary level building owners have been notoriously difficult to shift from deep inertia – so many people and organisations have tried.
They just don’t seem to care.
What does work is the thing that put a bomb under the top tier owners of the property market: cold hard cash. First the Green Building Fund and then in Victoria the Greener Government Buildings Program.
Voluntary programs don’t work because the owners of smaller buildings don’t have the same drivers as the owners of large portfolio.
First the smaller owners don’t have shareholders and big corporates as stakeholders. They might be in the business for a short term uplift in capital values, at minimum expenditure, or for the long term until the building falls over (figuratively) and then they can redevelop. Lastly, they’ve been hard to educate.
Big capital city governments have tried their darndest to get cut through in this sector. They find it hard even communicating with them because of privacy laws (gone crazy). So this means that though the rates department down the corridor knows who the owners are and you can find out very easily who owns what since property ownership is a matter of public record, the energy efficiency people are not allowed to contact the owners.
Which is strange in a world where we learn that big retailers can pretty much track our every mood and whim, and where the intelligence agencies can hack our televisions as well as our phones and computers and where some people reckon retailers are listening to our conversations because mention that you’d like a trip to Hawaii and suddenly, yep, you’re getting ads for flight to Honolulu.