Embracing momentum: Andrew Eagles on sustainability in commercial property post COVID-19

Although COVID-19 is an unrivalled pandemic, it feels all too familiar to our continuing battle against climate change. Both global crises are forcing us to modify our way of living – whether we are ready or not. While we focus on adapting our economic activity and social fabric in response to the global pandemic, will we lose momentum in our ongoing battle with climate change?

We recently sat down with Andrew Eagles, Chief Executive of the New Zealand Green Building Council (NZGBC), to gain some insight on the sobering, yet positive status of sustainability in New Zealand’s commercial real estate sector.

Sustainability measures have continuing momentum

Before COVID-19, sustainability measures had gained some real momentum in the commercial real estate industry in New Zealand. But it is inescapable that the post-Covid economy is a shrinking economy and past recessions have put ‘green', and other corporate responsibility initiatives, on ice due to budget cuts and more immediate priorities.

When we asked Andrew for his perspective on whether we are likely to see a loss of momentum for sustainability he said “maybe, but I feel like we are a bit more robust this time”.  He explained that there is no disincentive to cutting carbon emissions and adopting energy efficiencies, “it is really simple…adopting these practices is a cost saver, which in hard times is only going to alleviate the pressure.” NZGBC supports and implements programmes such as Green Star that encourages the property and construction sector to design, construct and operate more sustainable, efficient and productive buildings and NABERSNZ which is a scheme to rate and measure the energy performance of buildings. Andrew emphasised that NABERSNZ delivers on average over 30% saving over time and “for industrial facilities users report that Green Star can save an average of $1.11/sqm per year in operational costs, so for a 20,000sqm warehouse this is a saving of around $22,000 per year.”  There has been a perception that being sustainable is costly and a luxury, but in fact sustainable measures in buildings can save money.

Andrew pointed out that despite COVID-19, NZGBC has seen an increase in the uptake of its green building rating tools and the numbers have surpassed all prior years – by June this year there had been a 60% rise in the interest in Green Star and NABERSNZ usage is 25% over its yearly target.

There are also new tools in the pipeline from NZGBC. From early 2021, existing buildings can be measured against carbon zero and owners can make plans to decarbonise, offset those emissions, and get certified. From early 2021, NZGBC is making available on its website a free tool for measuring and benchmarking the energy usage of buildings. This will be a simpler tool than NABERNZ and is designed for owners starting out on their sustainability journey

A shifting market could leave some building owners with stranded assets

Andrew says, “there is a real concern for building owners who are reluctant to deal with their environmental and carbon responsibilities.” New technology, design, materials and expertise are now available to build and operate more sustainable buildings. There is enormous financial, political, public and legislative pressure building up to move us towards a zero-carbon society.

Some banks now have policies to only provide construction finance for new office buildings if they are built to a minimum specified NABERSNZ rating. In Andrew’s view, building owners that are not adopting sustainable measures may be left with their assets stranded because high carbon buildings are becoming increasingly undesirable to occupiers.

There is a market shift in train and more occupiers are demanding that the buildings they occupy have green credentials. According to Andrew, the single most powerful request that an occupier or prospective occupier can make of a building owner is “please show us a NABERSNZ certificate so we know how our building performs against other buildings”.

Andrew surmised that “occupiers requesting ratings puts pressure on building owners to provide certifications and they will not want to put up weak certifications – that’s the reason we will continue to see an uplift in sustainable buildings and transformation of the real estate industry.”

There is Central and Local Government leadership, but some missed opportunities too, like the ‘shovel-ready’ projects

The Government is demonstrating some leadership, however whether they are implementing sustainable practices consistently is up for debate. Andrew says that many Government Departments and Agencies have committed to change; “the Ministry of Health (meaning all DHBs), Ministry of Justice, Parliamentary Services, Ministry for the Environment, are all adopting Green Star in their buildings consistently or as a policy.”

Additionally, Auckland, Wellington, and Christchurch Councils have either signed up to Green Star or are considering the commitment. Furthermore, Andrew reports that Councils are starting to include green credentials in their public records for buildings and some Land Information Memoranda (LIM reports) will soon have an entry for Green Star rating and other green credentials. This will start to make sustainability a normal part of the due diligence process for prospective purchasers of buildings.

Andrew says that the impact of leadership from Central and Local Government cannot be under-estimated as has been shown in Australia. In 2007, Australian State Governments announced that they would only occupy 4.5 Star (or above) NABERS rated buildings and within six years there was a 35% increase in commercial office buildings with 4-6 Stars. The average rating in Australia for commercial office buildings is 4.5 Stars. Officials report that NABERS has now delivered almost $1bn of savings in energy bills and enough energy to power 93,000 households.  With New Zealand’s central Government now seeking NABERSNZ ratings when they lease or release their buildings NABERSNZ is becoming far more prevalent in the New Zealand market.

Andrew is expecting the same kind of uplift in New Zealand off the back of our own Central and Local Government sustainability commitments. When it comes to the ‘shovel-ready projects’ announced in June this year, he believes that Central Government missed the mark by not requiring the projects to be rated for sustainability. “We are locking in decades worth of carbon emissions and waste which is something Kiwi’s don’t want…there has been a massive missed opportunity to build in a low carbon sustainable way… it is damaging and it’s a real shame that in their rush to do this the Government did not consider their own sustainable development goals.” Andrew asserted that in NZGBC’s view many of the infrastructure projects could easily have been required to be rated against Infrastructure Sustainability Council of Australia (ISCA) standards, and the buildings could have been rated to green standards. “If we had invested right, we could have created more jobs, saved the Government money and delivered against our sustainable product goals.”

Regulation is forcing behaviour change

Andrew says that new reporting requirements are going to accelerate the pace of sustainable behaviour change for the better. If businesses have certain reporting obligations, this grabs the attention of directors and the behaviour filters down in the business to the point where the right questions are being asked and the right tools are being implemented. Directors have duties of care to the companies they direct, and the risks they consider depend on foreseeability and likely harm. Climate change – like any financial risk – is a threat to companies in the form of physical, regulatory and reputational risks. One could predict that the change in behaviour would follow a similar pattern to that after the ‘Health and Safety at Work’ reform that is now firmly cemented in New Zealand business culture.

The Government has announced the proposed climate-related financial disclosure regime that will require businesses (including listed companies, banks, general insurers, institutional investors and investment managers) to annually report on the financial risks and opportunities related to climate change for their businesses. The regime will make New Zealand the first country in the world to require the financial sector to report on climate risks. The Government estimates around 200 organisations will be captured by the regime. The aim is to help ensure that the market has the information its needs to allocate investments in a way that contributes to a low-emissions, climate-resilient economy. Regulations are expected to be prepared and introduced to Parliament next year, with the first reporting to be in 2023 at the earliest.

While not a regulatory requirement, the Climate Leaders Coalition requires 100 of New Zealand’s largest companies to report on their annual carbon emissions. Coalition members have pledged to declare these on their respective websites.

The Ministry of Business, Innovation and Employment is currently consulting on proposals to increase the operational efficiency of buildings, and to reduce the embodied carbon across the lifecycle of buildings as part of the Building for Climate Change programme.

The Building Code plays an important role in regulating the built environment – that contributes to 20% of our carbon emissions in New Zealand – but a much-needed refresh of the Building Code, to align it with our new carbon zero legislation, is still a long way off. One of Andrew’s major concerns is that people will pull back on their own initiatives because they are waiting for the refreshed Building Code before they take action. Andrew stressed any change in the Building Code will not come soon enough and it will not be the zenith to reducing carbon emissions in the built environment, “developers and building owners need to champion this now.”

Mixed-use developments are stimulating a new sustainable way of living

Andrew is a big fan of density “there is huge potential for NZ to become more dense and mixed-use developments and urban hubs are going to facilitate building up instead of out.” Mixed-use developments encourage more sustainable travel behaviour and they can slow down the ‘urban sprawl' with intensification. In New Zealand we can already see the likes of urban-hubs and mixed-use developments proving successful in the rebuild of Christchurch and with Commercial Bay in Auckland.

Sustainability is no longer a niche part of the sector

In Andrew’s view, “consideration of climate risks is a core responsibility for NZ directors. Investors, regulators and tenants are driving New Zealand rapidly to a zero carbon future. Getting measuring and improving is a key strategy for those in the property sector”. Don’t get left behind.

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Co-authored by Jennifer Campbell (Senior Associate) and Lucy Hannon (Solicitor) in MinterEllisonRuddWatts' Property team.

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