Will 2023 be the year we are forced to start factoring ESG considerations?

Author: Pete Rose

Trends that are unfolding in other jurisdictions will soon start playing out in the Australian property sector.

Are there any Australians out there who aren’t bracing themselves for a summer of super-sized natural disasters? We’re only part way through spring and the waters have already begun rising Down Under.

Late September saw NSW’s Northern Rivers region pummelled by severe weather and flash flooding, less than nine months after the low-lying town of Lismore was hit with what’s been described as the biggest flood in modern Australian history.

With a third consecutive year of La Nina – Spanish shorthand for rain, rain and more rain! – conditions heading our way, it seems likely there’ll be plenty more where that came from, once the wet season proper is fully upon us.

Meanwhile, our British and European cousins sweltered their way through record breaking summer temperatures in July and August, with temperatures in Blighty topping 40 degrees, for the first time in recorded history.

If anyone continues to harbour doubts about whether climate change is real, surely a glance at the headlines or out the window is now sufficient to put the issue to bed?

Counting the cost

The climate change phenomenon is certainly having an extraordinary impact on investment and funding decisions elsewhere in the world: the UK, for example, where I’m currently heading up Forbury’s recently opened London office.

While ESG is undoubtedly on the agenda for property businesses and investors in Australia, over here in the old country it is the agenda. Developments that can’t demonstrate their clean, green credentials now find it well-nigh impossible to secure funding from debt and equity partners.

At the same time, ESG experts who can navigate complex audit processes have become pivotal members of every acquisition and development team.

Legislation that makes ESG reporting mandatory is not yet in place over here – little old New Zealand is leading the world in this respect – but it’s not far off either. And when it arrives, we can expect to see an even more dramatic alignment of resources behind assets that are able to tick all the boxes. Conversely, there’ll be a flight of capital away from also-ran properties, however desirable their addresses or amenities may once have been.

Playing catch up Down Under

Will we see events unfold in the same way in Australia? From where I sit, it seems like a sure bet.

At present, ESG reporting among ASX listed companies varies considerably in the standard and quality of details supplied but within the next five years, we’ll likely see the introduction of standardised reporting and benchmarking. Letting the issue slide under the mat will no longer be possible when that occurs.

"Being forced to put one’s ‘report card’ on show can be an extraordinarily powerful catalyst for change and change developers undeniably will, once their developments and assets begin to be ‘rated’ on those results – and the cost of the capital required to construct or acquire them goes up or down accordingly."

Insurers, too, will increasingly use ESG reporting to make decisions, not just on the premiums that properties should attract but, rather, whether or not they should be insured at all.

Owners and investors, meanwhile, will need to be thinking about whether – and how – to future proof their assets, to ensure they continue to be ‘fundable’ in the long term.

Looking ahead

Whatever your role in the property sector, ESG will soon become a factor in many of the decisions that you make. Now is a good time to start developing your knowledge so you’re able to proceed with confidence in this evolving commercial landscape.