Michael Di Russo, Director of Property, Clean Energy Finance Corporation

Michael Di Russo, Head of Property, Clean Energy Finance Corporation

Going from Brown to Green with CEFC

Targetting Whole-of-building Sustainability

The Clean Energy Finance Corporation (CEFC) has been investing in commercial buildings since 2016. Initially focussing on upgrading energy efficiency to reduce their carbon footprint, the strategy has now matured into a fully-fledged repositioning of buildings – from brown to green.

Rather than just lifting a building’s NABERS (National Australian Built Environment Rating System) rating, the end-game is increasingly about whole-of-building sustainability.

The repositioning of assets has been common for decades, becoming a core principle of value-add in the property space. Repositioning looks at the existing hardware, at end of life and at what upgrades can be done to make a building more operationally-efficient and attractive to new tenants.

“The main focus is on energy. We can’t take our eyes off energy,” says Michael Di Russo, Head of Property at the CEFC. “It is a critical part of the task. Eventually, to reach net zero 25 per cent of the solution must come from energy efficiency improvements.”

An emerging trend, he says, is how the property industry is measuring and appreciating the value of the ESG component in retrofitting older buildings. It is about risk mitigation and future-proofing an asset to prevent it from being stranded in a net zero world.

“Today, when we undertake repositioning, the problem we are solving is much broader. It is a whole-of-building approach with an eye on its whole-of-life, focussing on getting gas and fossil fuel out of the asset and connecting to renewable energy during operations.

“What we are trying to solve today is significantly more complex and wide-ranging than what we were trying to tackle in 2016. That is a measure of the maturity of our market.”

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We can’t take our eyes off energy. Eventually, to reach net zero 25 per cent of the solution must come from energy efficiency improvements

The first CEFC investment was with Sydney’s EG Funds Management, setting up a fund looking to target secondary office assets specifically to add value and to reposition them.

(Separately today, the CEFC has deployed hundreds of millions of dollars with a range of developers towards green initiatives in new residential and commercial projects across the property market.)

“In 2016, we were trying to figure out operating efficiency and what could be done with an existing building. At that time, sustainability was not necessarily viewed as a risk mitigation tool, rather it was more of a value premium strategy. We were testing the market to find aligned capital which shared the same view.”

That initial close-ended fund acquired four assets– one each in Brisbane and Sydney, and two in Canberra. A lot of lessons were learned from these investments, Di Russo told [i3] Insights.

“We understood and we came to appreciate what the low-hanging fruit was, how much impact we could have, how cost-effective we could be by focussing on the metering, building optimisation and on-site renewable options.

“This provided a good learning curve in terms of understanding the moving parts of a building, and, from an investment perspective, starting to work through what the value proposition from a sustainability perspective of repositioning those assets.”

The EG Fund’s assets needed to lift their 1.5 NABERS star to a minimum of 4.5 star, a challenge that was quite market-leading at that time, Di Russo says. “Obviously, as the market has matured, the expectation has moved to a ratings need of 5.5 stars.

“Pleasingly, the cost- effectiveness of repositioning assets has continued to improve. The manager is targeting 5-5.5 star for some assets, so that has been progressively improving over time as well.

“We have now realised that the value of the mission is far greater than energy efficiency. A lot of the brown-to-green strategies that we are seeing today capture broader ESG packages and not just energy-related strategies.”

A current example is an office building at 200 Creek Street in Brisbane’s central business district. The CEFC has invested $30 million with local developer Forza to upgrade the building.

The plan is to lift the energy rating from half-star to 5.5 star to generate a 70 per cent improvement in energy efficiency with other initiatives focussed on driving outcomes broader than energy. The project has elicited tenant interest even before completion.

“There has been an exceptional take-up from a leasing perspective,” says Di Russo. “This proves that, even in this tight current market, and where tenants are looking at having to occupy a B-grade complex, they are looking to energy-efficient buildings. I think this speaks to the value of repositioning.”

As a federal government-backed agency charged with financing green projects, CEFC participation in projects such as 200 Creek Street has an important role in sending signals to the market on the commercial feasibility of greening a brown building.

“We look to be active in areas of the market which will provide scalable solutions to maximise momentum for the decarbonisation pathway across the real estate market,” Di Russo says.”

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Even in this tight current market,... where tenants are looking at having to occupy a B-grade complex, they are looking to energy-efficient buildings. I think this speaks to the value of repositioning

“We have a role to play in demonstrating how brown-to-green strategies can play a big part in the solution we need to get to net zero by 2050.

“The market has the required knowledge on what needs to be done with existing buildings. When targeting scaled change, the question for us revolves around what the market sees value in and where they are willing to invest,” he says.

Di Russo adds: ““Keeping an eye on capital flows and market themes ensures, we are driving an enhanced outcome for capital to sit alongside, driving scale, and can therefore focus on pushing the standards further through tapping into known market knowledge.”

It is heartening to see momentum starting to develop – ranging from financiers to investors, he says. Banks, non-bank lenders, global fund managers representing capital from pension funds, and sovereign wealth funds are all interested to participate in what is a large untapped market.

Under its ‘green real estate finance strategy’ aimed at funding old building retrofits for net zero, CEFC announced in September a $75 million commitment to its new investment mandate to leverage private sector capital to finance sustainable building upgrades.

The first commitment out of the mandate was a $35 million investment made alongside $35 million from MaxCap Group to refurbish an office building in Pirie Street owned by Adelaide-based developer, Quintessential.

As to how Australia compares with other regions, Di Russo says the answer is a mixed bag.

Europe not only has some good examples of strong regulatory approaches but ESG-focussed capital has also been investing for decades, resulting in being more advanced in their approach to implementing ESG into their investment strategies.

“Australia has been doing very well because it has been an industry-led market which has resulted in a market that very quickly finds the most commercial way to progress decarbonisation within assets.

“This has also resulted in some world-leading approaches to measurement and disclosure. Australia has the tools that help measure improvements, providing an ability for value to be attributed to these programs.

“Banking finance solutions looking for green debt options are predicated off the back of having some form of verification framework that can quantify what is green and what isn’t.”


[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.