Approximately 20 per cent of the CEFC’s capital has been invested in property. Florence Chong speaks with Michael Di Russo about the sector’s sustainability credentials
In 2011, former Prime Minister Julia Gillard set out a broad carbon emission policy for Australia and the establishment of a ‘green bank’ – the Clean Energy Finance Corporation (CEFC) – was among a dozen or so items on her agenda.
Her government created the CEFC, giving it access to $10 billion to invest on behalf of the Australian Government.
Operating independently of the government, the CEFC is now the world’s largest green bank, it says, working with businesses, institutional investors and innovative entrepreneurs to accelerate investment in Australia’s transition to net zero emissions.
An important part of the role of the CEFC is to invest to fill market gaps where the private sector is absent, and to retreat where the private sector is operating effectively.
Unsurprisingly, Australia’s carbon-intensive property sector was to become one of the key areas of focus for the green bank, and it is helping the sector close a market gap on sustainability investment.
Today, some 20 per cent of CEFC capital has been invested across the nation’s property sector, with some $2 billion in equity and debt investment commitments.
Why the property sector?
Because buildings account for over 50 per cent of electricity consumption in Australia’s built environment and contribute up to 25 per cent of Australia’s greenhouse gas emissions, explains Michael Di Russo, Director of Property at the CEFC.
“The property sector is a big focus of ours,” Di Russo says. “Decarbonising our built environment is critical for Australia if we are to achieve net zero emissions by 2050.
“For us, that means looking at how we can design and build new assets so they are low emissions and more energy efficient.
We’re finding commercial ways to reposition existing buildings as low carbon, with the added benefit of enhancing their attractiveness to investors and tenants, reducing the risk that they might become stranded assets
“Equally, we’re finding commercial ways to reposition existing buildings as low carbon, with the added benefit of enhancing their attractiveness to investors and tenants, reducing the risk that they might become stranded assets,” he says.
The CEFC is an active investor across all segments of the property market – from commercial office, retail and industrial segments through to the alternative and emerging asset classes, including student housing, retirement living and residential markets.
It also invests across the capital stack, using debt and equity instruments.
“We are unique in the way we approach our investments, whether it be as a lender or investor,” Di Russo told [i3] Insights.
“Because of who the CEFC is, our first lens when it comes to investing is always about purpose and driving an enhanced emissions outcome as it relates to ESG. And then we think about the best financial structure to achieve that.
“We invest with like-minded sponsors, looking to drive market-leading outcomes while also delivering significant emissions savings. We’re also focussed on models that are scalable in the broader market context, and likely to mobilise further capital,” he says.
Investor Demand
Australia’s institutional landlords are increasingly receptive to sustainability requirements, with many already deep into implementing their own programs, Di Russo says.
Large property managers, including Dexus, Stockland and Investa, rank highly on global sustainability indices, which measure the achievements (or otherwise) of corporate global corporations.
Australian property companies also compete among themselves to bring forward carbon neutral targets, brandishing their high NABERs ratings to attract both tenants and investors.
Their priority investor universe, including superannuation funds, offshore pension funds and sovereign wealth funds, is increasingly vocal in influencing company ESG agendas.
Di Russo says the diversity of the CEFC portfolio reflects its determination to drive positive sustainability outcomes across multiple asset allocations.
We make sure we understand the thematics that are coming through the sustainability landscape internationally, and how these can be relevant for the domestic market. Then we seek out the asset owners we can work with so we can have the biggest impact in terms of emissions reduction
“We make sure we understand the thematics that are coming through the sustainability landscape internationally, and how these can be relevant for the domestic market,” he says.
“Then we seek out the asset owners we can work with so we can have the biggest impact in terms of emissions reduction.
“This means we are participating in a lot of firsts for the Australian market, using our capital and focus to prove market-leading opportunities and to build the interest and confidence of other asset owners,” he says.
As an example, the CEFC was a cornerstone investor in the Investa commercial property fund’s $100-million Australian dollar green bond. The issuance was certified by the Climate Bond Initiative, a first in the Australian real estate sector.
The CEFC was also a cornerstone investor in both the Mirvac Australian Build-to-Rent Club and the Dexus Healthcare Property Fund – the first institutional managed funds in their respective sectors to include enhanced sustainability targets as core to their investment strategies.
CEFC participation in a $300 million sustainability-linked loan is supporting Frasers Property to finance a broad range of clean energy initiatives at two major developments – the Rubix Connect Estate in Victoria and the Horsley Park Estate in New South Wales.
Through its Real Utilities retail arm, Frasers is aiming to unlock the value of on-site solar, batteries, biodiesel and metering technologies as part of a long-term solution to manage tenants’ energy needs.
Mid Market
Di Russo says the CEFC sees exciting scope for growth in the mid-market, where private and smaller asset owners are shifting their focus to sustainability.
“It’s a balance between updating assets by using proven low carbon technologies and introducing a range of market firsts. Agile asset owners, backed by private money and high climate aspirations, are beginning to make a real impact.”
Di Russo highlights two recent CEFC investments as powerful indications of these trends. Victorian-based property investor Forza Capital is repositioning 200 Creek Street in the Brisbane central business district. The 25-year-old B-grade building had a 30 per cent vacancy rate and no NABERS rating.
“Our intention is to reposition the asset to be 55 per cent more efficient, placing it on par with the performance of premium grade office assets with no negative impact on commercial returns,” Di Russo says.
It’s about demonstrating how sustainability and commercial returns can co-exist
“It’s about demonstrating how sustainability and commercial returns can co-exist.”
Then there is the Roe Highway Logistics Park, which Western Australian developer Hesperia is building on the outskirts of Perth. The project is billed as the “greenest” in Perth, and will be the first industrial estate in WA delivered as a carbon neutral development.
“The core focus of our investment here is to tackle the embodied emissions during the delivery of a project by using low carbon concrete in the construction,” says Di Russo.
“Through more efficient design, choice of materials and carbon offsets, the project will achieve carbon neutral status upon completion.”
Di Russo described Hesperia as an innovative company which sets ambitious sustainability targets for its projects and understands the value of taking a market-leading position in the space.
This has led Hesperia to ‘think outside the box’ and look for investment opportunities that complement its sustainability aspirations.
One senses palpable excitement at the CEFC when it comes to this project. It marks another important milestone, looking beyond Scope 1 and 2 emissions to Scope 3, the crucial next leg in the journey towards net zero emissions.
Net Zero
As Australia looks to achieve net zero emissions by 2050, Di Russo says the construction industry will have to increase its focus on addressing upfront embodied emissions. This means looking at the carbon emissions of the underlying material – be it timber, concrete or steel.
The CEFC wants to be a market leader here too. On the back of the Hesperia commitment, it is seeking to transform Australia’s approach to large-scale building construction, encouraging mass timber construction across the property sector.
The approach has the potential to substantially cut construction-related emissions, providing a greener alternative to conventional construction materials, with CEFC research finding that the use of timber can cut embodied carbon by up to 75 per cent compared to the use of conventional steel and concrete.
Through its Timber Building Program, the CEFC has allocated up to $300 million in debt finance for eligible projects Australia-wide, including commercial offices, retail, industrial, healthcare and education.
Finance may also be available for multi-residential apartments, seniors living and student accommodation projects.
Today, 85 per cent of the lifetime GHG emissions of an asset come from the operational phase and 15 per cent from building materials and the construction process, Di Russo says.
By 2050, the emission sources will reverse, with 15 per cent coming from operation and 85 per cent in upfront-embodied materials as the current trend of grid electricity decarbonisation gathers pace.
Di Russo says the time is right for development of more timber buildings across the property sector. By locking in mass timber construction in new projects, Australia can also help develop local skills and experience, supply chains and delivery capabilities, all of which can catalyse more timber-based building activity into the future.
Equity positions are naturally stickier due to the scale and nature of the sustainability outcomes. Being an equity investor gives us a seat at the table, working alongside the other investors and asset owners
As an active investor, with a commercial focus, the CEFC is able to ‘recycle’ its capital, meaning it is available for reinvestment.
“With our early debt positions, we have been able to recycle the capital more frequently,” says Di Russo.
“Equity positions are naturally stickier due to the scale and nature of the sustainability outcomes. Being an equity investor gives us a seat at the table, working alongside the other investors and asset owners.
“It means we can continually evolve what we want to achieve in the investment, because what was best practice five years ago may not be so today and into the future,” he says.
The CEFC appreciates it can sometimes take time for investments to come to fruition, in what can often be frontier territory, Di Russo says. It is an approach which sees the CEFC operating as a ‘patient investor’ and working closely with its counterparties, right from the earliest planning stages to completion.
“There are opportunities to reduce emissions right across the investment lifecycle. We can be involved in the development approval process, through the design, procurement and construction phases and then into the operational stage,” Di Russo says.
“It’s about optimising the emissions performance of the asset to achieve the long-term sustainability targets.”
When it comes to sustainability priorities versus commercial returns, what is the choice?
“The market is changing rapidly and we’re seeing that it’s no longer a question of one or the other,” Di Russo says.
“There is a long- term commercial upside to sustainability related initiatives. Energy efficient buildings place less stress on the electricity network, cut electricity use and improve resilience outcomes for businesses.
“They are also increasingly attractive to tenants and investors, who want to be part of the low emissions economy. Today’s early adopters are setting the standards that others are increasingly following,” he says.
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[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.