In recent years, Environmental, Social, and Governance (ESG) criteria have emerged as integral components of investment strategies globally, reshaping the way investors evaluate opportunities. In the context of property investing in Australia, the significance of ESG considerations has gained prominence, reflecting a growing awareness of the interconnectedness between sustainable practices and long-term financial success.
What is ESG Investing and How Does it Work?
But first, we need to understand what ESG investing means and how it works. ESG investing stands for Environmental, Social, and Governance investing. It’s a strategy used by investors to evaluate and incorporate non-financial factors — environmental, social, and governance criteria — into their investment decisions. Here’s a breakdown of each component:
- Environmental (E): This aspect considers factors such as climate change, carbon footprint, pollution, resource depletion, and waste management. Organisations with strong environmental practices might focus on reducing their carbon emissions, using renewable energy sources, or implementing sustainable supply chain practices.
- Social (S): Social factors encompass an organisations’ relationships with its employees, suppliers, customers, and the communities in which it operates. Issues like labour practices, human rights, diversity and inclusion, community relations, and product safety fall under this category. Organisations with strong social practices may prioritise fair labour practices, employee well-being, and community engagement.
- Governance (G): Governance refers to the structure and oversight of an organisation, including aspects like corporate governance, transparency, ethics, executive compensation, and shareholder rights. Organisations with strong governance practices often have independent boards of directors, transparent financial reporting, and effective risk management systems in place.
ESG investing aims to integrate these factors into investment analysis and decision-making processes alongside traditional financial metrics. Investors may use various ESG data sources, ratings, and frameworks to evaluate an organisations’ ESG performance and identify investment opportunities that align with their values or sustainability goals.
Different approaches to ESG investing
- Negative screening: Avoiding investments in companies involved in industries or activities deemed harmful or unethical, such as tobacco, weapons, or fossil fuels.
- Positive screening: Actively selecting investments based on their strong ESG performance or alignment with specific sustainability themes, such as renewable energy or clean technology.
- Integration: Incorporating ESG factors into traditional financial analysis to better understand an organisations’ long-term risks and opportunities.
- Impact investing: Investing with the intention of generating measurable positive social or environmental impact alongside financial returns.
ESG investing has gained popularity in recent years as investors increasingly recognise the importance of sustainability and responsible business practices. It’s seen as a way to not only generate financial returns but also to contribute to positive social and environmental outcomes.
Environmental Sustainability
Australia, renowned for its diverse landscapes, unique ecosystems, and abundant natural resources, faces environmental challenges that necessitate sustainable practices in the property sector. ESG principles guide investors to consider the environmental impact of their investments, fostering responsible resource management and climate-conscious development.
1. Sustainable Building Design and Construction
ESG-conscious property investors in Australia prioritise sustainable building practices. This involves implementing energy-efficient designs, using eco-friendly materials, and integrating renewable energy sources. Such initiatives not only reduce the carbon footprint of a property but also contribute to long-term operational cost savings through energy efficiency.
2. Green Certifications and Ratings
Investors increasingly seek properties with green certifications such as Green Star or NABERS, which evaluate the sustainability performance of buildings. These certifications provide a tangible measure of a property’s environmental impact, aiding investors in making informed decisions aligned with ESG criteria.
3. Climate Resilience
Australia faces climate-related challenges, including extreme weather events and rising sea levels. ESG-focused investors evaluate the resilience of properties to climate risks, ensuring that investments are safeguarded against potential damage and loss. This approach not only mitigates risk but also aligns with broader societal goals of climate resilience and adaptation.
Social Responsibility
Beyond environmental considerations, ESG in property investing extends to social factors, emphasising the importance of fostering inclusive and vibrant communities.
1. Affordable Housing
ESG-conscious investors recognise the social impact of their investments, including addressing the need for affordable housing. By supporting initiatives that prioritise affordability, investors contribute to social equity and help alleviate housing challenges in Australia.
2. Community Engagement
Investors increasingly understand the importance of engaging with local communities throughout the property lifecycle. This involves seeking input from residents, addressing concerns, and contributing to the overall well-being of the community. Such engagement enhances the social sustainability of a property investment, fostering positive relationships and community support.
3. Health and Wellbeing
ESG principles also encourage investments that prioritise the health and wellbeing of occupants. This may involve incorporating green spaces, promoting active transportation options, and designing buildings with features that enhance the physical and mental well-being of residents.
HOPE Case Study
Without essential workers, our cities would cease to function. We depend on them for our health and safety and the education of our children. That’s why police, nurses and firies need to buy homes close to their work, so we don’t lose them to burnout from long commutes or the stress of not being able to provide a proper home for those they love. HOPE’s homeownership scheme is delivering the security and certainty they need.
In addition, by supporting essential workers to live closer to where they work, there are demonstrable productivity, performance and lifestyle benefits.
Since establishing its Fund in October 2022 HOPE has invested in 17 properties that house 26 essential workers (some households have more than one), including ten police, seven religious ministers, four teachers, two nurses, two allied health workers and one social worker. This impact measurement is calculated using tools developed in partnership with impact experts – Think Impact.
Governance and Ethical Practices
The ‘G’ in ESG refers to governance, focusing on the ethical and transparent practices of companies and investors. In the realm of property investing in Australia, adherence to strong governance principles contributes to stability, ethical conduct, and long-term success.
1. Ethical Property Management
Investors embracing ESG prioritise ethical property management practices. This includes fair tenant relations, transparent communication, and adherence to ethical business practices, ensuring a positive impact on both tenants and the broader community.
2. Risk Management and Compliance
ESG-conscious investors recognise the importance of robust risk management and compliance frameworks. Adhering to regulations and proactively managing risks, such as changes in zoning laws or potential environmental liabilities, contributes to the sustainability and longevity of property investments.
3. Transparency and Reporting
Investors committed to ESG principles prioritise transparency in reporting. Providing stakeholders with comprehensive information on environmental and social performance, as well as governance practices, builds trust and accountability.
Financial Performance
Contrary to the perception that ESG considerations may compromise financial returns, evidence suggests that integrating ESG principles into property investment strategies can enhance long-term financial performance. Making a property sustainable and resilient can add value; in fact, studies show energy efficient homes are valued 5%-10% higher than those without sustainable inclusions.[i]
1. Increased Asset Value
Sustainable and well-managed properties often experience increased asset values over time. ESG-conscious investors benefit from a positive correlation between sustainable practices and property values, reflecting the growing demand for environmentally and socially responsible investments.
2. Lower Operational Costs
Energy-efficient buildings and sustainable practices can result in lower operational costs over the life of a property. From reduced utility expenses to lower maintenance costs, ESG investments often demonstrate improved operational efficiency, contributing to overall financial performance.
3. Enhanced Marketability
Properties aligned with ESG principles are more attractive to a growing segment of environmentally and socially conscious tenants and buyers. This enhanced marketability translates into quicker lease-ups, higher occupancy rates, and increased demand, all of which positively impact financial returns.
In conclusion, the integration of ESG principles into property investing in Australia is not just a moral imperative but a strategic necessity. As the global landscape evolves, investors are increasingly recognising that sustainable practices contribute not only to the greater good but also to financial success. In Australia, a nation with a unique blend of environmental treasures and societal challenges, ESG considerations in property investing offer a pathway towards resilient, inclusive, and profitable investments. Embracing sustainability in property development and management is not only an investment in bricks and mortar but also a commitment to the well-being of communities and the planet. As the ESG movement continues to gain momentum, property investors in Australia have a unique opportunity to lead the way in creating a future where financial success and responsible stewardship go hand in hand.
To learn more about investing with HOPE, book a 30 minute call with our Investment Team.[i]
Footnotes
1 https://apo.org.au/node/260856?
Disclaimer
(i) Past performance is not a reliable indicator of future performance. Refer to the Fund Private Placement Memorandum (PPM) for further details which should be reviewed carefully prior to investing.
The information in this article was finalised in June 2024.
The article has been prepared by HOPE Housing Fund Management Limited ACN 629 589 939 (Investment Manager/Manager/Company/HOPE/HOPE Housing) directed to wholesale clients and is strictly for general information and discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service and nothing in this article shall be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction.
The Investment Manager is a corporate authorised representative (number 001289514) of SILC Fiduciary Solutions Pty Ltd ACN 638 984 602 (AFS licence number 522145). The authority of the Investment Manager is limited to general advice and deal by arranging services to wholesale clients relating to the HOPE Housing Investment Trust (Fund/HOPE Fund) in Australia only.
The Fund’s Private Placement Memorandum (PPM) dated 19 April 2024 issued by the Specialised Investment and Lending Corporation Ltd ACN 149 520 918 (AFS licence number 407100) (Trustee) which offers investors an opportunity to subscribe for units in the Fund is available. If you would like to receive a copy of the PPM, please email [email protected]. Prospective investors should carefully consider the contents in the PPM in full and seek professional advice prior to making any decision regarding an investment in the Fund. Past performance and/or forward-looking statements are not a reliable indicator of future performance. Information relating to the Fund contained in this document has been prepared without taking into account the objectives, circumstances, or needs of any person, and may differ to information contained in the PPM. Except as required by law and only to the extent so required, neither the Investment Manager nor its affiliates warrant or guarantee, whether expressly or implicitly, the accuracy, validity, timeliness, merchantability or completeness of any information or data (whether prepared by us or by any third party) within this document for any particular purpose or use or that the information or data will be free from error. Further, the Trustee, the Investment Manager and its affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceeding, cost or expense arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with or from the use of the information in this document.
