The real estate sector is market leading when it comes to sustainability. This is important given the Property Council of Australia (PCA) says that real estate contributes 11.5% of Australia’s annual GDP. Michael Bleby recent wrote on this issue in the AFR https://www.afr.com/real-estate/commercial/property-industry-leads-on-assessing-slavery-supply-chain-risks-20190410-p51czz
The real estate sector has made significant gains in reducing emissions, using less electricity, minimising waste and water usage, reporting on sustainability and contributing to the communities in which they have their assets. Ethical Partners performs an Operational Risk Assessment (EPORA) on each company prior to investment. In determining the outcome of the EPORA two of the key areas are People and Planet as they relate to company operations:
1) People: We look at knowledge of supply chain and human rights policy, commitment and practice as well as other factors
2) Planet: We rate management’s ability and commitment to address carbon emissions and we look for any evidence that businesses are proactively undertaking work to either rehabilitate or mitigate their environmental impact.
All the major real estate players produce thorough and detailed sustainability reports. This compares to the Top 200 listed companies in Australia, of which just 57% produce an adequate sustainability report. Some examples of market leading behaviour from some of Australia’s largest listed real estate players include:
o Vicinity (VCX) will have the largest property solar programme in Australia spending more than $75m on solar energy generation at its centres generating 31,000 MWh of clean energy reducing its consumption from the national grid by up to 40%. Financially the strategy makes sense too as it generates an expected IRR of 12%
o VCX has reduced its Scope 1 and 2 greenhouse gas emissions in FY18 by 6% vs the previous year as well as reducing electricity and water usage and increasing its recycling rate to 43% (+7% vs FY17).
o Mirvac (MGR) in FY18 reduced its energy usage by 8.1% and is targeting (by 2020) 1m sqm of NABERS 5 star rated assets. It is over 80% of the way to meeting its target.
o 94%of Stockland’s (SGP) residential development waste was diverted from landfill in FY18
Further significant steps for the sector to take are in the areas of human rights and supply chain. Ethical Partners is seeing significant progress at both an industry and individual company level. It is in the areas of human rights and supply chain where the greatest opportunity lies for the sector.
Like most of corporate Australia, there is often limited and patchy knowledge about how much real estate companies know about what goods and services they are buying. Very simply, when a real estate company buys steel for its latest redevelopment, does it know where exactly it came from, who made it, what the workers who made it were paid, did they make it safely and so on?
Supply chain issues aren’t just restricted the buying materials from offshore. Cleaning services are an important procurement area for real estate companies.
Are the large buyers of cleaning services here in Australia confident those undertaking the work are paid the right level of wages, are treated fairly, and have proper training on the handling of dangerous chemicals? Ethical Partners is sure the everyday person using their local shopping centre would not expect the property owner to be supporting unfair work practices.
The good news is that progress is being made.
A group of Australian property owners have come together in a The Property Council of Australia (PCA) work group take a non-competitive collaborative approach. The group comprising of representatives from General Property Trust (GPT), Lend Lease (LLC), VCX, SGP, MGR and others is developing a supplier screening questionnaire in order to better assess supply chain risk. The answers to the questionnaire will be shared across industry participants. This will reduce the burden on suppliers as well as give the industry a better understanding of supply chain risks.
Ethical Partners is not aware of another major sector in the market collaborating in this way.
The Federal Modern Slavery Act will require all companies with revenues of greater than $100m to submit a Modern Slavery Statement reporting on the risks of modern slavery in their operations and supply chains and to demonstrate the actions they are taking to mitigate those risks. The NSW Parliament will also be introducing a Modern Slavery Act. The first company Modern Slavery Statements are required to be produced in the second half of next year.
In addition to industry collaboration some real estate companies are leading the pack with their own internal work on their supply chains. Dexus, Mirvac and Vicinity are the leading real estate companies when it comes to assessing supply chain risk.
VCX has undertaken a review of its cleaning contractors which triggered changes to work practices and employment practices. It also procures general maintenance services in 15 of its centres in Victoria through the social enterprise YMCA Rebuild.
MGR is further developing its planning which includes increasing dedicated resources, risk based training of staff and engaging external consultants. Its risk based approach is likely to look at geographical risk and materials procurement first. It is also likely to look closely at labour intensive services procurement.
But it is Dexus (DXS) that leads the way in supply chain assessment. Its 71 page performance pack outlines in some detail how it is dealing with the challenge of supply chain assessment:
o It has introduced an Embargo Policy which formalises the approach to identifying contractors that don’t meet its standards
o It was one of the first real estate companies to identify modern slavery as an issue that needs to be addressed
o It has sent a questionnaire to 20% of its supply chain (top 14 suppliers) regarding modern slavery and “most said they were well positioned or ready to comply”. This appears a good first step with more follow up no doubt required.
o DXS is monitoring suppliers “country of origin” and has identified a number of suppliers that have disclosed they operate in or procure products from countries with poor human rights policies or track record.
o DXS has also completed a risk assessment on supply chain spend per category that identifies capital works (building materials, façade works – country of origin, safety, worker benefits) and cleaning (wages, benefits, migrant workers) as the two biggest risks
Ethical Partners is looking for everyday companies that do things well. Doing things well includes understanding supply chain risk. To us it is about understanding and pricing risk in addition to doing the right thing from an ethical or values perspective.
During October 2021 the Fund returned 1.09% versus the S&P/ASX 300 Accumulation Index of 0.10%, outperforming the market by 0.99%. An overweight position in Materials added to relative performance while and overweight position in Financials detracted from relative performance.
This World Children’s Day, 20 November, we recognise the devastating and disproportionate impact the climate crisis is having and will continue to have on children. As the most anticipated event of the year, COP26, finishes, it remains clear we have never needed more urgent action from government, business and society to respond to the climate crisis
During September 2021 the Fund returned -1.19% (after fees) versus the S&P/ASX 300 Accumulation Index of -1.89%, outperforming the market by 0.70%. An underweight position in Healthcare and an overweight position in Transport added to relative performance. Over the last 12 months the Fund has returned 36.03%, outperforming the ASX300 Accum Index by 5.17%.