ERM Energetics Exchange

Episode 6: AMP Capital - Unlocking value with a commitment to net zero emissions

• Season 1 • Episode 6

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Energetics’ Matt Sprague is joined by Chris Nunn, Head of Sustainability at AMP Capital, Real Estate, to discuss the value that can be created in setting net zero emissions targets. Moderated by Jamie Ayers, built environment leader at Energetics, the conversation spans why AMP Capital is pursuing a net zero ambition, their approach to scope 1, 2 and 3 emissions and their plans for securing offsets that support the restoration of Australia’s biodiversity.

Featuring: Matt Sprague, Senior Manager - Energetics and Chris Nunn, Head of Sustainability - AMP Capital, Real Estate

Our host: Jamie Ayers, Associate - Energetics

Note: The information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Listeners should not rely upon the content in this podcast without first seeking advice from a professional.

Introduction:

Welcome to the energetics exchange podcast, conversations with energy and climate experts. Please note that the information and commentary in this podcast is of a general nature only and does not take into account the objectives, financial situation or needs of any particular individual or business. Business should not rely upon the content in this podcast without first seeking advice from a professional.

Jamie Ayers:

Hello and welcome to the energetics exchange. I'm Jamie is built environment leader at energetics and today's host with me. I have my colleague and friend Matt spray. Matt is a senior team member at energetics and energy and climate expert and he provides technical and strategic advice to some of Australia's largest energy users. As a special guest today we're joined by AMP capital's head of sustainability Chris Nunn. AMP capital has a real estate portfolio of approximately$30 billion made up of approximately 1000 shopping centers, offices and industrial assets across Australia, New Zealand. Chris has 20 years of experience in sustainability with expertise in environmental law, writing systems, strategy and reporting and green building design. This level of experience from both Matt and Chris makes them well-placed to comment on today's topic of net zero pathways. Chris, Matt, welcome.

Chris Nunn:

Thank you.

Matt Sprague:

Hi Jamie.

Jamie Ayers:

Chris, why has imp adopted a net zero approach?

Chris Nunn:

Well, because of climate change, uh, I think it's the only responsible thing for old corporates to do now is to have a zero carbon target. It's not a question of if it's a question of when, when will you get to zero carbon? So I think that's the only question that corporates have to answer is how much pressure do you face from, in our case, your investors and your customers, the tenants, uh, plus the own pressure of that you supply for him on yourself, um, to, to get to zero carbon is the responsible thing to do.

Jamie Ayers:

And Matt, what's the market position on nuts here

Matt Sprague:

at the moment? More and more corporates and organizations across Australia and around the world are looking to set net zero targets as a few different approaches. But absolutely more and more people are setting these targets at the moment. In the Australian real estate sector, there's about 19 real estate companies that have set some sort of emissions reduction target, whether they're fully aligned or partially aligned to the climate targets sound to Paris and then more government organizations. Obviously each of the States and territories have now set a net zero 2050 targets and people have set different timeframes around their emissions.

Jamie Ayers:

The intersection of private and public sector approaches is an interesting one. Chris, how did you approach the target setting process?

Chris Nunn:

I think a big part of getting our internal and external stakeholders comfortable with the zero carbon by 2030 target is explaining how much of it is business as usual and us having an overrider to our 2030 zero carbon target that we will strive to achieve that at a cost neutral position, relative current electricity outgoings, and that's been the big comfort factor I think for investors, for our customers, for internal stakeholders is this is business as usual and I guess talking about business as usual, it's worth going into the elements of the the 2030 zero carbon commitment. For us that means scope one and two. So it's got two electrical emissions from base building services scope, one at direct emissions from gas consumption, diesel refrigerant leakage. And that we're not IX, we're excluding deliberately for now scope threes because that was a big unknown and a big uncertainty bar in the, how much are we going to have to pay to get to zero carbon. So in exploding Scott three that helped everyone get comfortable because there's a lot of discussion about should landlords take responsibility for tenant emissions transport to and from site waste generated by the tenants, water consumption in the site, downstream impacts of of waste disposal. And you know, it's endless. It's absolutely endless. So once you carve off scope three scope one and two feels achievable, then it was about, well a hundred percent renewable electricity has to be the foundation about zero carbon strategy. So a hundred percent renewables by 2030 is a big pillar of the zero con strategy. Of course, an ongoing commitment to energy efficiency. So we've set a target for all offices to be 5.5 star neighbors, base building energy ratings and old shopping centers to be five star neighbors righted by 2030 so we've set a trajectory of improvement across the area, weighted portfolio averages for efficiency, but that's ongoing, right? That probably will take 10 years to get there, but that's not going to stop us doing the renewable space. New developments obviously have to come in at a very high level, so 5.5 star minimum neighbors for offices and five-star for shopping centers from 2020 so anything new from now must be at that highest level that we expect it to be in the end game of 2030 that's a really interesting point. We scope two emissions making up the bulk of the challenge with the built environment. How did you go about prioritizing action on renewables and efficiency? Yeah, I think I preface that with saying how important it was for us to analyze our own emissions profile when setting those targets. Before we said all that detail targets, we established what the biggest elements of the amp capital owned real estate were. And as you say it, Scott too is by far the dominant, um, emissions source. So we worked with energetics actually to develop these excellent waterfall diagrams, which were really important communication tool early in both setting the targets and understanding where we should focus our effort. And it really showed that the scope to direct emissions from the base building electricity was more than half of our emissions profile. Um, and then gas and the efficiency improvements that we could achieve from ongoing knives. Improvements was smaller. So gas was perhaps less than 10%. Um, and the energy efficiency improvements were perhaps less than 25%, but the large bulk of it was the scope twos. And that was the real opportunity. And that directed our attention to procurement of electricity, a hundred percent renewable electricity, largely through KPIs as the primary focus of, of as zero carbon strategy. In the short term. Of course, the neighbor's work has, is ongoing. Um, and of course, so is research around, um, you know, the best way to do offsets and scope threes and tenant engagement. But it really did focus our effort, these waterfall diagrams on scope twos, uh, at direct electricity related emissions being the obvious place to start. And I think that was a bit of a departure from a lot of sustainability thinking has been informed by great work. But um, back in like 2007 with the McKinseys module Baton cost curves that said energy efficiency is the in buildings commercial buildings is the most cost effective climate change mitigation opportunity. And that was one of the reasons why I got into buildings is like, wow, this is a huge opportunity just by doing HVAC tuning and smart building stuff. We can make a huge difference to climate change in a way that's um, that has short paybacks and is, is cost positive ultimately in the, in the long run. And you know, me and many people in the built environment sustainability movement have been really motivated by that energy efficiency story. But that's changed, uh, with the declining cost of renewables. That has changed significantly and those cost curves have not tended to be redone. Climate works did an excellent, um, adaptation of the McKinseys module that Costco's for Australia, I think it was in 2010 and it still showed same sort of thing that building efficiency was, was right over there on the left in terms of the most cost effective bang for buck things you can do and pursuing renewables at that time was still relatively expensive. Uh, and I think that's one of the key messages we need to get out there is that is rapidly changing with the declining cost of solar in particular. Uh, and the PPIs now can be bought, um, from, you know, a one to two year time horizon. You can enter a PPA that is the same cost as your costs of procuring black power through the grid. You can, I mean, we've done a lot of analysis recently on costs of PPIs and the various providers and the contract terms and the various risk profiles of the different structures. And we are all over PPIs. But the big thing is the price. And for us we've got that massive overrider on our zero carbon strategy that we want to do this in a way that is actually responsible. Ultimately we're a funds manager. We hold money on behalf of investors who expect a return.

Matt Sprague:

I think Chris's point around the short term options for LGC our is is really interesting for a lot of organizations at the moment people are potentially hesitant around signing seven to 12 year electricity contracts with a renewable project. Just bearing in mind they don't know what the market's going to do in 12 years time, so they might be at a loss at that point in future. Even though it's a great deal now, so people are starting to look at alternative renewable procurement methodologies including short term LGC procurement based on an annual consumption volume or looking at LGC only off take agreements for three to seven years of LDCs only from a renewable project. So there's different alternatives. There's different options for corporates out there now and understanding which option suits you, your investors and your stakeholders is really key to making those pretty big decisions really. And we're seeing LGC prices coming down significantly over the last two years from our high of about 80 or$90 a certificate. They're now around about the$30 Mark and in the next couple of years we're seeing them closer to the$10 Mark. So that is opening up lots of other options and avenues for people to procure electricity. As Chris said, close to BAU, potentially a minor uplift, but potentially a cost neutral or even costs positive cost neutral or cost positive represents a real win-win. So moving on, Chris, residual emissions associated with gas consumption and other non renewable sources?

Chris Nunn:

Well, the first thing I'd say is that it's probably a small component and when we did those waterfall diagrams with energetics back in 2017, we were all surprised, I think how small the scope ones were. Um, because you expect there to be more gas. And um, for most of our assets we do have geographic diversification. There are quite a lot of Melbourne assets who use typically more gas for heating. And, and yet, uh, the scope ones were typically about 10% of our total emissions profile across the port. So I think that's the first thing to say is you'd be surprised how small they are and then when you actually go out and price what it costs to get offsets for that amount, it's cheap. And so that's reassuring and that that's a source of comfort. And, and then you turn to, well, what is a responsible offsetting strategy for those residual scope one emissions. And the negative perception around offsets have been that it's been seen as, as a cheap way of buying your way out of a problem. And I think there's a, there's a need for corporates doing voluntary zero carbon commitments to counter that through their choice of offsets. So intern cheap international offsets now have a relatively poor reputation in Australia. Um, I mean, you can still buy international offsets at the sort of three, four,$5 a ton Mark. Uh, and historically it was lower. It was one to$2 a ton. And, but now I think the, the responsible way to get to zero carbon for an Australian real estate is scoped to domestic renewables through a PPA. And then scope one's nature-based domestic nature based offsets because we want to really reserve the electricity related emissions, the renewables, uh, emissions reductions, you know, evidence evidence through Rex and other electricity related carbon credits for scope twos for electricity, you should be using zero carbon electricity to offset your scope to electrical demand. And then for scope ones where it's direct emissions from gas and diesel and refrigerants, then you can turn to two other options. You don't want to eat up the renewables capacity in the grid, um, or in the carbon market for, you know, other people will need those renewals across the economy. We'll need those recs for everyone's electrical. And there's only that, so much renewable energy so far. I mean, we can incentivize more investment, but, um, so reserve the reserve, the renewables credits for sculptors and then look at domestic nature-based for scope ones. And you know, we've got an interesting approach to that in that um, we were sourcing pricing on domestic, uh, nature-based credits and that tends to be, I think today in the 20 to$25 a ton Mark. But the outlook I think is that it will be a bit higher, perhaps 25 to 30 in the near term and then 30 plus in the longer term dollars a ton. The domestic nature based offset. So it's substantially more expensive than the sort of average father. It's Tom that you can get from other sources. And yet it's the right thing to do because of all the additionality we're also facing a biodiversity crosses and leveraging some of your scope. One costs for biodiversity preservation at the same time as you're getting a carbon benefit is really a big part of our strategy because biodiversity is one of our other pillars about 2030 sustainability strategy. We've made a commitment to buy a conservation reserve that is the equivalent in area two. Our entire real estate footprint, 4 million square meters or 400 hectares is that current real estate footprint. And we want to directly own and manage a high value conservation reserve that can compensate for the historical impacts of our footprint. And that's a bar diversity led initiative. But through that we can also potentially self-generate a reasonable amount of carbon credits that we hope to use for our scope one offsetting strategy. So that's how we'd like to see it going in the longterm is that corporates are using their scope one liability to do other great things. Uh, and so they focus on the additionality that those domestic offsets can bring. Whether that's, you know, uh, preserving Aboriginal culture by using, um, Savannah voting credits, um, in the Northern territory or, you know, land restoration in Northern new South Wales where land clearing is absolutely rampant, uh, or agricultural degradation through historical farming practices has left, you know, areas affected by salt. Um, you know, really not arable anymore. Well, we can use our carbon credits responsibly in Australia to get these great outcomes. And I think that's what we'd like to achieve as well.

Matt Sprague:

Your point about additionality that Chris is absolutely key. Having an offset strategy that identifies sources of offsets which have a fully audit-able trail and then having a clear retirement of those offsets into a registry is key to ensure that stakeholders and investors can see where they've gone and how they're retired so that they're not double counted or or use twice or on. Is is important to ensure and safeguard organizations reputational risks? I think as you said you can buy cheap international offsets with a poor reputation and I think as stakeholders and boards become more educated around sustainability and climate risk practices, they become more critical about the use of those offsets and the sources of them and now they'll start to pull you up if you're using cheaper offsets which aren't domestic based, which aren't appropriate and which aren't audited properly, then you'll have a poor reputation yourself as an organization. So targeting domestic certificates is probably a good strategy and then having a, an offset strategy which aligns with your corporate goals and your corporate objectives as well. So if you're a land based company and you want to do land based certificates to tell that co-benefit story or if you're a Marine operator and you want to invest in blue carbon credits because that's the environment that you operate in, that makes a lot of sense. So having those co-benefits as well as the additionality is really key to having a strong offset strategy towards 2030 and I think the other thing to consider is as we go forward towards 2030 when people are setting these targets, the demand on offsets is only going to increase. The supply might not necessarily be able to keep up in the short term. So having a longterm strategy or whether you want to start hedging offsets now to be able to retire in future years or whether you're going to ride the price wave to compensate for that supply and demand balance is going to be an important factor as well to the overall cost of a net zero strategy. And I think there's a great linkage there between how we create a narrative, which is fit for purpose, but it's also honest, Chris, how has AMD capital real estate communicated its net Sierra commitment and how has it been received?

Chris Nunn:

We use it in both ways. I think, uh, internally staff are really motivated by the biodiversity piece and they really like that. Um, yes, we have historically been part of an industry that's converted part of us bushlands into driveways and you know, foundations and I mean, we're all part of that story is that that is urbanization. And let's be honest about that. Externally, I think I've been surprised at how welcomely received that bite of se story is by our investors. Um, because when I was formulating that strategy for me, it was arguably the most ambitious and the most, the biggest logical leap for to make that, you know, uh, a city-based, um, property company should take direct responsibility for what's happening, uh, in the Bush. Uh, well people do respond to that. People are aware of the biodiversity crisis and the land clearing process in Australia. So, uh, I've been pleasantly surprised at how welcomely received that initiative has been among our investor community. So the net Sierra journey is an evolving one. What's next for amp capital real estate on energy and emissions? Well, in a targets we've set 20, 40 as the date to have fully offset relevant scope threes. So that's the latest by which we hope to have done it. But I think we'll incrementally tackle scope threes from those which we can, which are most directly attributable to our operational activity and those which we have the greatest degree of control over or, or influence over. Because I think all of scope threes are more in that basket of influence rather than control. And I think there's a, there's a pretty agreed position now among the real estate sector. Sums got threes, uh, close enough to control. Um, while there's still some influence in there, you can really take responsibility directly for some of them and we should be offsetting some of those. And so I think we'll see, you know, even asked, I think once we do ask one Scott twos in the next few years, we'll quickly move on to waste and water as the scope three emissions to tackle first. Then I think there's the ongoing question of tenant electricity. There's a lot of work to do in terms of the communications between landlord and tenant organizations about, well tenants, our scope three tenant emissions are their scope to, and who's gonna pick that up? Who's gonna pick the bill up for the scope? Those emissions that relate to the electricity consumption. And I think it's universally agreed that that should be the tenant organizations that, that ask type twos that they should pay directly for the renewables or the offsets. But we can help them with that. We can perhaps fold them into a PPI arrangement through an embedded network or we can help them leverage our procurement strategy by advising them or even buying for them. Um, so I think there's, there's some ways that we can really help tenants with their, um, scope two emissions, ASCO three emissions. And that's probably the biggest piece of scope threes is tenant communications, tenant engagement and agreeing who's going to do the offsetting and who pays and those financial arrangements between the landlord and tenant. Uh, something that we really have to work hard on. And then there's embodied carbon, which I think is really interesting and we've done quite a bit of work on this key quarter tower is building at that scale to entirely reuse the concrete core or rather retain a substantial of the contract concrete core and about a third of the decks as well. So it ends up being, um, about, you know, 65% of the structure retained. Um, so two 85% depending on, um, you know, how you calculate it. So it's actually a, a pretty big embodied carbon saving. And we've calculated that the embodied carbon saved by retaining the concrete core index, uh, in K quarter tower is equivalent to more than two years of operational emissions. And that's great. Uh, so you know, there is a substantial carbon saving through the retention of some of the concrete elements. But I think in the Australian property industry we are yet to tackle cement substitutes. There's definitely things we can do around steel. Um, recycled content in steel is not yet ubiquitous in the Australian construction industry. And I think the circular economy movement where we're starting to see those life cycle analyses and well, what are we going to do with the outputs from recycling centers? Well, we need to be turning that back into useful domestically constructed domestically made construction materials that we can then use in our buildings. And I think that's another important part of the scope three emissions is the circular economy dimension to incorporating more recycled content in building materials is something that we as an industry have not done well and we should be honest about that. And we need a lot of focus on that.

Matt Sprague:

I think building that embodied carbon scope into procurement strategies and procurement documentation when you're selecting suppliers or builders or building materials or whatever it is, um, having that as part of your assessment criteria upfront and whether you use a shadow carbon price or whether you use alternative scoring criteria to, to start challenging your supply chain and influencing, um, material selections of new builds or renovations I think can also aid in that influence. So you mentioned Chris around embodied carbon for purchase goods and services, all construction materials.

Jamie Ayers:

Thanks Chris. Thanks Matt. I think there's been a great story of the net zero journey, which I guess starts with some deep analysis. Then it really moves on to responsible messaging to bring people along on that journey. Yeah, I think Chris, you really expressed that it's important that you speak in the language of those you're speaking to. And would that be investors or to the public or to people within the industry. And then that view of leadership, getting your own house in order first and then bringing in clients, tenants and so, and that's how the world works. That's how we create a greater impact. More broadly. To everyone listening, if you have any feedback or questions, please email at info@energetics.com we look forward to you joining us again next week.

Introduction:

Energetics exchange podcast conversations with energy and climate experts.