The property and real estate sector is an example of an industry adjusting to the pressures and expectations that come from ESG integration.
In the previous edition of our newsletter, we discussed the challenges in commercial real estate, an industry that has been identified as a ‘sleeping giant’ in the climate conversation due to its significant downstream Scope 3 emissions. While traditionally not a sustainability leader, this sector is taking proactive steps to improve its environmental impact. One key strategy involves reshaping its procurement practices, directly influencing how it sources and manages real estate products and services. This approach serves as a clear pathway to prioritise sustainability initiatives and provides property owners and managers with a tangible way to demonstrate progress. Industry participants are also taking the opportunity to share sustainability commitments around procurement practices. They are establishing strategic partnerships with suppliers that share sustainability values, especially those capable of offering ethically sourced and sustainable products. This is proving to be an effective strategy to tackle downstream Scope 3 emissions and promote a greener, more responsible commercial real estate industry.
Outside of procurement practices, the real estate industry is increasingly attentive to the human rights risks within its supply chains. Industry leaders are demonstrating progress by seeking suppliers that can help address social responsibility risks in their supply chain. Pressure to demonstrate sustainability progress in the real estate industry is also coming from the continuing tight labour market and the increasing environmental and social awareness of workers and consumers. Sustainability efforts are essential for employers to stay competitive and appealing in the market.
Unsurprisingly, the construction industry has similar challenges to the real estate industry due to an overlap in supply chains. Notwithstanding this, the construction industry faces extreme pressure to operate more sustainably due to the significant footprint of the industry. Globally, construction is reportedly responsible for almost 25% of greenhouse gas emissions, 16% of total water consumption and 30% to 40% of all solid waste.
In addition to reducing the industry’s environmental footprint, strong sustainability performance attracts a wider pool of investors, improves marketability of properties, and futureproofs buildings against the physical consequences of changing weather patterns. The industry is also being pushed by a wave of legislation, regulation and reporting requirements which are quickly evolving to address global emissions. It is not surprising that 80% of global construction leaders consider that sustainability will transform the industry over coming years.
To reduce their direct environmental impact, many are engaging on emissions reduction at a subcontractor and supplier level. This involves taking actions that influence the carbon intensity and circularity of building materials, and ensuring that subcontractors and value chain partners are aligned on sustainability and climate commitments. When this is done really well, it is most often due to the integration of ESG into the whole life of the project at an early stage during project planning and then continued throughout with key project decision making.
Building materials will still play a significant role in addressing the emissions intensity of the global construction industry.The federal government has been exploring the introduction of a tariff on products with high carbon emissions, such as steel, aluminium, and cement, in response to moves by other international trading partners. It is intended that this tariff will drive demand for alternative low-carbon products and cleaner production practices to reduce the overall impact of the construction industry.
The tariff would be in the form of an Australian carbon border adjustment mechanism (CBAM) which would put a price on carbon emitted during the production of carbon intensive goods (e.g. steel and cement) entering the country. The mechanism intends to drive cleaner industrial production by international suppliers. The final report on the proposed CBAM is expected by the third quarter of 2024 and will address if Australia should adopt similar policies to the EU CBAM which is set to commence its transitional phase in October 2023.
The introduction of an Australian CBAM would significantly impact the construction supply chain and further demonstrate the transformational sustainability shift in the industry. When considering what sustainability initiatives to prioritise, construction industry participants are advised to be modelling implications of an Australian CBAM if it is introduced and undertake a value chain audit to tackle downstream emissions exposure while engaging with suppliers.
The Australian agricultural industry plays a unique role in the conversation. It faces the same pressure to reduce emissions generated by its activities, however it is also widely acknowledged to be part of the solution for Australia’s overall transition.
In 2021, the industry was responsible for 16.8% of Australia's net emissions. The spotlight is shining brighter than ever on the industry to address its environmental impacts, given Australia will not achieve its national climate commitments without this effort.
Earlier this year, Australian Agriculture Ministers released the National Statement on Climate Change and Agriculture which demonstrated a shared commitment to work in partnership with the industry and ensure that Australia is a leader in climate-smart practice by:
The Statement demonstrates how sustainability considerations will shape the agriculture industry in coming years, and the important role of the industry to manage climate impacts. The industry is exploring innovative solutions across Australia, including examples of digital agricultural technology pilots, drought resilience plans, climate adapted farming projects, circular economy solutions, methane reduction projects, carbon-neutral feeding systems and carbon forestry tools.
Sector specific progress is also identifiable within the wider agriculture industry. The Australian red meat industry has released a report outlining the pathways for climate neutrality. The report reveals that, by adopting a common method and approach, the sector has the potential to become carbon neutral by 2026.
State governments are also focused on decarbonising the agriculture industry. Queensland, Victoria and the Northern Territory are releasing frameworks to support the industry to reduce emissions. In Queensland, the Low Emissions Agriculture Roadmap has been released to guide the industry over the next 10 years to reduce production-based emissions and to increase carbon farming opportunities.
Beyond emissions reduction, biodiversity loss is a key sustainability risk for the industry. There is pressure on the industry to halt and reverse biodiversity loss that has occurred through agricultural activities. In addition to emissions reduction, the next key sustainability focus for the industry will be to pursue nature positive solutions and to reverse biodiversity impacts.
McR ESG recognises that each industry faces its own set of challenges and opportunities in addressing sustainability, and we are supporting clients across variety of industries to respond to these changes.
In August, the Australian Government released the 6th annual Intergenerational Report (the report), which identified and examined five major forces that will shape the country's future and economy to 2063. These forces are:
These forces set out clear opportunities and obstacles that Australia will face over the next four decades. Climate change and the net zero transition is particularly set to change the composition of the Australian economy and will have a significant impact on society. The report predicts that this force will lead to the decline of global demand for some exports, while creating new markets and opportunities for some key industries that Australia is positioned to capitalise on.
While many of the findings have already been identified by the federal government, a couple of key observations are that:
Dovetailing with these findings are the results of the most recent Responsible Investment Association Australasia report released which reveals that:
Advising businesses on their ESG responses, McR ESG ensures our clients are positioned for these opportunities and ensures their objectives meet development standard expectations by government and financial stakeholders like investors, lenders and insurers.
Reach out to our team to explore how you can take advantage of these opportunities to gain competitive advantage while meeting stakeholder expectations.
As we approach 2025, companies who have introduced ambitious interim emissions reduction targets are starting to evaluate their progress. Anglo-American miner Rio Tinto is one of these companies, with its first decarbonisation target set to achieve a 15% reduction in group emissions set for 2025. This month, Rio Tinto announced that it is likely to miss its 2025 decarbonisation target unless it turns to its last resort of buying carbon credits.
This admission reflects the challenges faced by the mining sector to decarbonise operations and meet emissions reduction targets at the same time as scaling up operations to produce the resources essential to facilitate a low-carbon transition.
In its half-year update, Rio-Tinto revealed its concerns about meeting the set 2025 targets and attributed the setback to underlying emissions growth tied to "evolving production plans". Rio Tinto’s emissions largely come from the processing and refining of metals such as iron ore and aluminium, with mining only making up 20% of total emissions.
Earlier this year, Rio Tinto’s chief executive Jakob Stausholm said he regretted the emissions targets that were set by the company’s previous executives. He stated that reaching the 2025 and 2030 deadline would require some hard choices, including increased capital allocation towards the decarbonisation of its facilities which are also facing increasing payments for carbon emissions under the reformed Safeguard Mechanism scheme.
Rio Tinto’s mining peers including BHP and Fortescue Metals Group remain on track to meet their goals. BHP is aiming for at least 30% reduction of Scope 1 and 3 emissions by 2030 and Fortescue is aiming for net zero emissions by the same year. However, heavy-emitting peer Shell has also come under fire this month for revealing that it has shelved plans to develop carbon credits to compensate for its continued CO2 emissions. The Anglo-Dutch oil major has maintained its commitment to net zero 2050, however, investors are unclear on how the company will reach this target as a strategic shift was made earlier this year to focus on fossil fuels.
Investors will be paying close attention to Rio Tinto over the next 18 months to see how the company is progressing towards its 2025 target, and sector peers will face pressure to avoid the same pitfalls as they work to decarbonise in line with set 2030 targets. This announcement demonstrates that emission reduction targets are not set-and-forget goals. Companies are expected to demonstrate progress towards any climate commitments through capital allocation, strategic change, and alignment of policies and internal decision making.
McR ESG is experienced in assisting clients to develop fit-for-purpose sustainability strategies and targets. We support clients integrate sustainability into business-as-usual practices to ensure targets can be achieved. If you would like to have a more detailed conversation around the circumstances of your business, please contact the team at McR ESG.