Green Premium, Brown Discount: New ESG Regulations Drive Value

Once regarded as a cost forced onto the sector by regulators, or by market demand, ESG is increasingly being seen as a boost to the bottom line. But putting a precise figure on the value provided by sustainability efforts is still a finicky business, property experts say. New regulatory and reporting measures will help the property sector quantify the correlation of ESG with an uptick in asset valuation, improvement in tenancy rates, or attention from investors. An Ernst &amp; Young report released earlier this year found 46 per cent of tenants are willing to pay a premium of up to 5 per cent for access to sustainable buildings. Ernst &amp; Young climate change and sustainability partner Emma Herd thinks that new and upcoming regulatory changes will help make data, and therefore dollars, even more visible. “The property sector has been at the forefront of thinking about both the risks and opportunities around sustainability factors,” Herd tells The Urban Developer . “And that plays out in many ways. In asset valuations. In cost base, in operations and design and construction considerations.” Valuers are at the forefront among those affected by changes to ESG regimes, with consideration of sustainability now incorporated into the International Valuation Standards. JLL head of ESG and risk Georgia Warren-Myers says that valuers and asset owners will need to collect more sustainability data to produce more accurate valuations. Warren-Myers says that the IVS changes are currently trickling through the valuation process. “The requirements and direction under the IVS are quite a woven process, with clear steps, yet still an evolving space as valuers work out significant ESG factors for their sectors and markets...but valuers have likely been implicitly considering, and the changes require valuers to consider sustainability more explicitly,” she says. ESG value gap looming in office market Commercial assets are among those most affected by ESG efforts, with significant divergence among prime and secondary markets. New regulations, and a wave of tenancy turnover, will soon expose underperforming assets. MSCI head of private assets Benjamin Martin-Henry says that “we’re certainly seeing things like green premiums coming into valuations and leasing outcomes as well”. “It’s just hard to pull out the green premium. It’s easier to see the brown discount, because those are poorer-quality assets.” GPT head of leasing, office Stephen Nicol says high-performing buildings, and being actively engaged in managing assets sustainably, make a difference to leasing outcomes. “Sustainability credentials can play a role in the decision-making process,” Nicol says, “particularly for businesses with net zero targets or focused on reducing their emissions. “Tenants are also looking for workplace owners and managers who will actively partner with them to help achieve their ESG and net zero targets for their business.” Nicol points to GPT’s under-construction project at 51 Flinders Lane, Melbourne as an example. Embodied carbon neutral and fully electrified, the two towers of 14 and 39 storeys are also offering optional sustainable fitouts under the GPT Fitted Suites and GPT Space&amp;Co programs. ▲ Stephen Nicol says that GPT’s 51 Flinders Lane is attracting tenants with built-in sustainability, along with sustainable services. Warren-Myers says that big corporate tenants are going to be keeping removalists busy in the Sydney and Melbourne office markets in 2027-28. “You’re going to see a lot of churn over the next few years as tenants with clear net zero or carbon goals are seeking electrified assets to align with their corporate strategy. “For building owners, that presents a bit of an opportunity—or a risk if you’re not planning to go down that path. “And with markets that have significant levels of vacancy at the moment, tenants have the opportunity to move. It’s their market, to say ‘this is what I want’.” Herd’s report found that 92 per cent of corporate clients are more likely to stay in a building if it has strong sustainability credentials. For workers in the building, sustainability elements are often amenity features. “The sustainability aspects or dimensions of the building, they’re tactile, very visibly and tangibly experienced by the tenants, and they’re part of the core occupancy experience,” Herd says. But that same conflation of sustainability with amenity makes it difficult to draw out the bottom-line impact of each. “Valuers have to reflect what’s going on in the market, commonly comparable assets often have very similar characteristics and these often include their focus on sustainability attributes,” Warren-Myers says. Martin-Henry agrees that sustainability contributes to value, but that defining its impact is murky. “Premium assets, generally 5.5 to 6 Star Green ratings, they’ll have lower vacancies. “But even in that premium cohort there’s going to be differentiating factors. The gap between the top five office buildings in Sydney, and then the next five, the premium is quite big. “The worst-performing premium offices have lost 30 per cent of their value over the past two years, whereas the best-performing premium offices have lost 7 or 8 per cent. That’s a huge difference in premium assets. “Whereas the secondary offices—their value is still falling, they have not bottomed out and I don’t think they’ll bottom out for a while ... the recovery is going to be very long.” Retrofitting to bring ESG standards up to scratch may be too expensive to justify, Martin-Henry says, but the Quay Quarter Tower at 50 Bridge Street in Sydney is an example of how ageing stock can have a sustainable makeover. “Some of them, you have to kind of tear it down and start again. If your footplates aren’t big enough to command premium rents, it’s just not worth the money. “ Fifty Bridge Street is probably the poster example of how to do it, globally . Tearing it down around the core and re-using assets—it’s hard, it’s expensive, but they could do it because it’s a premium asset.” ▲ A rendering of Quay Quarter Tower at 50 Bridge Street, Sydney. Warren-Myers says that 101 Collins Street was an example of a retrofit done well. The 57-storey tower completed an electrification project in 2024 , which was achieved while the highrise was kept fully tenanted. But the case for retrofits can be very specific, according to Warren-Myers. “It’s highly dependent on the building. Some buildings are simpler to electrify, some are more complex ... depending on the year they were built, they have nice, big plant rooms, large risers ... that can make a difference to enabling retrofits.” More change, more opportunity Government is driving demand for sustainable buildings, both as a regulator and tenant. Warren-Myers says that government, as a tenant, has anchored expectations around a 5 NABERS rating, and signalled a move to a 5.5 NABERS minimum. ▲ Lendlease, Holcim and Nightingale Housing are among business leaders calling for a 75 per cent by 2035 emissions reduction target. The introduction of mandatory climate reporting in 2025 has also driven interest in scope-3 emissions data, with tenants asking landlords to provide information on their climate impacts—and to reduce them. Herd says the property industry is undertaking a slew of work on the measurability of embodied carbon—and there’s more to be done. In part, that’s driven by regulatory efforts such as the coming revisions to Australia’s Nationally Determined Contributions to the Paris Agreement, due to be released this year under the Net Zero Plan. Australia’s model sets emissions reductions targets for six key industries, including the built environment sector. A number of property industry leaders, including Lendlease, Holcim, and Nightingale Housing, have recently joined the Business for 75 coalition, calling for a 75 per cent reduction target. “We’re definitely seeing that wash through some of these decisions, both from the perspective of the requirement in the standards to do climate risk opportunity analysis, and secondly, in terms of data availability for underlying issues, reporting and target setting,” Herd says. “There’s a sectoral response that needs to happen as well, in terms of how we’re going to measure [embodied emissions], and then what to do about it. Because it’s everyone’s supply chain; it’s not just one company that can make this change.” For those holding the purse strings, sharpening up data practices under new regimes is also likely to bear valuable fruit. According to Herd, the release of the Australian Sustainable Finance Taxonomy in May, which developed ANZSIC codes for a number of activities relevant to property developers, will help banks and other lenders decide what to invest in. “That’s going to flush out a lot of underperformers,” Herd says. “So I think you’ll see a bit of a recalibration across the market in terms of who is actually doing this well, who is really positioning for that broader market shift around construction materials and processes.”

Green Premium, Brown Discount: New ESG Regulations Drive Value

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