Ep2: 5 frequently asked questions about real estate sustainability, with Connor McCauley and Anthony Clark, JLL

Anthony Clark

There was a fundamental lack of understanding as to basic concepts and principles. A lot of people didn't understand the difference between carbon neutral and net zero carbon.

Connor McCauley

An interesting one is in the industrial sector. For industrial logistics, the landlord has very little responsibility over the emissions for that whole asset class. But the occupier, the client or the tenant, they do. They're responsible for almost 100% of the emissions.

Anthony Clark

A lot of businesses didn't realise if you have employees working from home when you factor in people in poorly built Australian homes that are very leaky, running the air conditioners, running the gas, hot water, gas heating, all that kind of thing, it very quickly starts to add up.

Rebecca Kent

Welcome to JLL’s Perspectives podcast. In those soundbites just there we just heard from Connor McCauley and Anthony Clark, two of my colleagues at JLL who last year hosted a real estate sustainability roadshow. I asked them to join me in this episode to distill the conversations they had with their audiences into to five of the most frequently asked questions. I’m Rebeca Kent, content director at JLL, and host of this podcast. I hope there’s something here for you to take away.

Connor McCauley

My name is Connor McCauley. I'm the head of sustainability for JLL, Australia. My responsibility is to look after our corporate sustainability targets and making sure our people understand what we're doing in that space. The other is helping our clients to achieve their sustainability ambitions.

Connor McCauley

I was fortunate enough to grow up by the beach. And from a very young age, I always had a deep connection with nature. I was working in the mining sector of all places. And it was just a huge eye opener for me. I realised that I really wanted to work on the environment, and also the social side, and understand how I can focus my career and efforts on improving those things.

Anthony Clark

I'm the complete opposite. I grew up on a farm. Well kind of. I'm what you'd call a hybrid farm-city boy. My friends like to call me a concrete cowboy. I have, for want of a better phrase, a side hustle in the agricultural space. I have a farm out in the central west. And basically, I come from generations of farmers. And I just thought maybe there's an opportunity to do something different in that sector. I'm looking at how I sequester carbon in soils and trees and all that kind of thing.

Anthony Clark

My name is Anthony Clark. I'm a senior director in the tenant representation business at JLL. And my job is to advise and represent clients or occupiers of commercial office space to manage their ongoing real estate needs.

Rebecca Kent

So I mentioned in my intro that we’re going to discuss the most common questions that came up in your sustainability roadshow, which was held at the end of last year, and attended by 100 or so different organisations. Some with just 300 square metre offices, while there were also larger telecoms firms, and banks represented, with thousands of sqm spread across the country. But what we’re going to discuss affects all them.

So kicking off with question number one: ‘What is the difference between carbon neutral and net zero carbon?’, because the two are often used interchangeably, which is incorrect.

Anthony Clark

yeah, sure. So one of the things that prompted the sessions that we had with our clients across the country was that there was a fundamental lack of understanding as to basic concepts and principles. A lot of us were learning to walk before we could crawl. In the conversations we had with our clients, a lot of people didn't understand the difference between carbon neutral and net zero carbon. Carbon neutral is basically a process of a business measuring its scope one, two, and material scope three emissions, and then offsetting. It's still a good thing. We're not saying that carbon neutral is the poor cousin to net zero. It can be part of a net zero plan.

Net zero is more about prioritising true reductions. So instead of just offsetting, you're changing your business practices and behaviors. For example, procuring renewable energy, and if you've got a fleet, moving towards electric vehicles. It’s reducing your emissions across the entirety of the value chain, scope one, scope two and all of your scope three, and only using offsets as an absolute last resort for the residual 5% to 10% of the hard-to-remove emissions across the value chain.

Connor McCauley

Just add to that, there's another one that some investors and other big corporates are looking at globally, and it’s about being climate positive. So that's when they're going further than that and they're purchasing more offsets. They're having a positive impact on the environment.

Rebecca Kent

Oh, I see. So you're purchasing more offsets than carbon that you're emitting?

Connor McCauley

Exactly right. Yeah. So, through that net zero approach, you're reducing your emissions as far as possible, you're offsetting the remainder of your emissions, and then you're going further and taking in more carbon.

Rebecca Kent

Wow, so presumably that’s a pretty far off goal for a lot of organisations?

Connor McCauley

It isn't common. But there are some organisations that are already looking at that. I think Microsoft is a really good example where they've actually gone back to the year that they started business and purchased offsets for emissions from their operations back in history. So, not only from a point of view now and going forward where they're going to be climate positive or carbon positive, but back to when the initial company was founded.

Rebecca Kent

Carbon goals right there.

Connor and Anthony

Laughs

Rebecca Kent

Excellent. Okay. So that's question one. Now let's move on to number two: ‘What emissions are factored into my company's carbon footprint and how are they affected by hybrid working?’ I imagine hybrid working can complicate your carbon net zero plans. Connor, do you want to have first pass at this?

Connor McCauley

Yeah, Sure. Anthony mentioned before we have three scopes of emissions: scope one, two, and three.

Scope one is about any combustion activities within your operation. So often, when you're in an office, there might be some fossil fuel use for heating. So that's covered in scope one. And then also, if you have a fleet of vehicles, there's combustion happening there as well.

The next is scope two. These are indirect emissions from purchased electricity. So again, a lot of the buildings we sit in, for example, this room that we're in here now, the equipment is all run off electricity. So that accounts for your scope two emissions.

The final and the biggest area is scope three. So scope three can account for a company's total carbon footprint and it could be anywhere from 80% to 95% of their emissions are scope three. They often split them into upstream and downstream activities. So your upstream activities are any purchased goods and services. That could be around air travel or any procurement spend you have. And then the downstream activities are what happens once you've sold your business's products or services. For us at JLL, that's about the properties that we manage, and the facilities we manage. So that counts for our scope three emissions.

Rebecca Kent

Thanks, Connor. So, Anthony, how is this managed when you have staff working both from the home and office?

Anthony Clark

So a lot of businesses don't realise, certainly in the sessions that we ran, a lot of them didn't realise, that if you have employees working from home, it's not just an hour at home in the morning, actually spending whole days at home, those emissions form part of the business's scope three emissions.

So, for a business like JLL, our real estate, our own leased premises, isn't a large percentage of our footprint, because we manage buildings on behalf of landlords and that takes up a big chunk of our emissions. But for a law firm or an accounting firm where their premises are a pretty substantial portion of their broader footprint, a business in the old world might have had 10,000 sqm pre-pandemic, in the new world, if they're going to retain that footprint, but also allow people to work from home, their footprint’s actually growing. A lot of businesses didn't realise that. They think that 10,000 sqm occupier can actually skinny down to 8,000 sqm and there might be a net saving there. But when you factor in people at home in poorly-built Australian homes that are very leaky, running the air conditioners, running the gas, hot water, gas heating, all that kind of thing, it very quickly starts to add up.

So I think that's going to be a path that a lot of our clients are really going to struggle to understand, and manage. It's very easy to manage your own real estate and the footprint and it peaks and troughs, but with people working from home, it just adds an extra element

Connor McCauley

Just to add to that, it's going to change. We're still in this post-COVID-19 recovery time when people are considering how much office space to take and what the return to work looks like. But when we're looking at carbon accounting, which is the other fancy word for this, it is a ledger. So, there's carbon going in, there's carbon going out, depending on what decisions you're making. The opposite to that is, if people are traveling into work less than they're staying in their local area, there's also less transmission. So that comes into consideration as well.

Rebecca Kent

Where do you even start with calculating that?

Connor McCauley

There needs to be a lot of estimation that comes in originally when you're calculating a company's carbon emissions footprint. A company like JLL, we've got almost 100,000 people globally in over 100 countries, it would take a long time to accurately measure all of the carbon for that business. So we use a lot of benchmarks. And we end up using a lot of spend, so we can calculate our emissions initially, based on how much revenue we're generating for certain clients and use that as a proxy.

Rebecca Kent

Right. Okay.

Connor McCauley

Similar to the one about hybrid working. There, you just send out a survey to your staff, and hopefully you get a high response rate, but you use average data, so the average distance that they'd be travelling to and from work to calculate the emissions level.

Anthony Clark

That's one of the biggest problems at the moment. We've heard a lot of our clients saying they're struggling to get good data, particularly from a real estate perspective, either because the base building systems don't allow for that data to be churned out, or there's a challenge getting it from the landlord, for whatever reason that may be. So there's a lot of estimating occurring.

But traditionally, the onus has been on the tenants to provide information to the landlord, so the landlord can maintain ratings and all that kind of thing. One of the things that we see needing to happen over the next couple of years to get better at all of this and increase efficiency in the sector is a lot better information flow between landlord and tenants, and the right tech in the building to be able to track and record that information so it can be shared.

Rebecca Kent

It really is a symbiotic relationship, isn't it? And it goes both ways so landlords output can affect the tenant's path to net zero and vice versa.

Anthony Clark

Yeah, and you need truckloads of data. Connor was talking about the scope. So the landlord, the scope one and two emissions in the base building are the tenant's scope three. And then the tenant's scope one and two emissions in their tenancy is the base building’s scope three. So there's an absolute alignment. You pick up each other's emissions, basically.

Connor McCauley

But an interesting one is in the industrial sector. So, for industrial logistics, the landlord has very little responsibility over the emissions for that whole asset class. But the occupier, the client or the tenant, they do. They're responsible for 90%, almost 100% of the emissions there. So, there needs to be a lot more collaboration between those two.

What we're seeing in that industrial and logistics sector, is the occupiers, or the tenants, are going to the landlord and saying, 'Look, how can we optimise this building? How can we use the roof space to put on solar? How can it be more energy efficient?’ And then the investors and the landlords are coming to them and saying that, to your point earlier, ‘We want your data, so we will give you that data, but we'll also provide a an incentive to you to help make that building more energy efficient.'

Rebecca Kent

So why in industrial and logistics is the landlord responsible for less than saying the commercial office sector?

Connor McCauley

If I take an office, for example, the tenants are responsible for about 40% to 65% of energy consumption for that building. But in industrial it's 95% to 100%. So it still comes down to the landlords, because it's their scope three emissions, but they have very little control. So, if a Woolies or a Coles, or someone in the industrial logistics sector has a lot of space, they have the responsibility, the operational control, for how that facility is managed. But the landlord still owns the asset. So, for them to reduce their scope three they need to have a stronger partnership with those tenants.

Rebecca Kent

Right, so it's just the nature of the asset class.

Anthony and Connor

Yeah.

Rebecca Kent

Alright, let's move on to the next question. ‘What is the process to get to net zero? And how do my company's commitments impact the leases that we sign?’ The process? Truckloads of data, as Anthony would say?

Connor and Anthony

Laughs

Connor McCauley

I'd say initially, you have to measure. You can't manage what you don't measure.

Anthony Clark

I like that. Didn’t you coin that phrase?

Connor McCauley

Definitely not me.

But the first point is to calculate. You can't reduce what you don't know. So you have to calculate what your emissions are. And then once you have that, the second step is to do energy efficiency programs. You don't want to be spending a lot in terms of refurbishing the asset if it is an inefficient one. Usually, the easiest low-cost, or no-cost measures, is stuff that most building owners have done, but some haven't, which is changing your lighting, putting more energy efficient lighting or sensors in there to make sure things are switching off when they don't need to be used.

Connor McCauley

So that's definitely step one. Step two is then to spend a bit more money to do the upgrades for that asset. You'll be looking at mid-size or deep retrofits for that building. You could be switching over the mechanical electrical plant within the building or within the occupancy if it's just a tenant space. And also, looking at installation. After that, you want to then look at how you're sourcing the electricity. That can be from renewables ideally on site. So again, going back to the industrial or the retail sector, they have larger roof spaces. So there's more opportunities to put solar on top of those roofs. And then finally, you'd be looking at purchasing any remaining electricity from the grid, but from a renewable source on the grid.

Rebecca Kent

Okay, great, Anthony, anything to add to that?

Anthony Clark

I'm just going to say for, for a corporate, it might be a little bit different. So I guess the exploration phase and setting up the plan is a big milestone for a corporate, so they need to understand what activities they're going to undertake over the next 5, 10, 15 years, depending on where their commitment is to slowly phase out, for example, if they've got a fleet of vehicles, moving those to fully electric. In the case of JLL, we've got to look the buildings we manage and how that impacts us.

Rebecca Kent

And you need to register that you're sort of officially on the path, right, to carbon zero status. Is that correct? And how do you do that?

Connor McCauley

We've just gone through Cop 27. But a year ago, we had Cop 26. And what we saw in the lead up to that was that a huge number of companies signed up to the Science-Based Targets initiative. And what that initiative does is sets in stone how you're going to decarbonise. It uses sophisticated data models to measure the carbon for your industry, and then maps it against your organisation. Through that process, and there's a few others that are that are emerging, that's when you can lock in how you're going to achieve net zero and then you have to report against that commitment and that roadmap you have each year.

Rebecca Kent

Okay, so that’s the process to get to net zero. The next part of that question was ‘How are leases changing to factor in companies’ sustainability targets?’. Anthony, that’s one for you.

Anthony Clark

So certainly our expectation is that, much like a company's financials that audited annually, there will come a point in time where a business's net zero target, what it's doing with its emissions, will be audited. So it's very important that if you are setting a target, that the lease mirrors what that target is, and that's really around a decarbonisation plan.

So we've had green leases, historically, green leases have been around for a while. And a lot of that deals with performance levels in the base building and initiatives to make buildings more efficient. And now we've really got to start looking at where are the emissions coming from? So where are you sourcing your electricity and have milestones in leases that mirror a tenant's net zero plan?

So it would be very hard for a small occupier to knock on the door of landlord one day and say, 'Hi, I'm a little 200-300 sqm occupier can you decarbonise your building because I've got to net zero target?'. It's probably more around the bigger occupiers doing the heavy lifting.

years from: 2025

Rebecca Kent

Thanks, Anthony. Okay, moving onto question four: ‘What are the regulations in this space, and what the opportunities on the horizon?’

A healthy dose of regulation can certainly put companies on the right path. It creates a bit of a stick approach, and this can create great opportunities as well for change. So, Connor, maybe you can talk to the regulations, which entail NABERS and Green Star certifications, I guess?

Connor McCauley

Yeah, so they are very progressive, NABERS and Green Star. I think there's a sort of a triumvirate of the NABERS: the government departments that runs NABERS, the Green Building Council of Australia, and the Property Council of Australia. The three of them together when it comes to the built environment, they're really setting the tone of how we're going to decarbonise.

A few years ago, they set out a roadmap called the climate positive roadmap, and it showed the industry really how to get from where we are now, for both new builds and existing assets. That is, what the pathway is to get from where we are now to get to a net zero world. There's a long way to go, but they have been, I guess, you would say progressive in how they're changing those standards and updating them. So it will become more difficult to maintain that same high level of five star, six star Green Star NABERS rated asset. And to do that, what you need to do is then you have to procure renewable energy, and also electrify those assets to maintain those going forward.

Anthony Clark

And you spoke about the stick, but we need to see the carrot as well. And one good example is, the way it currently works is if you're an Australian domiciled majority Australian-owned fund, and you build a new 'green asset', you'll get tax breaks. Whereas if you if you go and refurb an existing building, which arguably has a lot greater green credentials, because you're utilising the existing concrete, existing structure, that kind of thing, the embodied carbon is a lot lower, you can't access the same incentives. So all that sort of stuff needs to be better thought about. JLL as a business is part of the body advocating for some of that change.

Connor McCauley

Yeah, and I think the banking sector, the finance sector, are the ones who'll be driving that. So there's going to be a lot more green bonds and sustainable financing happening. And again, going back to those certifications, like Green Star and NABERS, they're the links to achieving them.

Rebecca Kent

Yeah, indeed. Ok, let's move on to our final question. What sustainability hacks can you share? I'm not sure anyone on your roadshow asked you this question, but I put it in here a bit selfishly because I frankly I love a good hack. And sometimes ideas are too good not to be shared.

Connor McCauley

I'd say we're in a environment at the moment – and not just in Australia, but internationally – of rising energy costs. So a lot of people don't want to spend the money initially to understand how they can save energy or water or even reduce their waste. But I would highly recommend investing a small amount. It can only be a couple of thousand dollars in getting an audit done. So once you've done had an audit, you can see where the energy savings are, water savings and even reducing your waste and that's going to save you money in the end. So the cost of an audit hasn't gone up, but the energy prices and waste collection prices definitely have. So I highly recommend getting an audit done.

Rebecca Kent

I presume you’ve conducted audits yourself for clients, and I bet they can be a real eye-opener in terms of how much waste there is?

Connor McCauley

Yeah, definitely. A simple one is around waste. So I'll give you a good example here where pre-COVID the waste contractors would be picking up how many bins they picked up. And then office numbers have gone down. So there hasn't been as much waste. So they're still collecting as many bins, a lot of them empty, and people are still paying the same prices. So all you need to do is count the number of bins you actually need go back to your supplier, reduce the numbers and save money.

Rebecca Kent

Wait, that's outrageous. You've got empty bins that you're paying for rubbish collection for? And trucks are still doing circuits for these empty bins?

Connor McCauley

Yeah, exactly. Crazy.

Anthony Clark

Truck still turns up and find a bin empty.

Connor McCauley

You're paying for an air collection.

Anthony Clark

I just want to make a point around power purchase agreements. So a lot of landlords recently have entered into renewable power purchase agreements. So that is basically, in the office sector there's only so much rooftop, and you can't really generate too much solar off a rooftop. So they're basically going to a renewable energy provider, whether it's a wind farm or solar farm, whatever and committing to a certain amount of power being purchased over a certain amount of time. So if tenants are able to access and piggyback the landlord's power purchase agreement, it can be challenging to do it, when you don't already have a lease in place that says that because the landlord will have already allocated that power somewhere. But when you're entering into a new lease, that's a really good way and it ticks a box as far as a net zero plan goes, if you have one. It gives you access obviously to the landlord's economies of scale with respect to pricing as well.

Connor McCauley

It helps a lot. So there's other there's other ways of doing it as well. There's the embedded network. So in different parts, especially in the retail sector, over in Western Australia, there are a lot of embedded networks. And that's where the landlords are already making their own network of energy, which they often sell to the tenants. So again, if they're purchasing renewables there, that's an easy win. But otherwise, it's around scope three, so more and more landlords are going to be looking to, well, they're already, purchasing these PPAs, as you mentioned, and then offering those to the tenants so they can reduce their scope three emissions.

Rebecca Kent

Fantastic. All right, we've come to the end of our five questions. Is there anything you'd like to enlighten our listeners with before we wrap up?

Connor McCauley

I think one of the other hacks I had on my list was just around the circular economy. So that can be a bit of a buzzword, but when we're looking at, you know, whether it's a whole building, or a tenancy, how we can reduce the amount of waste at the end of the life of that fit-out, of that building, going to landfill. And so it's about considering that early on in the design principle, and recycling and refurbishing as much of that material as possible.

If anyone's doing a de-fit at the moment, like we're moving our offices in Sydney soon, there's some great companies out there, like the Green Furniture Hub, FTD Circular, and Good360. These are not-for-profit entities take on that existing furniture and find new homes in charities and another areas. So just a bit of a plug there for those types of services.

Anthony Clark

And fit out as well. I think we need to get better at utilising and refurbishing existing fit-outs whether it's just reconfiguring them or whatever it is. I think historically we've been very good at just taking premises back to 'base building' standard and going again. So there's an incredible amount of embodied carbon in the fit-outs that we occupy. So we need to get better at refurbishing them and upcycling them so to speak at the end of their useful life as opposed to just turfing them out and burying them in a hole somewhere.

Connor McCauley

I think that goes to removing the requirement in the lease as well. The make-good requirement in the lease. Yeah, that can go a long way of helping us get there.

Rebecca Kent

Definitely. Because it sounds like it's sort of a cultural shift, if anything that needs to happen, as well as what's happening on paper and agreements, and that sort of thing.

Anthony Clark

you're absolutely right. The key takeaway is that we need to move as far away from this kind of transactional relationship between landlord and tenant as we can, and more to that symbiotic partnership where we're doing this together, we're on the same journey together-type relationship, which is hard for me to say as a tenant rep. Very hard.

Rebecca Kent

All right. That's great, Anthony Clark and Connor McCauley. It’s been fun. Presumably if anyone wants to learn more from you, you’re both happy to be contacted. Email, Linkedin, Phone?

Connor

Pleasure.

Anthony

Thank you very much

Rebecca Kent

This has been JLL’s Perspectives podcast and I’m Rebecca Kent. Thanks for listening.