Adam is the co-founder of Forza Capital, a property funds management business that specialises in value added and opportunistic investments on behalf of high net worth investors. Over the 11 years of operation, Forza Capital has built an enviable reputation through delivering investor IRR’s (net of fees) on concluded transactions of over 23%.

Adam heads up the investment side of the business. Adam has a strong interest in governance, sustainability and philanthropy – he was the former Vice President of the Property Funds Association of Australia (PFA), founded its Sustainability Committee and is currently involved as a Committee Member of Gruppetto, a philanthropic sub-fund of the Australian Communities Foundation.

Environmental, Social and Governance (ESG) criteria are fast becoming key drivers to investment allocation and outcomes. ESG can be a divisive topic that elicits emotive responses both for and against the concept. Even disregarding the moral and social responsibilities and focusing entirely on financial outcomes, the pursuit of strong ESG outcomes is critical.

ESG refers to the three criteria that are increasingly used to assess the return and risk of investments beyond financial outcomes. Investing does not occur in a vacuum - in fact, investing is the aggregate exposure to risk management, corporate behaviour, investment markets and environmental responses (both in the biological and human behavioural context).

ESG is inextricably linked to investment returns in the same way that investor behaviour impacts market performance. There is a well-established (long term) positive correlation between managers and investments that have strong ESG credentials and long-term outperformance. ESG is really just another form of risk analysis and management that looks at ‘non-balance sheet’ issues to analyse where investment performance may be positively or negatively impacted by corporate behaviour.

Very quickly, the narrative on ESG is moving away from a ‘nice to have’ to a mandatory and minimum requirement. Some of the greatest risks in investment markets over the last few years have come from non-financial sources. Consider the Banking Royal Commission where the cost of appalling and ingrained governance failures was ultimately borne by consumers. Or the environmental disaster that was the worst bushfire season on record in 2019/20, which occurred as climate action was elevated as the global social movement of this time.

Integrating ESG into business and investment decision making is essential and done properly, costs you nothing but can materially reduce risk and improve performance. COVID-19 has highlighted the causal link between social outcomes and financial ones; stripping some industries and business bare (think AMP and coal fired power plants), whilst driving unprecedented growth in others (renewable energy and electric vehicles) .

To date, many investment professionals have not really considered, or priced, the cost associated with acting unsustainably. Poor governance can lead to major financial loss for many and inadequate environmental controls are resulting in catastrophic global changes, increasing electricity costs, higher insurance premiums (or lack of insurance availability) and accelerating obsolescence.

The social impacts of poorly designed, poorly built residential dwellings are being felt by whole communities and are forcing behavioural change. Property has been at the forefront of ESG development for two reasons. Firstly, property is a major producer of greenhouse gases through embodied energy in construction materials and through ongoing energy usage. Secondly, building design is key in facilitating behavioural change of residents and occupants.

One key application of ESG to property relates to the recycling of old buildings. There should be a broader acknowledgement that the embodied energy in new buildings makes truly sustainable development nearly impossible. By recycling old buildings, we can reduce planning risk and rejuvenate existing assets, creating positive environmental, social and financial outcomes concurrently.

Where the construction of new buildings is necessary, design should go beyond code compliance to achieve leading environmental credentials at the time of construction. Many of the most impactful environmental building design elements, such as façade shading elements and integration of green walls and deep planting, are thousands of years old and cost almost nothing,

Technology also has a strong ESG role to play, especially when it comes to property. Building Management Systems can be used to fine tune an asset’s operation to minimise energy wastage, improve efficiency and reduce costs whilst also improving the occupants’ quality of life.

The considered use of buildings and supportive planning frameworks are also important. The co-location and integration of amenities such as childcare alongside offices can allow primary carers to advance in their careers whilst balancing family demands. This in turn can increase employee retention, and tenant retention for landlords.

PV solar arrays can also be deployed to reduce energy use, roof heat load and to create financial gains. In Queensland, where most leases are on a ‘gross’ basis, PV cells can be used to reduce common area power and increase net income. If a property sells on a 6% cap rate, there is a nearly a 17X multiple on the additional net income whereas the solar PV arrays typically cost 4-5X the annual savings generated. That is a significant arbitrage and a compelling investment outcome, both in terms of financial and ESG outcomes.

Other ESG considerations for new buildings include integration of End of Trip facilities that encourage people to ride or run to work, the creation of communities for the sharing of resources and experiences, improvement of air conditioning systems to both reduce load and increase fresh air and better design layout to improve the health and wellbeing of occupants.

By designing for the future, we can increase building lifecycles and resilience, reduce redundancy and running costs, and improve tenant attraction and retention. In time this may lead to more diverse debt funding sources with optimised pricing outcomes or better access to alternative capital that is seeking results beyond just financial returns.

ESG is no longer optional or nice to have, and ESG considerations will continue to flow into investment markets. Both those who actively choose to be at the forefront of this movement, and those who are dragged into it through customer, client or regulatory demands will find it an unavoidable element of business and investment.

Outside the environmental considerations for us and future generations, real assets play a key role in the operational lives of our society. Property investors wholly benefit from using ESG to proactively identify risks and create opportunities to secure tenants, source funding and optimise pricing outcomes.

While ESG outcomes can be on occasion difficult to quantify, better tools and systems will evolve to measure the positive impacts. We hope these will become commonplace for all investors in times to come. In the meantime, by understanding the importance of integrating ESG and being at its forefront, industry leaders will remain ahead of the competition and offer investments which not only enhance value but reduce risk and obsolescence for their investors.