Ep 105 - CEFC Mass Timber Program - Enabling Finance of Timber Construction

Adam Jones (00:20):

Today we're speaking with Christina Wijeratne from the Clean Energy Finance Corporation about sustainable construction and building. We'll be discussing the goals of the CEFC, the unique challenges of Embodied Carbon, the Mass Timber program while it was deployed, what the money was for the 300 mil there. So I know you want to know how you can get involved and use it as well. So Christina's going to share her knowledge and insights on these critical topics and provide a unique perspective on the role of financing in sustainable construction. So this is a must listen for anyone in the mass timber industry. So without any further ado, here is my conversation with Christina.

(00:56):

Thanks so much for coming on the podcast. Christina, can you start by telling us a little bit about yourself, your role and what you do?

Christina Wijeratne (01:03):

Yeah, sure. And thank you Adam for having me. So I've spent the past decade working across the institutional banking and investment space the last four years at the world's largest green bank, the CEFC. So my background and experience is very much in finance, but there's a heavy sustainability overlay just given the purpose led nature of the CEFC and I guess personal value alignment as well.

Adam Jones (01:27):

Fantastic. So that's crazy. I didn't realize the CEFCs. Did you say the The world's biggest?

Christina Wijeratne (01:32):

Yeah, so we're the world's largest green bank, which is really amazing.

Adam Jones (01:36):

Really? I actually had no idea that's such a big deal. And what are the overarching goals of the CEFC?

Christina Wijeratne (01:42):

Sure. So we were established by the federal government back in 2012, and we have the goal of accelerating Australia's transition to net zero emissions by 2050. So obviously a very important goal. And as the emissions challenge is an economy-wide issue, we have a cross-sectorial focus, which means we cover everything from energy generation and decarbonizing the grid all the way through to the energy demand side of which obviously property is a key component. Over the past decade, we've made commitments of over $10 billion and a bit over 2 billion of that is invested in the property space. And it's roughly split 50/50 between debt and equity as we have that flexibility too, I guess invest across the whole capital stack.

Adam Jones (02:23):

Gotcha. Moving on to embodied carbon. So you mentioned a lot about energy and technology and decarbonization, things like that. So recently you started looking at embodied carbon. Can you tell us your thoughts on this?

Christina Wijeratne (02:36):

Yeah, sure. So I guess we've seen the property sector make huge strides in addressing the operating emissions challenge for new buildings. So it was operating emissions continuing to be addressed. Embodied carbon is obviously becoming a much bigger piece of the built environments, emissions profile, the embodied carbon emissions of materials used in Australia total something like 30 to 50 million tons of CO2 equivalent per year, and that's about 5-10% of greenhouse gas emissions. So it's a huge contributor to emissions across our economy. And with over half the buildings that will be standing in 2050 yet to be constructed, it's really essential that we address the embodied carbon building materials. And I guess we know that industrial processes can be very high in emissions and difficult to decarbonize particularly, I guess like steel and glass come to mind. And we're looking to support the decarbonization of these industries from multiple angles, including through the CEFCs focus on resources and manufacturing, but also through influencing significant property construction

(03:41):

on the demand side. Concrete is probably the most advanced in terms of having commercially viable solutions available in the market across various suppliers. And we've supported a few projects in that space. So the Roe Highway Logistics Park in WA, users, borrows and busier products. And we also have a project down South North Kit Place in Victoria, which is the development of 74 townhomes and they're using Olson's eco product. And as we know, Mass Timber can obviously play a significant role here as it presents a readily available and proven technology that addresses embodied carbon where the application suits. So the CEFC is very keen to support the decarbonization of materials across the economy and help grow demand for long-boiled carbon materials using our finance to help address the challenge.

Adam Jones (04:31):

All right. So well assign, that caused a bit of a thrill. Last year was the Mass Timber program. Can you tell us a little bit about that and why it was deployed and what is it?

Christina Wijeratne (04:41):

Yeah, sure. So the idea was born out of a report we published titled Australian Buildings and Infrastructure Opportunities for Cutting and Bodied Carbon. And that was developed by Edge Environment for the CEFC in collaboration with the Green Building Council of Australia and the Infrastructure Sustainability Council. And we thought the topic was very relevant given the significant expected shift in the breakdown between operational emissions and embodied carbon emissions that I spoke to before. And we wanted to help quantify the challenge of cutting embodied carbon as well as identifying solutions and opportunities that it could create. So the report is full of great analysis and insights. I highly recommend the listeners check it out. But a key finding was that the use of timber can reduce embodied carbon by up to 75% in certain use cases, and that's compared to the use of conventional steel and concrete.

(05:32):

So on the back of these findings, we then launched our $300 million timber building program last year. The program aims to accelerate the use of mass timber construction in Australia with the provision of tailored debt finance to eligible projects. And I guess in addition to driving that kind of direct demand for mass timber products, the program also hopes to help develop local skills and experience supply chains and delivery capabilities. So all of those indirect impacts we're hoping will also catalyze even greater adoption of lower emissions timber-based construction and pleasingly, our first investment under the program has been made, so we're supporting our 15-story office tower in Collingwood at 36 Wellington Street that's being developed by Hines and will be one of Melbourne's tallest hybrid mass timber buildings, cutting embodied carbon levels by about 40% during construction. And it's also targeting net zero in operations. So it's really great to see the program come to light with such an impressive project.

Adam Jones (06:34):

Yeah, a hundred percent. So debt financing, can you tell us a little bit about what's the money for? Is it like lending it out and at a lower interest rate, or how does it actually? Yeah, how does that actually work?

Christina Wijeratne (06:44):

Yeah, sure. So I guess when we think about decarbonizing the built environment, it really does require an integrated whole-of-building approach rather than focusing on one element of a building. So we provide funding on a whole-of-project basis, which is kind of the typical way that other commercial investors would approach it as well. Under the timber building program, we look at project finance or lending at the corporate level. It's really based on the best fit for the project and the borrower and with the goal of supporting projects that have a material impact on upfront emissions through the use of mass timber. We also have some really helpful information on the timber building program on our website that kind of goes through eligibility guidelines and a bit more of the specifics about the program. So recommend checking that out as well.

Adam Jones (07:32):

Awesome. And so does this, correct me if I'm wrong, a bit of the pain points I did hear a few years ago in Mass Timber that it was a bit harder to find money for borrowing because there's something new and innovative and that gap is what you are filling here, is that you're going to be able to allow this new technology and really resolve that pain point. Is that correct?

Christina Wijeratne (07:51):

Yeah, precisely. That's what we're here to do. And if we can partner with other financiers bringing in third-party capital that's really a cherry on top. So that previous project I was talking about in Collingwood was invested alongside another financier. So it's great to kind of bring private capital along for the journey and support of these buildings and these materials.

Adam Jones (08:12):

So you're teaming up with private capital where we're required to get things across the line. Brilliant. Well, there's 300 mil to sitting runs, licking their lips, there's a lot of money. How do they go out there and get their hands on it?

Christina Wijeratne (08:23):

Well, we operate as a bespoke financier, so every transaction we look at, it's really on a case-by-case basis. It's very tailored for an individual project. And as we're a purpose-led organization, all our conversations really start at the point of impact. We really want to engage early cause it's critical to ensure that kind of alignment. So like-minded sponsors that see a role for timber and want to partner with an aligned party should definitely get in touch. If anyone has a project using timber to materially drive down emissions, the first step is to email me a project summary and we'll get in touch from there.

Adam Jones (08:59):

Great. And you may have already answered this, Christina, but so we're speaking about projects. Is there any mechanism for lending in terms of manufacturing capabilities or anyone looking to really build infrastructure to enable projects? Or is it all just at the project level? What are your thoughts on that?

Christina Wijeratne (09:17):

Yeah, for the timber building program specifically, we are looking to support the construction side, so projects that are using mass timber, but certainly across CEFC, we are looking to support both the supply and the demand side. So if anyone has any projects kind of across the spectrum that are helping the industry, definitely get in touch.

Adam Jones (09:38):

Great. Well, I've got one more question on the general dynamics of lending money. So say someone is a developer and they're looking to borrow money, just more generally, what puts them in a good position to be able to borrow money, whether it's through yourselves or through private capital as well?

Christina Wijeratne (09:54):

I suppose lending typically looks at things like the project itself, so understanding the product, where the planning approvals are up to the project timeline, having a good understanding of the feasibility analysis or having a financial model available. Any valuations are obviously key. Understanding the project structure in relation to sources of debt inequity, the proposed builder, and contract type are really important. Understanding the key consultants and advisors, particularly for something like mass timber, which is a bit new in the market, any leasing and sales strategies, all about information, kind of all finances would be looking to understand from our side. Obviously, we want to know a lot about the sustainability and we want that early engagement to help shape up the project.

Adam Jones (10:44):

Gotcha. That's a great 101 pulling ourselves up as we're getting towards the end now, Christina, what do you see is the future of sustainability in construction as we're moving forward?

Christina Wijeratne (10:55):

Sure. So I guess if we look at what we need to do for Australia to hit our decarbonization aspirations, we know for property we can't just focus on operational emissions. We need to address the decarbonization of construction and materials. Pleasingly, we're already seeing such pathways forming up. I think of the GVCA's green star rating tool, which now factors in upfront emissions and has a transition process to progressively stretch buildings to achieve greater embodied carbon standards. We're also seeing state governments and some local councils requiring the measurement of upfront carbon for residential and non-resident developments. And there's also an important role for technology. We're seeing some really interesting PropTech opportunities through our BC and impact capital arms, which is great to see. And I think moving forward we'll see more and more capital aligned to purpose. We're already seeing that shift start to happen over the past few years and there'll be more investment available and support tangible sustainable outcomes. So on that basis, I'm quite positive and optimistic about the path forward.

Adam Jones (11:57):

Fantastic. If people want to find out more about yourself or the CEFC or the Mass Timber program where should they go?

Christina Wijeratne (12:05):

So all the information about the CEFC and the Mass Timber program is at CEFC.com.au. And my email address, if anyone wants to get in contact about any potential opportunities is christina.wijeratne@cefc.com.au

Adam Jones (12:21):

Thank you so much for your time today. It's been great chatting.

Christina Wijeratne (12:23):

Yeah, thanks, Adam. It's been a pleasure.