30 May 2022 5 minute read
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One year on from publishing our 2040 net-zero pathway for real assets, Ed Dixon talks through some of the key highlights, challenges and priorities for 2022.

Important information

Read this article to understand:

  • Our progress so far in achieving our 2025 interim net-zero goals for our real assets portfolio
  • The challenges in infrastructure debt, structured finance and private corporate credit and what asset managers can do to address these
  • Our origination and asset management priorities for 2022

In January 2021, Aviva Investors published its net-zero pathway for real assets,1 detailing how we aim to achieve net-zero emissions across our real estate, infrastructure and private debt investments by 2040.

The pathway included five short-term goals that we expect to be delivered before the end of 2025:

  • Investing £2.5 billion in low-carbon and renewable energy infrastructure and buildings
  • Increasing low-carbon and renewable energy generation capacity to 1.5 gigawatts
  • Originating £1 billion of climate transition-focused loans
  • Creating at least 50 per cent of new pooled strategies with sustainable or impact labels
  • Reducing real estate carbon intensity by 30 per cent and energy intensity by 10 per cent

To coincide with the release of Aviva Investors Real Assets: Net-zero target, one year on, which provides a detailed update on our progress since publishing the pathway, we sat down with the author of the report and Aviva Investors’ head of responsible investment for real assets, Ed Dixon (ED). He discusses some of the key successes, explains why some private debt asset classes remain challenging, and sets out the priorities for 2022.

What have been the key highlights over the past year?

ED: Since launching our net-zero pathway in December 2020, we have made excellent progress towards our short-term investment and decarbonisation goals. Key highlights include the growth in our smart buildings programme, which has now reached over £3 million in avoided utility costs for our customers and contributed to a six per cent fall in energy intensity.

We also made great progress towards our green asset origination and renewable energy generation targets, with 78 per cent of all origination going to green assets and our total capacity reaching 1.1 gigawatts – enough to power a large city.

We grew our sustainable lending programme, delivering £783 million in sustainable transition loans, with just over 20 per cent remaining to reach our 2025 target of £1 billion. Another highlight was our acquisition in December of 6,300 hectares of Scottish moorland, where we will plant 3,000 hectares of new forest and restore 1,800 hectares of degraded peatland.2

Where do we need to see more improvement?

ED: Although we made strong progress against our short-term targets, our infrastructure debt, structured finance and private corporate debt asset classes still prove to be difficult areas to make tangible progress.

We joined a group of major infrastructure lenders to develop an ESG covenant package

We recently joined a group of major infrastructure lenders to develop an ESG covenant package, designed to establish a unified approach on ESG-related information and reporting requirements for infrastructure debt financings. This will go some way to ensure relationships between lenders and borrowers set off on the right foot, with good quality climate reporting embedded from the start.

However, the nature of the asset class means it will take many years to permeate the bulk of our assets as well as the broader industry.

As we see it, we currently operate in a ‘borrower’s market’, where the provision of robust climate data is not commonplace. In the year ahead, we intend to grow out sustainable lending capabilities into these more complex asset classes to encourage change in the sector.

Many asset owners and asset managers have set net-zero targets in the past year or so – how fierce is the competition for assets, and what does that mean for our acquisition and asset management approaches?

ED: In real estate, we have seen a hunt for sustainable value and the green premium for high-quality existing assets has led to stiff competition for the best core and core-plus assets. Poor-quality assets with prohibitively costly net-zero transition journeys ahead are attracting a brown discount as buyers factor in high decarbonisation costs to their underwriting. In addition, the volume of capital chasing green buildings and brown buildings with attractive decarbonisation pathways increases competition with multiple bidders on each opportunity.

Competition for green assets in infrastructure is intense

In infrastructure, competition for green assets is intense, particularly for core renewables. This is increasing pricing for these assets so the economic value is being squeezed.

We’re also seeing a significant convergence of capital, which is perhaps not directly related to net-zero targets but more based on commitments to invest in green assets. Clearly these themes align; however, greater net-zero and impact-focused allocations are needed to speed up the deployment of institutional capital into transitional assets beyond core renewables.

Can we draw any conclusions yet on how our net-zero pathway is impacting investment performance at an individual asset/portfolio level?

ED: In real estate, we’ve seen sustainability moving to the top of the agenda for external capital when considering how to invest with partners. Our recent joint venture with Allianz3 proves this, with it taking a pioneering approach to embedding decarbonisation into the deal structure. More broadly, the growth of our sustainable lending programme has seen us gain an edge in the real estate lending market with borrowers keen to be rewarded for taking on decarbonisation projects.

While we can’t pin net zero to a particular core performance metric yet, what we can say is it has already become table stakes for attracting external capital and maintaining credibility in the market.

What are the key priorities over the coming year?

ED: The most important priority is to focus our origination on both green and transition assets. Where we originate assets that do not meet our definition of low carbon or renewable, we will focus on the provision of covenants and incentives. By doing this we can minimise our negative contribution to the climate crisis while maximising our positive impact through driving real change on the ground. As we begin to learn more about our infrastructure and private debt assets through our work applying the Partnership for Carbon Accounting Financials (PCAF) methodology, this challenge will become easier to meet.

We will redouble our efforts to decarbonise existing buildings

Elsewhere in the portfolio, we will redouble our efforts to decarbonise existing buildings. Through our sustainable design partnership with Buro Happold, we intend to put far greater focus on planning, implementing and measuring the success of building refurbishment. In addition, we intend to finalise a solar partnership agreement that will target the creation of one of the largest rooftop solar portfolios in the UK.

Cutting across these themes is the need for us to leverage the power of our people to meet this challenge. Our origination, asset management and performance analysis colleagues are critical to the success of our short-term targets and progress towards our long-term goal of achieving net zero. To that end, we will provide training for our people to give context and build capability. We expect to go further and faster with the weight of the business behind our goals.

Aviva Investors Real Assets: Net-zero target, one year on

PDF 1.8 MB 25 pages

This document outlines the progress we have made to invest in low-carbon solutions and decarbonise existing assets across our platform.

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References

  1. ‘Real assets net zero pathway’, January 2021
  2. ‘Major peatland restoration, carbon capture & woodland creation scheme announced following acquisition of Glen Dye Moor’, Aviva Investors, December 20, 2021
  3. ‘Aviva Investors brings Allianz Real Estate in as partner for development scheme at 1 Liverpool Street and 101 Moorgate’, Aviva Investors, February 28, 2022

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