How real-asset investors must decarbonise to future-proof portfolios.

Transforming the built environment is critical to decarbonising our economy. Carbon emissions from buildings and infrastructure are responsible for 60 per cent of emissions globally1.

In the UK, 80 per cent of buildings standing in 2050 will have already been built2 and across the developing world buildings and infrastructure are set to double by 2060  (the latter is the equivalent of adding a whole New York City every month)3. This means we need radical change in how we build and refurbish the buildings, transportation and utility systems we use every day.

Indeed, the Institute for Government recently warned the UK has still not grasped the scale of the task. It noted: “Meeting the commitment is a more difficult challenge than responding to the coronavirus crisis or getting Brexit done, and will require transformations in every sector of the UK economy, sustained investment over three decades and substantial changes to everyone’s lives.”

Radical transformation, risks and realigning capital

Achieving net zero is extremely challenging and will not be delivered without radical behavioural and economic transformation. For real asset investors, this means extensive electrification of transport and heating, rapid adoption of hydrogen and the development of affordable carbon capture and storage technologies.

Vital role investors must play in pushing for change on society’s biggest issues

Mark Versey, CEO of Aviva Investors, is under no illusion as to the changes required or the “vital role investors must play in pushing for change on society’s biggest issues”, especially on climate change.   

Darryl Murphy, managing director of infrastructure at Aviva Investors, wants to see more state intervention. “I’m pleased to see we have reached the point where government has been more prescriptive about the kind of technologies it wants to see,” he says. 

Although some may see this as controversial, arguing governments should not be allowed to pick winners, we simply don’t have time to lose. “We are not going to get there by just letting things evolve. We need much more planning, more focused effort,” says Murphy.

Ed Dixon, head of ESG for real assets at Aviva Investors, agrees that government has a significant role to play and wants to see better use of the assets we already have. “A skyscraper in the City of London might be knocked down and replaced with a new one, even though it is in a usable state and could be refurbished. There is nothing in current policy or regulation to prevent that; in fact, the VAT structure privileges ‘new’. We cannot keep demolishing 20-year-old buildings to rebuild simply because we want something different,” he says.

It is imperative real asset investors put in place detailed and robust net-zero pathways to protect their investments

Real asset investors are used to investing over the long term, so these future changes are relevant now. As the impact on portfolios could come quicker than many anticipate, it is imperative they put in place detailed and robust net-zero pathways to protect their investments.

But should they increase their appetite for risk to spur the changes needed? After all, net zero cannot be reached without rapid redeployment of capital – meaning investors must embrace this challenge to avoid far more damaging implications from the effects of the climate crisis.

Unfortunately, many people do not understand how to make the changes needed, even though tried-and-tested technologies exist. And yet, the value of properties that cannot achieve net zero without significant upgrades will fall.  

Building a sustainable future

This changes the client demand dynamics. Daniel McHugh, chief investment officer for real assets at Aviva Investors, is acutely aware of this. “As a committed investor, acting and supporting the transition to a low-carbon and climate-resilient world is not only consistent with our values, it is absolutely in line with what our clients now expect,” he says. 

We have placed sustainability at the heart of our real assets business

That we have placed sustainability at the heart of our real assets business should therefore come as no surprise. And having set our stall out to become net zero across our £47.3 billion real assets platform by 2040, we have also committed to embedding this through multiple layers of the investment process: from asset origination to asset management and ongoing stakeholder engagement.

To ensure these commitments are met with measurable actions, the initiative is supported by five explicit short-term interim goals we expect to be delivered over the next four years to 2025, including:

  • 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 ten per cent.      

In recognising mass electrification of transport and heating is needed to meet society’s growing need for power, we have invested over £5 billion since 2015 in green assets, including solar, wind, energy centres and electric rail. This equates to 730 MW of low-carbon and renewable energy generation capacity in 2020, enough to power a million homes. In 2020, we set a new target to reach 1.5GW by 2025 and have already reached over 900 MW through further investment in on and offshore wind.

From rooftops in real estate to direct investment in renewables within infrastructure and financing large-scale energy projects through private debt, our expertise is helping our economy transition to low carbon, while delivering risk-adjusted returns in growing sectors.

Our 2020 commitment to originate £1 billion in sustainable transition Loans by 2025 should also help accelerate the societal transition. We are well on track to meet this target and have already originated in excess of £600 million in just seven months. Borrowers typically receive a financial incentive of around 20 basis points, or £200,000 on a £100 million loan. 

Our new proprietary framework is designed to specifically address the climate transition of buildings

Speaking on the transition loans, Dixon says: “Our new proprietary framework is designed to specifically address the climate transition of buildings,  which is an area of increasing focus across the real estate market.” 

Our borrowers are already taking the agreed steps to reduce emissions from the assets against which the financing is secured. This includes retrofitting solar photovoltaic panels, reducing energy demand through more efficient lighting and plant, and undertaking green building certifications. 

Sustainable lending ultimately helps reduce the carbon footprint of clients’ investments, improves the financial stability of the underlying borrower, and reduces the long-term climate transition risks associated with real estate. 

Beyond our own efforts, getting this right will bring many benefits. Collaboration and learning from industry best practice will be critical. Regulation and client demand are driving us in the right direction, but we should also be driven by the knowledge that building a more sustainable future is simply the right thing to do. 

As Oliver Rix, partner for energy, utilities and resources at Baringa, puts it: “The quality of life should be so much higher. As professionals, we tend to talk in terms of various scenarios, and we compare the risks and costs. Those approaches are needed, but we also need to understand and talk about what it means for people. It’s about better air quality, less noise pollution, using land more sustainably, having a well-managed countryside and improving biodiversity.”

It is difficult to sum things up any better.

Note: ESG and Climate related engagement, goals and exclusions can vary at the investment strategy and portfolio level depending upon country, jurisdiction and individual client needs.

References

  1. Department for Business, Energy & Industrial Strategy provisional UK emissions 2019
  2. https://www.ukgbc.org/climate-change/
  3. https://architecture2030.org/why-the-building-sector/

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