Can real asset investors 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.
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.
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.
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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.
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