Successful efforts to cut carbon emissions will require significant investment into a more sustainable built environment and infrastructure system.
Understandably, the investment industry has focused on the initial enthusiasm for raising funds that are green. This is certainly a positive indicator — and long may enthusiasm for pure-play green funds continue. But ultimately, we also need to focus on investing in the real economy.
So, what does investment into the future real economy look like? One may envisage a 32-kilowatt wind farm off the east coast of England, or innovative "tokamak" technology built to produce fusion energy. This wouldn't be wrong, but it's not the whole picture, or the sole solution. While clean energy infrastructure and asset creation is vital, achieving a sustainable future is not exclusively reliant on investing in new, "readily green" assets.
A successful journey to net-zero cannot happen without a cross-sectoral, all-encompassing shift.
Some 80% of the buildings that will exist in 2050 have already been built, and so yes, we must invest in the new, but we must also bring what we have now along with us. By ensuring our existing real assets are both relevant and resilient, we lay the foundations for a future we all want. This is therefore about enabling the transition.
In practical terms this not only means insulating housing, financing electric trains and building rooftop solar power, but also means going beyond providing the capital, with active engagement and knowledge building.
The housing sector is a perfect example of the dual nature of building new while financing the transition. As we build homes that will stand long past 2050, these homes need to be built ready for that future. Rising energy bills have made this dynamic even more pressing from a cost viewpoint, also providing a further indication that a large premium is likely to develop for new assets that are built today to meet future standards.
Housing also illustrates the importance of investing in the assets we already have. Here in the U.K., heating and hot water account for 25% of total energy use in homes and 15% of greenhouse gas emissions. Social and affordable housing providers have an especially large amount of housing stock that needs to decarbonize, often with tenants who will benefit most from more affordable energy bills. These organizations need the capital to support that transition — this is where the private sector can come in and play its part.
Proactive, responsible investors can have real impact through active engagement, ownership and influence. Take direct lending to companies or the corporate debt sector as an example. For example, at LGIM, we have invested over £430 million ($527 million) via structures with ESG-linked credentials, spanning the social housing, higher education and corporate sectors. This means that the funding from us, as a lender, must either be designated for "green" or "social" purposes or have criteria linked toward a "green" or "social" target — whether that be retrofitting existing stock with the likes of heat pumps and solar panels, or supporting the delivery of new energy efficient assets.
Over £300 million of this financing has gone towards the social and affordable housing sector, specifically, supporting social housing providers across the regions, including some of the largest providers in the North and Southeast England, as well as major cities, such as London and Manchester.
As a result, we have been able to educate, support and provide borrowers with the right tools and empowerment — alongside the capital — to realize their sustainability ambitions. By doing so, we accelerate practical, incremental — and importantly, achievable — decarbonization plans. This will be key to ensuring no sector is left behind in the transition to a low-carbon society.
Within the world of real assets, we must engage across the spectrum — our stakeholders come in all forms, whether that be investors, occupiers, borrowers, local authorities, local communities, partners in our supply chain and even consumers. And thus, to achieve meaningful change at scale, we need global collaboration alongside clear and considered regulation.
For example, there is no "one" standard for a net-zero building. To tackle this, in the U.K., a number of climate groups have come together to produce a coalition — to ultimately conclude on a U.K. net-zero carbon buildings standard. This is an important step, and one that needs to happen globally; with a lack of standards, we are faced with a range of goalposts. If we can't set the goal, how do we get there? Without an aligned approach, or even an agreed understanding of what success looks like, we won't progress.
The asset management industry has an important role to play in expediting the transition to a low-carbon society through the capital we invest and manage on behalf of our clients. Our purpose as an industry is unequivocal –— protecting our society and future generations from the consequences of climate change, and as a result, supporting a more environmentally, economically and socially sustainable world.
Taking the above points into consideration, it's clear in our view that social and environmental objectives must go hand in hand. Historically, the social "S" of ESG has been pigeonholed due to the misjudged perception that social impact will compromise financial returns. However, investors are now waking up to the fact that delivering social impact does not always come at the expense of risk-adjusted returns.
It's fair to say that if we want our assets to be fit for purpose and for the future, understanding and addressing local needs and inequalities must sit firmly at the top of the agenda. We believe that investments in real assets through the built environment and infrastructure has one of the most significant opportunities to create genuine place-based social impact. The socioeconomic status of a community is dependent on many factors, one of which is its location or geography. Real asset investors can play a crucial role in shaping the future of a community based on how they design, build, and finance the places and infrastructure in which communities will live, work and play.
Today, we are seeing some backlash and skepticism of ESG in the financial sector. Actually, we don't see this as entirely negative. It's important to recognize that this represents a healthy evolution of an industry that was once seen as niche, but now considered standard practice. This also helps to prevent the risks of greenwashing. That being said, not a month goes by where institutional investors aren't introduced to yet another ESG or climate-related standard or organization, often represented by a new set of acronyms to add into the ESG alphabet soup. In the U.K. in April, the Taskforce on Climate-related Financial Disclosure, or TCFD reporting framework, became mandatory for companies and financial institutions (of a certain size) to disclose their exposure to climate-related risks and opportunities. Over the coming months and years, institutional investors will continue to navigate an increasingly complex landscape of regulatory disclosure requirements.
It's important to stay abreast of the evolving regulatory landscape as greater ESG data disclosure and transparency will become ubiquitous, but it should not be seen as a box-ticking exercise. Asset managers' role is to mobilize capital on behalf of our clients through responsible investment decisions and, where possible, to focus on generating positive societal and environmental outcomes.
Going from intention to implementation is about getting real.
Shuen Chan is head of ESG at LGIM Real Assets, based in London. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.
