Delivering climate progress in real assets

More and more of us have been returning to our workplaces over the past few months and there is a real energy in face-to-face collaboration after so long working predominantly remotely.

It is also a time for reflection, for rethinking how and where we want to work. This gives us – as owners and managers of property across the office, retail, industrial, leisure and other sectors – a once-in-a-generation opportunity to rethink much of our physical environment. On COP26's 'Cities, Regions and Built Environment' day, this is the time to be bold.

We know that buildings contribute up to 40% of global greenhouse-gas emissions. For the built environment, inaction is not an option if we are to meet our commitment to the UN Paris Agreement.

The G20 policy agenda rightly emphasises the importance of investing in green infrastructure as part of the world’s COVID-19 economic recovery plans to support the transition to net-zero emissions and enhance resilience. LGIM and 586 other investors with $46 trillion in assets under management recently signed the 2021 Global Investor Statement to Governments on the Climate Crisis in support of this objective.

Future proofing

As important and exciting as the potential of new green buildings and infrastructure is, we cannot overlook existing stock – the buildings in which we currently live, shop and work today, which will still be around in 2050. Just as we must engage across the ‘old’ economy, while continuing to invest in the new green economy, a major priority is decarbonising our existing assets while allocating capital to tomorrow’s.

This is possible, and we are taking steps every day that move our real-assets portfolios closer to our target of net zero by 2050 or sooner.

For example, one of the portfolio’s large office buildings in Hillswood Park, Chertsey, was in need of refurbishment. We have been able to put in place plans to make the property operationally net-zero carbon enabled through measures including removing the gas boilers and replacing with air-source heat pumps, reducing energy demand through plant and fabric upgrades, and reusing what would otherwise have been waste material. As well as installing photovoltaic cells to generate renewable electricity onsite, we have cut its base-build operational energy consumption by almost 75%.

We can also make buildings more attractive for occupiers by providing new amenities such as electric vehicle charging points and enhancing health and wellbeing through improvements in indoor air quality. For our clients, these enhancements should help ‘future proof’ assets and potentially increase their value through improved rents, lease terms and yields.

Real assets, real change

It’s not just on the bricks-and-mortar side that real-assets investors can effect positive change. In our private-credit business, for instance, we have helped finance the rollout of air-source heat pumps. The UK government has set a target of installing 600,000 such heat pumps every year by 2028, as part of a bid to ensure homes are greener, warmer and more energy efficient – a vitally important effort given over 23 million UK homes use carbon-intensive gas as their heating fuel.

The funding we have provided explicitly focuses on affordable housing and local authorities, where private capital support is essential. It’s an example of how private credit investors can channel capital towards climate solutions and help meet policy objectives, while generating secure income over the long term.

These are just some of the ways in which we can invest in and remodel our built environment so it aligns with our climate ambitions. LGIM has reduced landlord operational carbon emissions by 20% in the past 10 years, yet we know more can – and must – be done.

An invitation to act

This is an imperative, not just for policymakers but for our clients – the pension scheme members and many others who rely on real assets for income and steady performance. As new regulations come into force, the buildings that do not meet the required levels of energy performance risk being stranded, becoming unattractive to occupiers and losing value. As investors and real assets owners, we have a responsibility to future-proof our portfolios as far as possible.

As I recently wrote to G20 leaders as part of the We Mean Business Coalition:

Responsible real assets investors can and will make a meaningful contribution to doing precisely that.

• Versions of this article originally appeared in ESG Clarity and in EG.