Real assets path to net zero targets

Institutional investor capital can help support the transition towards a low-carbon future, and support a progress towards net zero targets for real assets sector, if funnelled into more impact-based investment activities, according to Aviva Investors.

However, investors should be aware of challenges to their net zero flightpaths which included significant divergences in the level of disclosure across asset classes, for example in private credit where provision of environmental, social, governance (ESG) and impact data to lenders was still uncommon, the firm said.

Another issue was a very limited ESG data across the real estate sector.

Aviva, one of the UK infrastructure and real estate investors financing projects supporting built environment in its transition to net zero, said that in order to attract more investor capital net zero targets needed to move on from being pledges to becoming more grounded in action. if the real estate sector was to fulfil its potential in tackling the climate crisis.

The firm announced that it had made a progress by its £47 billion real assets business towards net zero thanks to the improvement in the sustainability credentials of new and existing buildings.

Last year, the firm also issued a net zero pathway plan to reach net zero emissions across its entire real assets platform by 2040.

Following this, the company’s recent update has detailed progress against five interim goals Aviva had committed to achieving by 2025, which were:

• investing directly in and financing £1.4 billion of low-carbon and renewable energy infrastructure and buildings, making 56% progress against a target of £2.5 billion by 2025;
• expanding total renewable energy capacity to 1.1 gigawatts (GW), representing 48% progress towards its commitment of reaching 1.5GW capacity by 2025;
• originating £1.04 billion in climate transition-focused real estate loans, achieving over 100% progress towards its 2025 target;
• launching a climate transition strategy, that delivered on its commitment to align to Article 8 of the Sustainable Finance Disclosures Regulation (SFDR) framework;
• achieving a 25% reduction in carbon intensity and 6% decrease in energy intensity for direct investments, against targets of 30% and 10% respectively by 2025

Daniel McHugh, CIO, real assets, at Aviva Investors, commented: “Demand for more comprehensive sustainability data has risen dramatically and it is not inconceivable that even high-quality buildings in prime locations will become vulnerable to sustainability-related obsolescence.

“The importance of refurbishing and retrofitting of existing assets with energy-efficient materials and cleaner energy sources cannot be understated. Continuing variations and gaps in the quality of ESG data will cause polarisation in the performance of assets, making investment expertise and rigorous analysis more important than ever.”

Other challenges identified in the report included an increasing “green premium” for existing assets, as the race to net zero intensified, as well as heightened competition for core and core-plus assets with the best sustainable credentials which were expected to increase, in to contrast to poor-quality assets expected to attract a “brown discount” as a result.

The Aviva’s report also highlighted a growing trend for investors to prioritise renewables and already-green assets, rather than impact-focused investments which improve under-performing existing buildings and can be more effective in transitioning towards a low-carbon future.