Investors review ‘real’ assets based on their sustainability credentials
The demand for sustainable investments having exploded, asset managers have been pressured to focus on environmental, social and governance (ESG) issues when buying stocks and bonds. But attention is now shifting to a less liquid yet highly influential asset class: real assets.
Certain so-called real, or physical, assets, which include property, infrastructure and farmland, already play an important role in addressing investors’ ESG concerns. Renewable energies, including wind, solar and battery projects, have already proven popular with investors looking to tackle climate change.
However, other real assets are less monitored for ESG reasons, both by asset managers and their clients, although they often have a substantial environmental or social impact. Buildings in the United States, for example, account for 40 percent of the country’s carbon emissions, according to the Institute of Environmental and Energy Studies. Real assets such as railways, power supplies or airports also often have high emissions.
Proportion of institutional investors planning to increase ESG investments in real assets over the next five years
However, that lack of ESG control is changing, says Paul Jayasingha, global head of real asset manager research at Willis Towers Watson, a consultancy firm.
“Fund managers and investors are starting to pay a lot more attention [to ESG in real assets]. There has been a marked positive change over the past two or three years, ”he says.
A survey conducted last year by Macquarie Infrastructure and Real Assets find 91% of global institutional investors, who collectively oversaw $ 20 billion in assets under management, are expected to increase ESG investments in real assets over the next five years. Only 58 percent had increased their concentration in the previous five years. A combination of strong performance, regulatory pressures, and concerns about long-term issues such as climate change, have all been credited with garnering investor interest.
Chris Leslie, global sustainability manager for the infrastructure and real assets division of Macquarie Asset Management, part of the Macquarie Group, headquartered in Australia, said ESG was “being approached from a business perspective. risk ”in the past. Now, in addition to looking at the risks, investors are focusing on the opportunities, especially with regard to the climate transition.
“The transformation of the energy sector or the industrial sector will require massive investments. Investors shifted their focus from risk analysis to [thinking] ‘wow, this is potentially the greatest investment opportunity of our life. How are we participating in this very big change in the global economy? “
DWS, the German asset manager, predicts that sustainability will increasingly be at the center of the investment agenda, due to the pandemic. He argues that Covid-19 will accelerate the sustainable infrastructure goals of policymakers to support the recovery and decarbonization of global economies.
Hamish Mackenzie, Head of Infrastructure at DWS, says: “Investing in renewable energy is perhaps the most obvious manifestation of the sustainability agenda, but the focus is increasingly on ESG – no only from a political point of view, but as a value creation asset. -management strategy.
Another factor is that investors no longer believe that ESG and performance conflict with each other.
A survey last year by UK asset manager Aviva Investors of more than 1,000 pension and insurance investors found that eight in ten believe the pursuit of ESG is not happening to the detriment of financial returns. The research also found that more than half of investors are now looking for investments with a positive impact.
One of the attractions of real assets, compared to more liquid stocks or bonds, is that “you are often much closer to investments” because you are usually the owner or the lender, says Ed Dixon, ESG manager of real assets. at Aviva Investors. .
Allison Spector, sustainability director in the real assets and private markets team at Nuveen, the US asset manager, adds that sustainability has “always been an important concept in real assets.”
“But there is a greater awareness of the risks and the opportunities of the problems,” she said.
Spector says Nuveen is receiving more questions from clients on ESG issues, including how it is using climate solutions in its farmland and forest portfolios.
Jayasingha says the increased focus on ESG makes sense. “Real assets are long-term investments and are usually an integral part of society or a local community. They tend to create the most value over time for investors when they create value for the company. If they don’t, then typically customers, politicians, or regulators will act in a way that reduces your return.
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Nonetheless, there are challenges when it comes to real assets and ESG. While a multitude of benchmarks and standards have emerged to allow investors to compare the ESG criteria of different companies and public funds, this is often much more difficult to do with real assets.
“One of the biggest challenges is the similarity and comparability of the data,” Dixon says. “The investment universe is so vast and so vast that it is very difficult to compare one infrastructure asset to another, one real estate portfolio to another. “
This is changing, thanks to new standards, such as GRESB, a global ESG benchmark for real assets. GRESB provides institutional investors with standardized data on sustainability – on real estate companies, developers, infrastructure funds and assets.
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However, that does not prevent some from worrying about a bubble developing in some real ESG assets. “There is a huge demand for these investments. As demand increases, the price increases, ”Leslie explains. “But there is still a lot of investment to be made.”
Spector minimizes the risk of a bubble. “You have to know your manager, do your due diligence, research performance metrics and decide for yourself,” she says.
Dixon says he expects demand for ESG in real assets to continue to grow. “By investing in real assets, you can support the economy, create jobs, invest directly in assets that support the climate transition,” he says. “Investors are starting to realize the potential. ”