CAN institutional investors accelerate the journey to NetZero?
Institutional investors own more than $1 trillion in infrastructure assets. Many take an active role in their investments. Some have become massive infrastructure operators. And that gives them significant space to influence how the infrastructure sector achieves the world’s NetZero goals.
For institutional investors, the need to address climate change has been clear for some time. “De-risking the transition to a green economy is not just the right or moral thing to do, it’s the most financially prudent thing to do,” argued Greta Talbot-Jones, associate director of Responsible Investing at Aviva Investors, a fund manager. global assets with significant investments in renewable energy and green infrastructure.
In fact, for large institutional investors and asset managers, particularly pension funds and sovereign wealth funds, investment decisions are heavily influenced by an asset’s potential NetZero trip. “Number one, we need to overcome our return hurdles as value investors. But number two, we need to demonstrate impact through our investments. If we can’t make an impact, we won’t invest through our Global Transition Fund,” said Ruth Kent, managing partner and chief operating officer of Brookfield’s Renewable Energy and Transition Group.
What is clear is that the appetite for green and impact investing is strong among institutional investors and their clients. Brookfield’s recent $15 billion Global Transition Fund was oversubscribed. Aviva Investors wrote 80 percent of its 5-year goal for sustainable loans in just 18 months. “I suspect that within the next 5 years, all loans will have some sort of environmental or social KPI attached to them,” Greta added.
BUT what is the impact really like? And how do institutional investors assess the impact on their new and existing investments? The reality is that there is a proven formula or list of checkboxes that applies universally across industries and markets (which remains a subject of much debate and painstakingly slow progress at the multinational level). Different institutional investors focus on different metrics and use different approaches.
Some, like Aviva Investors, are taking a data refresh approach. “We have mapped Scope 1, 2 and 3 emissions across our illiquid investments and now we are mapping that back to financial performance over time,” Greta told me recently. “That allows us to complete the feedback loop in a way that really helps drive impactful investment decisions.”
Others are looking at the impact holistically. “We have 4 ‘As’ that we analyze: Alignment with the Paris Agreement, Additionality to the NetZero trip, Accountability in terms of reports and Prevention of negative impacts”, added Ruth. “As value investors, we are growing at a pace and this gives us the flexibility to quickly adapt where necessary.”
Ultimately, however, it all comes down to transparency and accountability. “Being able to verify your alignment with things like the Paris Agreement through science-based targets and then voluntarily reporting those results speaks volumes about your commitment to achieving the NetZero goals,” Greta added. “It’s easier for investors to back NetZero’s journey story if there’s historical data to back it up.”
More than decarbonization, carbon emissions and climate risk are undoubtedly the most important. But larger institutional investors are also focused on ensuring they can have a broader impact on the “S” and “G” of the ESG equation. “As one of the largest hydroelectric and renewable energy operators in the world, we know the importance of making sure we partner with the communities in which we work and serve,” said Ruth. “We want to decarbonise, but we don’t want to negatively impact any of the other main areas of the ESG agenda by doing so.”
Social and political pressure to ensure that the green transition is a “just transition” is influencing the debate. “It is often very difficult to separate environmental and social KPIs because they are so intrinsic. As we invest, we must appeal to different parts of the population and ensure funds are distributed fairly. We need to prioritize those most affected by climate change. We need to train the population with the skills that contribute to a green economy,” added Greta. “The social side is much more difficult to measure, but it is just as important.”
catalysts of change
So how do institutional investors and traders help shape the NetZero routes of their assets and investments? On the liquid investment side, many institutional investors focus on improving management across their investments. On the illiquid side, real estate and infrastructure in particular, investors are using innovative financial tools and operational capabilities to accelerate their portfolio company’s journey to NetZero.
“We do a lot of active structuring to encourage the results we want to achieve. We will add covenants to debt structures, offer sustainability-linked loan structures, green loans and other vehicles that allow us to reduce investment risk and take the portfolio company down the decarbonization path,” Greta said of Aviva. investors.
As a large clean energy company with more than 6,000 generation projects in operation, Brookfield Renewable is also using its expertise to drive change in the broader business ecosystem. “Our operations side works with corporate clients to help them transition their energy footprint to renewables, to shape their energy use and production, and to improve their energy efficiency across the business,” said Ruth. “We want our portfolio companies to be the catalysts that drive other businesses to NetZero.”
clear and practical
WITH extensive experience helping portfolio companies and clients develop and achieve their NetZero journeys, what advice would these institutional investors give to others looking to accelerate their decarbonization plans?
“One of the most important things is to set milestones. There is a lot of focus on the ultimate goal of 2030 or 2050, but to hold it accountable, you really need to set and measure interim targets that take you towards your ultimate goal. You need to be proactive and you need to act early,” Greta advised. Last year, Aviva Investors published a Roadmap on how it plans to achieve NetZero emissions across its Real Assets portfolio by 2040. The Roadmap includes five explicit interim targets for 2025, providing proof points of progress and ensuring promises are delivered. long-term. with material action.
Accordingly, Ruth Kent said, “I think the first thing companies need to do is understand the problem they’re trying to solve. For most, that journey begins with your Scope 2 emissions from the energy you consume, and products are now available to fully decarbonize you through renewable power purchase agreements. Once they’ve walked through that door, we’ve found that our corporate clients can really jump-start everything else.”
- Bottom line: Climate risk and the trip to NetZero are seen by institutional investors as critical to an asset’s value;
- They are looking for transparency and accountability in reporting and management;
- While environmental measures lead, governance and social interdependencies cannot be ignored; Y,
- Companies could accelerate their NetZero journey by being clear about what they want to achieve and setting intermediate goals.
The excerpt was taken from the publication “KPMG Thought Leadership”: https://home.kpmg/xx/en/home/insights/2022/08/institutional-investors-creating-an-impact.html.
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