ESG integration has become a must-have for a growing number of investors and a crucial ingredient to futureproof portfolios. Yet the key is not just choosing investments but staying invested and – most importantly – staying engaged.
So far this year, a third of the UK's largest companies¹ have signed up to the United Nations' Race to Zero campaign. The UK government recently committed to cut emissions by 78% by 2035.
These commitments will require sweeping changes to various areas of the market, encompassing buildings, transport, and infrastructure - all components of the wide and varied real assets investment area.
In fact, real assets are at the heart of the three-pronged challenge in transitioning to net zero: decarbonising the heating and cooling of buildings, transportation, and power. As such, pension funds must be aware of the climate change risks their real asset portfolios are exposed to and have concrete strategies in place to mitigate these.
Aviva Investors' Ed Dixon says that ESG considerations in real estate also include wellbeing factors, such as "how cheap that building is going to be to operate compared to another building down the road, the quality of the build, and whether it's going to be affordable to maintain over its lifetime".
Meanwhile, bringing a real estate portfolio in line with net-zero targets will have profound implications on the investment market itself, according to Dixon. It will mean investors are more focused, only buying assets where there is full confidence they can be decarbonised in time, as well as refurbished and redeveloped.
Or, alternatively, disposing of everything else in your portfolio that isn't managed in line with the pathway to net zero.
According to Dixon, the idea of using ESG to drive better quality investments and ‘futureproof' portfolios is only increasing, and long-term pension fund schemes are beginning to realise this. Key trends such as the climate change transition, which is transforming the way some industries grow, means pension funds are keen to not miss out on a largescale economic shift and investment opportunity.