By Jeremy Anagnos, portfolio manager of Nordea’s Global Sustainable Listed Real Assets strategy
The listed real assets universe – an $8trn market1 – is uniquely positioned to lead and benefit from global sustainability initiatives.
Infrastructure and real estate are at the forefront of net zero action – through the installation of solar farms, the upgrading of transmission lines, and improving building energy efficiency. Global utilities are pushing to shutter fossil-based generation and upgrade water systems, while in communications and transport, companies are enabling telecommuting, optimising logistics, and reducing congestion.
Companies within the listed space have amongst the largest portfolios and operating platforms in real assets. They touch nearly every sector of the economy in the management of essential facilities and delivery of vital services. As a result, listed real assets are well positioned to contribute to sustainability goals.
Collectively, industries in real assets are leading nearly three fourths of investment to support decarbonisation, improve energy efficiency and promote economic growth with a lower carbon footprint. Global real assets can also have a tremendous impact from a societal perspective – impacting community health, employment, and quality of life.
Specialised ESG considerations
Real assets are relatively unique and disparate entities, with unique data reporting compared to broad equities. For example, a property developer may report a high proportion of green building certification, while a global utility company may report renewable capacity in place or carbon intensity goals.
From a social sustainability perspective, the evaluation of a given company’s alignment with UN Sustainable Development Goals such as ‘Sustainable cities and communities’ or ‘Clean water and sanitation’ can vary significantly depending upon whether a railroad or a student housing facility is being considered.
When it comes to standardising ESG scores across different sectors and companies, third party ESG scorers are often of little help, particularly in real assets. Among the different ESG ratings agencies, little agreement exists about how a specific company can score – correlations across major agencies including MSCI, S&P, Sustainalytics, CDP, ISS and Bloomberg range from 0.3-0.7, whereas major debt ratings agencies exhibit scoring correlations of over 0.95.
Third-party ESG rating agencies are also dependent upon simplified company disclosures for ratings – ‘yes/no’ information about a given social policy can lead to high social scores, without any analysis on the degree of those social policies or actual results achieved. Third-party ratings and a generalist ESG approach lack experience in real assets and tend to prioritise backward looking data, which can be misleading. For example, a well-flagged utility CEO transition to a well-known internal candidate may impact a company’s rated governance score, which dedicated investors would set aside.
Climate commitment optimism
A focus on net zero and environmental sustainability tends to dominate investor engagement, given the outsized impact real assets can have in combating climate change. To find out more information about real net zero commitments, CBRE, manager of Nordea’s Global Sustainable Listed Real Assets Strategy, recently completed a study of net zero policies and emission reduction targets across the listed investment universe2. We focused on companies who also reported Scope 1 and Scope 2 emissions in order to better understand the potential impact of company policies on mitigating climate risk.
Within the listed real asset universe, companies reporting scope 1 and 2 data comprise $5trn in total market cap. These companies generate 5-10% of total world emissions and 10-15% of emissions stemming from all real assets. Companies within listed real assets therefore have a significant opportunity to make an impact on the forces of global warming and climate change.
Our findings here are optimistic. Of the companies reporting scope 1 and 2 emissions, nearly 70% have interim reduction or net zero targets. From a commitment to net zero emissions perspective, about 40% of these companies reporting emissions have net zero targets, with a third seeking to hit net zero by 2030 or earlier. Collectively, these real asset companies with net zero targets can therefore direct the elimination or offset of over 1.2 gigatonnes of carbon over time.
Our review of emission reduction targets clearly showcases the accelerating impact listed real assets can have on the environment and the globe’s pathway toward net zero. As society progresses towards its sustainable goals, the need for real assets and for specialised ESG analysis will only increase. When considering the future of sustainable investment, the years ahead show real promise.