ESG Clarity COP26 guide

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Delivering climate progress in real assets

As leaders gather for the upcoming COP26, LGIM CEO and COP26 Business Leaders Group co-chair looks at how building emissions can be reduced

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More and more of us have been returning to our workplaces over the past few months and there is a real energy in face-to-face collaboration after so long working predominantly remotely.

It is also a time for reflection, for rethinking how and where we want to work. This gives us – as owners and managers of property across the office, retail, industrial, leisure and other sectors – a a-generation opportunity to rethink much of our physical environment. With COP26 now days away, this is the time to be bold.

We know that buildings contribute up to 40% of global greenhouse-gas emissions. For the built environment, inaction is not an option if we are to meet our commitment to the UN Paris Agreement.

The G20 policy agenda rightly emphasises the importance of investing in green infrastructure as part of the world’s Covid-19 economic recovery plans to support the transition to net-zero emissions and enhance resilience. LGIM and 586 other investors with $46trn (£33.5trn) in assets under management recently signed the 2021 Global Investor Statement to Governments on the Climate Crisis in support of this objective.

Future proofing
As important and exciting as the potential of new green buildings and infrastructure is, we cannot overlook existing stock – the buildings in which we currently live, shop and work today, which will still be around in 2050. Just as we must engage across the ‘old’ economy, while continuing to invest in the new green economy, a major priority is decarbonising our existing assets while allocating capital to tomorrow’s.

This is possible, and we are taking steps every day that move our real-assets portfolios closer to our target of net zero by 2050 or sooner.

For example, one of the portfolio’s large office buildings in Hillswood Park, Chertsey, was in need of refurbishment. We have been able to put in place plans to make the property operationally net-zero carbon enabled through measures including removing the gas boilers and replacing with air-source heat pumps, reducing energy demand through plant and fabric upgrades, and reusing what would otherwise have been waste material. As well as installing photovoltaic cells to generate renewable electricity onsite, we have cut its base-build operational energy consumption by almost 75%.

We can also make buildings more attractive for occupiers by providing new amenities such as electric vehicle charging points and enhancing health and wellbeing through improvements in indoor air quality. For our clients, these enhancements should help ‘future proof’ assets and potentially increase their value through improved rents, lease terms
and yields.

Real assets, real change
It’s not just on the bricks-and-mortar side that real-assets investors can effect positive change. In our private-credit business, for instance, we have helped finance the rollout of air-source heat pumps. The UK government has set a target of installing 600,000 such heat pumps every year by 2028, as part of a bid to ensure homes are greener, warmer and more energy efficient – a vitally important effort given over 23m UK homes use carbon-intensive gas as their heating fuel.

The funding we have provided explicitly focuses on affordable housing and local authorities, where private capital support is essential. It’s an example of how private credit investors can channel capital towards climate solutions and help meet policy objectives, while generating secure income over the long term.

These are just some of the ways in which we can invest in and remodel our built environment so it aligns with our climate ambitions. LGIM has reduced landlord operational carbon emissions by 20% in the past 10 years, yet we know more can – and must – be done.

An invitation to act
This is an imperative, not just for policymakers but for our clients – the pension scheme members and many others who rely on real assets for income and steady performance. As new regulations come into force, the buildings that do not meet the required levels of energy performance risk being stranded, becoming unattractive to occupiers and losing value. As investors and real assets owners, we have a responsibility to future-proof our portfolios as far as possible.

As the We Mean Business Coalition recently wrote to G20 Leaders:
“We can build stronger, just and more resilient economies: bringing prosperity and creating decent jobs while protecting health and
the planet.”

Responsible real assets investors can and will make a meaningful contribution to doing precisely that.

Michelle Scrimgeour
Chief executive officer, Legal & General Investment Management, and co-chair of the UK government’s COP26 Business Leaders Group

‘For the built environment, inaction is not an option if we are to meet our commitment to the UN Paris Agreement’

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The sensitive issues that must be addressed
at COP26

Global population growth, whole irresponsibility and inefficient products should not be overlooked during tough conversations at the summit

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COP26 is one in a series of vital steps in creating a globally shared sense of the issues facing the planet, and a chance to instil a sense of urgency about the time pressures we are under. It’s also a real opportunity to address some of the underlying drivers still regarded as too sensitive to address head on.

At the top of that list lies population growth. The global population has exploded fourfold in the 20th and early 21st century, a growth driven by our economic paradigm and enabled by industrialisation, by wholesale food production, increased longevity and improved medical care. The global governmental response is focused on reducing the ecological footprint of 7.9 billion people, while watching that number increase by around 250,000 per day.

Yes, we need to dramatically reduce the harm we are doing as a global population, and we need to do it right now; but no matter how efficient we get there will always be a natural cap to the number of people the planet can sustain. That discussion is sensitive, politically fraught and not even on the agenda.

This brings with it the whole hustle and bustle of how to distribute the pain globally. It is true that industrialised nations have had a free ride for years, but that doesn’t give new arrivals to the pollution club free reign to try to catch up. We are where we are, and while a levelling up is needed and justified, that mustn’t be used as an excuse for wholesale irresponsibility.

Shared responsibility
Instilling the concept of a shared responsibility is the key goal for COP26. Nations, particularly some that should know better such as the US, have too long been allowed to foster domestic interests while directly adding to a common crisis. The situation needs leaders, not shirkers. But is Boris up to the task?

The UK illustrates the issues well. The country recognises a deep, urgent need to force change, but is faced with the economic realities of doing what needs to be done. There isn’t yet the political will to accept the inefficiency and reduced productivity associated with a solution. Human nature will always look over the brink for longer than is justified and will only take the leap when the opportunity has passed.

The investment industry is at a crossroads. It has reorganised itself to cover the whole sustainability spectrum of investor choice, from ESG ranking and filters through to impact investing and ultimately philanthropy. But the language of sustainable investing is still in its infancy, and the competing needs of environment and social inequality still need to be defined in a way to allow capital to be allocated intelligently and with a realistic return expectation.

The good news is that recent years have awakened an ever-more strident global social conscience. The task now is to harness that conscience into action through the medium of self-interested politicians. Lots to do ...

Mark Northway
Investment manager, Sparrows Capital

‘The situation needs leaders, not shirkers. But is Boris up to the task?’

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First day warnings

COP26 opened yesterday with urgent pleas from Alok Sharma and a warning from the WMO. Natasha Turner reports

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COP26 opened in Glasgow yesterday, with statements from delegates welcoming the challenging negotiations ahead.

“We have no choice but to make COP26 a success,” said Patricia Espinosa, executive secretary of UN Climate Change.

Finance will form a critical part of the conference, particularly in relation to meeting the Paris Agreement and the mobilisation of $100bn (£73.2bn) per year to support developing countries.

COP president Alok Sharma thanked delegates for travelling to Glasgow and outlined the urgent need for action.

“As COP president I am committed to promoting transparency and inclusivity. And I will lead this conference in accordance with the draft rules of procedure, and with the utmost respect for the party-driven nature of our process. In that spirit I believe we can resolve the outstanding issues. We can move the negotiations forward. We can launch a decade of ever-increasing ambition and action.

“Together, we can seize the enormous opportunities for green growth, for good green jobs, for cheaper, cleaner power. But we must hit the ground running to develop the solutions we need. And that work starts today. We will succeed, or fail, as one.”

WMO climate report
These statements come as the World Meteorological Organization (WMO) releases a report showing the past seven years have been the warmest on record.

The WMO State of the Global Climate 2021 report found global sea levels rose to a new high in 2021, as did greenhouse gas emissions.
Arctic sea ice was below the 1981-2010 average at its maximum in March. Sea-ice extent then decreased rapidly in June and early July in the Laptev Sea and East Greenland Sea regions.

As a result, the Arctic-wide sea-ice extent was at a record low in the first half of July. There has also been mass loss from North American glaciers accelerated over the past two decades, nearly doubling for the period 2015-2019 compared with 2000-2004.

The global mean temperature for 2021 (based on data from January to September) was about 1.09C above the 1850-1900 average.
Extreme weather events around the world have led to economic instability, which has impacted food security.

“The provisional WMO State of the Global Climate 2021 report draws from the latest scientific evidence to show how our planet is changing before our eyes,” said United Nations secretary-general António Guterres.

“From the ocean depths to mountain tops, from melting glaciers
to relentless extreme weather events, ecosystems and communities around the globe are being devastated. COP26 must be a turning
point for people and planet.”

‘We must hit the ground running to develop the solutions
we need’

Alok Sharma, COP president