Huge gaps exist in the net-zero methodologies used by asset owners and managers across asset classes, experts say, pointing to shortfalls in capital expenditure to make the transition, and mismatching regulations and standards that make carbon emissions difficult to compare on a consistent basis across jurisdictions and asset classes.
Real estate is an area critical to getting to net zero, with data from the International Energy Agency showing the built environment generates 40 per cent of annual global CO2 emissions, said Jennifer Johnstone-Kaiser, principal consultant, property leader, at Frontier Advisors.
Speaking at the Investment Magazine Fiduciary Investors Symposium held at Healesville last month, in a panel discussion examining net-zero methodologies across a range of asset classes and the progress being made, Johnstone-Kaiser said enormous capital expenditure will be required to retrofit buildings to meet net zero requirements.
She pointed to research by real estate services firm Cushman & Wakefield that found approximately US$18 trillion ($26 trillion) will be required to decarbonise the global real estate market and said “the industry is not well placed in terms of capex, and preparing for the repositioning of those assets”.
Scope 3 emissions are particularly difficult to address because managers do not have total control of this category, Johnstone-Kaiser said. “Tenants have exclusive use and they operate the buildings with little legal contractual obligations to actually report their data and usage,” she said.
A swathe of different building standards and ratings agencies need to be synchronised, she said. “As importantly, heightened advancements are required to fundamental building systems and designs. Focusing on LED globes, some solar power or conversion to electrified buildings alone is not enough. Building owners and managers need to commit to significant prop-tech strategies and real time energy usage and measurement.”
Standardised measurements lacking
The global aggregate fixed income universe totals around US$65 trillion, said Jamie Stuttard, head of global macro fixed income at Robeco, and only US$45 trillion can be measured in terms of carbon emissions with standardised industry measurements that can be compared.
“There are vast gaps out there in global Agg and one of them I would say is the US MBS market where there’s an entire market there where there’s no sort of CO2 measurement, not at all,” Stuttard said.
Ratings agencies in particular need to work to close these enormous gaps, he said.
Picking your benchmark is one of the most important things an investor can do, said Stuttard, and investors need to navigate a range of trade-offs to arrive at a sustainable investing position. Some relatively low CO2 emitting countries in emerging markets may have significant governance problems, for example.
“I happen to believe there’s no such thing as passive, because the choice of benchmark that you make is a very important choice and can give you some quite different investment exposures,” Stuttard said.
In addition to its well-known index strategies, BlackRock is also a relatively large alternatives manager, managing around US$330 billion across a number of global strategies.
While investors are comfortable with renewable technologies like wind and solar, there is a big transition that needs to take place in areas such as gas from “shades of brown to shades of green,” said Jason Horn, managing director and head of BlackRock Alternatives Specialists – Australasia.
Storage and transmission will also play a key role for intermittent generators like wind and solar, Horn said, pointing to BlackRock’s acquisition of battery storage startup Akaysha Energy, which won the NSW government tender to deliver the massive Waratah Super Battery.
Carbon capture will also be increasingly important, he said, and “the technology is catching up”.
Private markets are not easy to track and are “well behind public markets in this component,” said Horn, with competing views among asset owners, investors, regulators and governments.
“So until we get a standard alignment, it is going to be difficult, but in the interim, you know, we will actually try to obviously force through a path.”