Risk and Reward - Q4 2022

Studies show that real assets have become one of the asset classes with the strongest links between material ESG factors and financial performance. Investors can thus have confidence in the strength of ESG approaches pursued by real asset strategies – in addition to other characteristics such as yield potential, diversification and inflation protection, which may be more important than ever.
Resolving social injustices and bringing people together rest fundamentally on securing humanity’s physical habitat. Capital markets, and the market for real assets in particular, have a transformative role to play in catalysing solutions for this challenge. In this article, we briefly review different types of real assets and their ESG credentials before discussing performance differences between ESG leaders and laggards in the listed real assets space and describing our own ESG approach.
Real assets define our world. Whether infrastructure, energy and natural resources, metals & mining, agriculture or real estate – real assets are as important for economic development as they are for achieving better ESG outcomes.
Infrastructure – a long runway
Infrastructure is a cornerstone of economic development and an important investment lever for countries on the way to pandemic recovery. Roads, bridges, electrical transmission lines and other traditional assets lack the desired state of repair and modernisation in the US and elsewhere – and the capital availability gap must be filled by real asset investors. Infrastructure assets are characterised by higher economic visibility, lower volatility and greater yield potential than other investments. As demand for data continues at a torrid pace, emerging opportunities in smart grids, data centers and fiber networks will be critical to power the next leg of the digital transformation.
Energy and natural resources – clean energy gains
Climate change has made the energy sector fertile ground for innovation and investment. The Paris Agreement, representing over 60% of global GDP pledged to net zero emissions by 2050, calls for significant investment to decarbonise industry and transport, build smart energy systems and increase access to affordable clean energy. Concomitantly, the IEA Sustainable Development Scenario estimates spending on renewable power needs to double by the late 2030s. We have already seen an impressive adoption of low carbon energy sources over the past decade – doubling to nearly 16% of global primary energy consumption. In combination with customer expectations, these trends are transforming traditional power and energy infrastructure systems, and new business models are springing up throughout the landscape.
Metals & Mining – sustainability taking hold
Although it may seem that metals and mining would be antithetical to ESG, the sector is critical for the energy transition. Realising the full potential of green technologies will require greater investment in minerals such as lithium, copper, cobalt, manganese, nickel and zinc. The sector has demonstrated ingenuity in developing best practices to help reduce its carbon intensity and prevent environmental disasters. Progressive rehabilitation of material extraction sites at each stage in the mining lifecycle is a notable example of prioritising environmental risks earlier and more comprehensively than in the past. In combination with zero fatality mining safety practices and local employment, the industry is poised to benefit from greater social license to operate, lower environmental impact and enhanced mining performance.
Agriculture – carbon focus
In the US, agriculture accounts for roughly 10% of total greenhouse gas emissions, according to the EPA. However, studies indicate that enhanced agricultural practices have the potential to reduce this burden, even to the point of the sector becoming a carbon sink by offsetting more carbon emissions than it emits. New technologies and production changes, such as compost, use of cover crops, reduced tillage and more precise fertiliser management, are areas of promise in the sector. Leading companies in the space have been able to reduce water use and carbon emissions while enhancing yields through such improved methods.
Real estate – raising the bar
As part of the efforts by REITs (Real Estate Investment Trusts) to identify and implement efficiency measures, best-in-class operators track and monitor property-level energy, emissions, water and waste data. Every year, these managers identify buildings as candidates for green building certification, so that a growing percentage of properties contributes toward improved ESG outcomes. For example, we have seen several top REITs reduce energy intensity by more than 20% while lowering overall energy costs by more than 10% over just a few years. Other measures include Indoor Air Quality (IAQ) audits and ensuring direct line-of-sight views in all regularly occupied buildings.