The $130trn opportunity in sustainable real assets

By Eric Pedersen, Head of Responsible Investments at Nordea Asset Management

1 October 2022

Our world is changing, and the global economy is at an inflection point. Rising geopolitical tensions, headlined by the war in Ukraine, have driven energy prices to unprecedented levels – which is fuelling an inflationary shock threatening both consumers and industry. The war’s impact on elevated food prices is also being compounded by changing weather patterns – as the climate crisis continues to spill over into our everyday lives.

It is clear we must confront the challenges to our current way of life by adopting new approaches to reduce fossil fuel reliance and decrease energy use. In addition to accelerating the shift towards renewable and alternative power generation, the world needs to become more energy efficient.

We see major opportunities for sustainable change within industrial processes, transportation systems and in intelligent construction. For example, smart building systems can slash power consumption and increase energy savings, which reduces environmental impacts and cuts costs. Within sustainable housing, green building techniques and materials, as well as innovative appliances, can reduce energy consumption by an average of 33%.¹

While we all understand the importance of the green transition for the planet’s future, sustainability is no longer the sole driver of change – as the current energy crisis demonstrates the clear economic rationale for rethinking the status quo. Thankfully, ongoing technological innovation that can support the evolution we need to make is within financial reach.

Environmental and societal impacts

Identifying sustainable leaders within the real assets space will be imperative for enacting both short and long-term change. While industries within the infrastructure and real estate spaces are responsible for half of all carbon emissions today, these sectors also make up almost three-quarters of current capital spend towards global low-carbon initiatives. Real assets companies are at the forefront of net-zero action, by investing in green initiatives such as the installation of solar farms, the upgrading of transmission lines, and the improving of building energy efficiency.

While significant focus has been on environmental effects, we should not overlook the tremendous societal impact of increased sustainable real assets spending. Infrastructure and housing developments have clearly not kept pace with recent demographic and societal change in many parts of the world, and major investment is needed to ensure these assets are future-proof.

The characteristics of real assets are also appealing to investors in the current economic climate. Underpinned by essential needs – such as housing, power, transport and communications – these entities are frequently monopoly-like businesses, exhibiting contracted or regulated returns, which provide a strong bedrock of stability during economic stress.

In addition, the vast majority of real assets have the ability to pass on price increases – which is why the real assets space has historically outperformed global equities during periods of above-average inflation.

Companies at the forefront of change

The investment opportunity in ensuring that existing infrastructure and real estate assets meet the evolving needs of society is set to be worth upwards of $130trn² over the next three decades. We are already witnessing a multitude of compelling corporate opportunities – tied to the themes of environmental and social stewardship, and technological evolution.

LINK, a diversified property owner headquartered in Hong Kong, is committed to net zero by 2035 with an interim target for 2025. In keeping with its commitment to SBTi standard, the company seeks 100% green building across its portfolio by 2025/2026 and already reduced its carbon emission intensity by 15% over 2021/2022*

Another example is National Grid, the owner of critical UK electricity transmission networks, and a company at the forefront of environmental stewardship. Between 2022 and 2026, National Grid is set to undertake capital expenditure of £30-35bn to ensure the UK is able to meet its net zero targets.*

As for leaders within technological transformation, Portuguese electric utilities group EDP is a shining light in decarbonisation innovation. It is one of the world’s largest renewable energy developers, generating 24.7GW, which services nine million customers. EDP currently has a hydrogen capacity target of 1.75GW by 2030, while it is maintaining its aim to abandon all coal production by 2025 and operate with 100% renewable capacity by the end of the decade.*And within social stewardship, companies such as Ventas – the diversified healthcare REIT with 1,200 properties across the US, Canada, and the UK – are well positioned. Ventas is a beneficiary of secular trends, including senior housing demographics and accelerating demand from the medical office and life science markets. While the US senior population is seeing significant growth, senior housing supply in the country has fallen 66% since 2017.*