By Jeremy Anagnos, portfolio manager of Nordea’s Global Sustainable Listed Real Assets strategy
Our society faces a number of incontrovertible challenges. Economically, the current inflationary shock – accelerated by Russia’s invasion of Ukraine– continues to threaten consumers and industry heading into the northern hemisphere winter. Environmentally, we are continually being reminded of the impact of global warming and climate change with increased frequency and severity of coastal flooding, droughts and wildfires.
As our world changes, we have no alternative other than to adapt. In order to reduce the reliance on fossil fuels and decrease the use of energy, we must intensify renewable and alternative power generation and become more energy efficient.
Identifying sustainable leaders within the real assets space – encompassing both infrastructure and real estate – will be imperative for enacting both short and long-term change.
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. For example, smart building systems can slash power consumption and increase energy savings. Within sustainable housing, green building techniques and materials, as well as innovative appliances, can reduce energy consumption by an average of 33%.
Even while industries within the infrastructure and real estate spaces are currently responsible for half of all carbon emissions today, these sectors make up almost three-quarters of current capital spend towards global low-carbon initiatives.
While a healthier and more prosperous future depends on the green transition, 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 able to support the evolution is within financial reach.
The multi-trillion investment opportunity
Investors are increasingly noting the appealing characteristics of real assets 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.
The investment opportunity in ensuring existing infrastructure and real estate assets meet the evolving needs of society is set to be worth upwards of $130trn 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.
Within environmental stewardship, LINK, the 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 the SBTi standard, the company is seeking a 100% green building portfolio by 2025/2026, while it has 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.
Finally, 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.
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