Do not wait for governments to make portfolios resilient

Is the institutional real estate industry set up to cope with the changes a 2.6-degree climate scenario could bring? Against the backdrop of escalating temperatures it is more important than ever to examine it – before we are quite literally burnt.

For a long time, institutional real estate has focused on climate mitigation; the drive to reduce and avoid carbon emissions. This is still, rightly, a key priority. But as we make the complicated transition to net zero globally, it is imperative we develop strategies to adapt to changes we are already seeing due to climate change. Seemingly extraordinary events are becoming a more frequent reality, carrying with them a genuine risk that assets once safe could now be relegated to financial write-offs.

As beneficiaries become more expectant of an asset’s green credentials, there may be more ‘white elephants’ created than we might think. Yes, the shiny, ‘green’ exemplar buildings in London and other central business districts around the world are likely to be more resilient to these changes. These buildings are typically funded by large institutional investors with strong ESG commitments. But, what of the rest of the market? What of the long tail of older, browner buildings which make up a large proportion of the sector’s stock?

There is a huge variety of poorly adaptable assets, ranging from large industrial manufacturing sites on long leases, where net-zero carbon audits reveal the millions it will cost to remove fossil fuels from on-site activities, to buildings with deficient lifespans such as retrograde retail and business parks. They also include assets that were ‘prime’ only a few years ago. Vacant, old offices would not have been a candidate for the sin bin in our pre-covid world.

What we do not know, however, is exactly how many. We are also in the dark on who decides what is redundant. Surely, then, our efforts should be placed on making data more available and – by extension – correcting public policymakers’ failure to regulate data disclosure, which is holding the industry back? Despite being a huge advocate of investment-grade ESG data and its importance to robust reporting processes, this argument is tired.

The reality is governments will fall in and out of love with sustainability issues – even those at the frontier of green policy. After all, there are difficult political decisions that stem from both mitigation and adaptation. It is also going to cost an enormous and unprecedented amount of capital. We would be naïve to think long-termism across short political cycles will win out.

It is the private sector that is going to have to take more accountability and leadership when it comes to the transition. We cannot wait for national parliaments to provide us with the tools and incentives needed to support this shift, as appreciated as that would be.

So, as the heat turns up, who is going to address – and importantly fund – the resiliency needed across the sector? In a market where it is hugely challenging to raise capital, and where financial return is still king, it is going to be an uphill battle to ensure that the real estate sector thinks long term about the protection of its value at an asset level.

I would challenge those holding the purse strings to think more carefully about finding a balance – after all, will it be worth paying high pensions in world that is no longer worth enjoying?

Jess Pilz is head of sustainable investing, private markets at manager Fiera Capital.