No one has a crystal ball to pinpoint the degree to which global warming will reach and by when. But we do know temperatures are rising and that will bring long-term implications for where people live, shop and work.
The impact of this can be seen today even though it is not yet so extreme that buildings cannot be occupied. However, that day is on the horizon.
Unquestionably, asset owners and asset managers must take a long-term view on portfolio resilience, hand in hand with decarbonization. Correct management of climate transition risk is an integral part of managers’ fiduciary responsibility – not least because investors will be hurt by increased costs involved if we do not.
In a future net-zero carbon world, everyone will be taxed for their share of carbon – providing the cost of carbon is built into the economy. So, even if we build in resilience for a more wet or dry climate at a local level, if there are still carbon-intensive buildings, heavier taxes will undermine returns.
Managers need to start honing their underwriting skills for decarbonization costs so a measured approach to risk can be taken. If potentially energy intensive assets are taken on, what practically can be done to decarbonize the building and is that reflected in the purchase price?
Stretching carbon targets will be challenging to meet at an industry level, given an imperfect regulatory framework for decarbonizing real estate. Among investors, a two-tier market has now emerged, creating an uneven playing field. Selectivity in asset requirements can narrow the pool of investible assets, while inconsistent decarbonization standards may also have competitive implications.
“Reducing carbon emissions is an immediate priority, which is why it is important to uphold ambitious targets; setting lower targets would be a slippery slope”
However, shooting for lower targets is untenable. All buildings will need to be net-zero carbon in the long term. Progressive managers, therefore, continue to push forward, in order to meet targets at a portfolio level and protect investments. Building into strategies factors that are beyond direct control is a core part of this – whether that is the regulatory landscape or government intervention to support infrastructure.
Reducing carbon emissions is an immediate priority, which is why it is important to uphold ambitious targets; setting lower targets would be a slippery slope. Our approach is to prepare for the worst-case global warming scenario, but hope for the best.
What is more, we do not yet know how much technology might improve to help us hit 2050 targets. Thirty years ago, if someone had told you video calls from a mobile phone would be second nature, you might not have believed it.
The bottom line: asset managers have a responsibility to reduce carbon emissions to ensure buildings meet likely regulations and prevent stranded assets – focusing on solutions over barriers is critical.
Tony Brown is global head of M&G Real Estate
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