Jeremy Anagnos, portfolio manager of the Nordea Global Sustainable Listed Real Assets Strategy
Environmental and societal issues increasingly challenge cities. Sustainable infrastructure and real estate are essential in addressing them.
The real estate and infrastructure sectors are vital levers in any country’s climate policy. In Europe the building and construction sector accounts for around 37% of energy and process-related Co2 emissions (2021)1 followed by Transport, which is responsible for about a quarter of the EU’s total greenhouse gas emissions, according to the European Environment Agency2.
At the global level, however, the situation is bleaker: infrastructure and real estate are responsible for half of global carbon emissions. Considering that real assets are integral to the Sustainable Development Goal of “Sustainable Cities and Communities” and that extreme weather events such as flooding, droughts and wildfires are becoming only more frequent, there is no alternative other than to adapt and invest in sustainability—a cause for which real assets are well positioned.
The good news is that greenhouse gas emissions could be reduced substantially with the increased use of innovative technologies—and much progress has already been made in this area.
Heavy investments required
Cities need to become smarter, use energy more efficiently, and meet society’s evolving needs. Sustainable real estate and infrastructure are leading the way and investing heavily in initiatives such as the installation of solar farms, the upgrading of transmission lines and the improvement of building energy efficiency. In total, sustainable real assets are driving almost three-quarters of total capital spend towards global low-carbon initiatives. Over the next three decades, investments are likely to total over 130 trillion USD. For sustainable real assets, which are known for regulated or contracted returns, this rising investment should lead to growing cash flows for companies and dividends for investors.
One example is Vinci, a world leader in concessions, energy and construction aiming to drive the transformation of living environments, infrastructure, and mobility over the next several decades. Across its networks, the group is introducing smart mobility solutions to ease congestion. It is targeting 50 percent emissions reduction in concessions by 2030, and it is doing well: from 2018 to 2021, Vinci had driven a 20 percent fall in emissions. Its energy unit is modernizing and refurbishing buildings and industrial production sites to make them more reliable, energy-efficient and sustainable—all contributing to growing cash flows for the company.
The sustainable investment opportunity is a real one for investors. The opportunity is heighted by the resilience of real assets in an increasingly uncertain world. Real assets are at the center of societal needs—housing, power, transport, and communications—where demand is often inelastic and reliable. Should economic conditions worsen, investors should find comfort in the resiliency of real assets and their potential to outperform during periods of market stress.
Resilient to inflation and rising in return
In addition, the vast majority of real assets have the ability to pass on price increases to their customers. This allows real assets to historically outperform global equities during periods of above-average inflation. Over the last 15 years, from a total return perspective, today’s sustainable leaders have delivered annual returns of ~10 percent, outperforming both broader real assets and global equities; they have also achieved this with less volatility.
Compared to bonds, sustainable real assets seem further promising: while coupons in fixed income can be static, sustainable real asset dividends are growing, driven by cash flows that are forecasted to grow in the mid-single digits. In a potential market regime where recurring income could be prized more than in years past, sustainable real assets stand as an income equity for investors.
Sustainable real assets: for smart cities and investors
With 60% of global emissions produced from cities, where half the developed world population resides, and with real assets essential for sustainable investment, sustainable real assets should be at the center of smart city development. This rising investment opportunity can address societal goals and accomplish investor objectives—all driven by an asset class with resilient cash flows, inflation protection, and growing income. As we look to the years ahead, we see sustainable real assets poised to perform for both smart cities and smart investors.