Real Assets Working Group Update

The Real Assets Working Group has produced a discussion paper, Transitioning to a Low Carbon Economy, to guide our future work.

Comments on the discussion paper are welcome.

Introduction

The Network for Sustainable Financial Markets (NSFM) is an international, non-partisan network of over 200 finance sector professionals, academics and others that was established in April 2008 to foster long-term investing and sustainable financial practices.

The Network is made up of individuals who contribute as independent thinkers around complex subjects with the objective of developing sustainable financial markets.

We believe that many financial systems problems appear to be deep rooted and problem solving requires contributions from reflective practitioners and real world academics working together collaboratively. We believe that the extent to which financial markets invest in renewable energy, energy efficiency and clean technology will impact on the degree to which these technologies can become universally accessible. Through sensible interventions we believe we can accelerate investment.

NSFM serves as a think tank and testing laboratory for financial sustainability initiatives, allowing for the speedy dissemination of ideas; eventually readying ideas for broader adoption and implementation. Initiatives are built to address key financial system weaknesses, identified from surveys and engagement with the NSFM community and the wider market. They are then developed by NSFM participants on a collaborative project-specific basis, with the expectation that viable projects will attract separate implementation funding or support.

As an example of an NSFM project is the Climate Bonds Initiative (CBI), which was established in 2009 following a NSFM discussion paper and is now operating as an investor-focused not-for-profit organization, led by NSFM participants Sean Kidney and Nick Silver. This was the first NSFM ‘spin-off’ project, proving NSFM’s capacity to act as an incubator for innovative projects resulting in meaningful impact. A major milestone has been the launch of a prototype Climate Bond Standard to certify the low carbon claims of green bonds for wind energy development, supported by the World Bank, OECD and national governments. CBI has also worked on international climate finance projects for the United Nations Environment Programme and the UK government.

The establishment of the Real Assets Working Group recognises the role that infrastructure and real estate assets can play in transitioning economies to a low carbon footprint.

Traditionally, infrastructure and real estate assets have been managed as separate asset classes. Projects such as Hudson Yards in NYC, where an extension to the NYC metro is being financed through value capture on re-developed railyards demonstrate that with appropriate governance frameworks infrastructure and real estate can work together to achieve beneficial outcomes. Increasingly, large asset managers and owners are now creating real asset management capabilities that combine infrastructure and real estate elements.

The Real Assets Working Group will offer a platform for relevant and appropriate industry participants to aggregate thought leadership and best practice with a focus on identifying solutions that maximize real asset capital that in turn facilitate transition to a low carbon economy.

Specifically the objectives of the Working Group are to:

  • Function as a new working group within NSFM that positively enhances and expands the existing NSFM platform, its initiatives and its brand
  • Attract leading industry actors to the group to assist in building the Working Group and overall NSFM platform
  • Promote the role of real assets transitioning economies to a low carbon footprint
  • Educate the global market regarding best practice
  • Propose market mechanisms and advice to both public sector (government) and private sector (where possible) on proposed policy in order to create positive change in the sector
  • Create a library of best practice and case studies Identify opportunities for collaboration with other industry associations that will assist in meeting the objectives of this Working Group and its overall mission Working Group Members

The members of the Real Assets Working Group are:

- Gordon Noble (Co-Chair) Better Infrastructure Initiative at University of Sydney

- Stuart Kay (Co-Chair) GreenPlace Assets

- Alan Mitchell KPMG

- Ruben Langbroek Global Real Estate Sustainability Benchmark (GRESB)

- Jane Henley United States Green Building Council (USGBC)

- Kevin Teng Marina Bay Sands

- Ingo Kumic UN Global Compact Cities Programme International Secretariat RMIT

- Peter Verwer Asia Pacific Real Estate Association

- Gordon Falconer Schneider

- Nick Fleming Innergise

- Helene Winch Consultant / former Director Policy UN PRI

- Sei Kawashima Global Logistic Properties

- Valborg Lie Borg Consulting Sustainable Investment

- Michael Marais Cities Climate Finance Leadership Alliance

What does the future look like?

One of the key objectives of the Real Assets Working Group is to propose innovations that will assist the transition to a low carbon economy. There is no doubt that a low carbon economy will not function the same as today’s economy. The unpredictability of future technology means it is difficult to know what tools and opportunities may be available to future communities. How we live, work and play in a low carbon economy of the future may therefore be different from the way we function today, both at individual and collective levels. Infrastructure and real estate have very long lives.

The decisions that are made about what we build, how we build, and where we built it will influence the choices that future generations are able to make. One common assumption is that more and more people will move to cities. We need to envisage what the ‘future city’ will look like, and consider potential impediments that are in the way.

Whilst cities have a key role to play, we see that a future low carbon economy will not just be about urbanisation and that regions will have a critical role to play. The focus must be creating a low carbon economy, and not just low carbon cities. The interconnections between regions and cities should be considered. In particular, technology and infrastructure will may make it increasingly possible to participate in economic activity from the regions. In a low carbon economy, it is entirely possible that the forces that have driven urbanisation could be reversed.

Employment growth may not be in traditional industrial businesses and large corporations. Through distributed energy, networked communities and connecting infrastructure, regions may provide future employment opportunities that are not currently present.

Built Environment: We have seen rapid technology improvement and green building has perhaps evolved as the poster child for the built environment. New building stock around the world is increasingly built to higher energy efficiency and environmental standards, year-on-year, particularly in developed markets/ economies. However, we recognise that improvements to single buildings, although helpful, are not enough. Scale must be encouraged through `carrot and stick` approaches that hinge around stakeholders receiving increased value, which in itself can be defined in several ways.

Clearly, a large proportion of those leading built environment initiatives are the financial stakeholders of such projects and it is the financial benefits, both short and long term, that they will prioritise. Creating mechanisms for financiers to indeed benefit financially, whilst positively affecting externalities in the contextual financial, societal and environmental systems that they affect, must receive attention in order to incentivise responsible practice.

In addition to improved pathways for new development, operating assets already exist in vast quantities around the globe, so we must also focus our efforts on ensuring that they operate as efficiently as possible, avoiding the need for replacement ahead of their time. With operational efficiency comes cost savings, creating a win-win situation, and this can be achieved through both mindset and operational protocol changes in addition to systems and hard equipment renewals.

Improved efficiency results in improved Net Operating Income (NOI), resulting in turn in improved asset valuations. So with haste, we must assess how best can the existing stock of property be retrofitted at scale? What is the business base for sustainable real estate? What mechanisms can be unlocked to make such a meaningful outcome possible?

Real Estate and Infrastructure: There are a range of investment opportunities that come about as a result of collaboration between parties. One example is Hudson Yards, where a new property development becomes possible because of an extension of a rail link. Mechanisms such as value capture can be used to fund the development of infrastructure that would have otherwise not have been possible. - How do we overcome the risk adverse culture of long-term investors? - How can we start to quantify value capture in infrastructure, not only real estate? - What is the opportunity for real estate and infrastructure assets to come together? - How do we support this?

Investment Structures: Are structures that have been traditionally promoted as vehicles for infrastructure investment such as Public Private Partnerships (PPPs) suitable to support large-scale investment? What other structures, such as REITs, can be developed?

Public and Private Transport: In some cases, centuries of construction have laid the foundation for an efficient private and public transport system. Rapid urbanisation is leading to increased congestion and the service outcomes that individuals are experiencing; service levels that are reducing in many parts of the world.

Building new infrastructure may not be the solution. How do we maximise the use of infrastructure in ways that are equitable and efficient, and that provide sustainable solutions to the transport infrastructure requirements of today with those of the future, along with emerging transport-related technologies? And how do we get the mix right between public and private enterprise? Water Infrastructure: Volatile weather is resulting in droughts followed by flash flooding in many parts of the world. The ability to build new and larger dams is constrained in many global territories due to existing land use, and are often opposed due to the environmental (and sometimes social) impacts damming causes. What options do we have to capture water when it rains, but also use it more efficiently when it doesn’t? How do we integrate water more effectively into the built environment and the natural ecosystems the built environment occupies? How can we integrate smart landscape practices into water conservation?

Community Infrastructure: Many countries have built up community assets over the last century that support community sports and social activities? Many facilities are single use. For instance, the local football club may be unoccupied from Monday 9-5 and used intensively on weekends and evenings. In a low carbon world, we need to find ways to use all of our assets efficiently. How do we create the mechanisms that maximise the use of community infrastructure for different purposes?

Distributed Energy: We are on the cusp of an energy revolution. The combination of advances in renewable energy technology with battery technology are providing the opportunity for individuals and corporations to switch from being energy users to energy suppliers. Future energy production will not be dominated by large scale plants, but by small and medium scale facilities. How will distributed energy change the way we live? What changes need to be made to maximise its usage and reliability?

Digital Connections: Universal access to broadband internet has often been derided as a means to allow individuals to download movies. The ability to access fast broadband however fundamentally changes the nature of work and employment, allowing for this first time in history, for work to be efficiently conducted outside of a supervised workplace. One of the challenges of existing economies is that as land prices have increased and transport infrastructure has improved, we have seen individuals make decisions to move further and further way from employment zones.

Urban planners see that the response to urban sprawl is densification. This however does not ultimately reduce congestion, but confines it to a set location. Congestion, and indeed to a degree densification, has major costs in terms of wasted time and energy consumption. The question is whether the internet is the superhighway which can be used to change we work. Distributed employment, by reducing commuting, can play an important role in reducing carbon. In a future low carbon economy, large organisations may no longer have huge head offices, but distributed workplaces.

Renewable Energy: As renewable energy investment gains tractions, the energy sector is increasingly focusing on the reliability of wind and solar energy and the potential for increased renewable energy to be accompanied by grid blackouts. Battery storage offers an ability to address the variability of solar and wind, but technology is still in its infancy. The future offers may offer the ability for distributed energy solutions to enable consumers not only to produce their own energy, but trade it with market operators and fellow consumers.

There is the potential that the future will see a shift away from the dominance of fossil fuel power stations delivering energy to business and communities. But to achieve this transition there is a need to ensure that the regulatory environment supports adaptation and innovation. The question is what reforms and innovations are needed to maximise the role of renewable energy? How do we get there? Tomorrow’s low carbon economy may look very different from today’s economy.

A key question is do we encourage governments and investors to be prepared to innovate and adapt? There is currently strong interest in infrastructure and real estate investment. According to Preqin, the latest estimate of dry powder (that is commitments that have been made by institutional investors that have not yet been placed into investments) was $230 billion for real estate and $147 billion for infrastructure.

The question is what reforms and innovations are required that would support real estate and infrastructure investments that can play a meaningful role in a transition to a low carbon economy and place these committed investments towards more optimal outcomes.

Next Steps

The Real Assets Working Group is seeking contributions from individuals and organisations that are focused on identifying innovations and reforms that will support infrastructure and real estate investments that maximise transition to a low carbon economy. We ask that contributions be emailed to Co-Convenors of the Real Assets Working Group at:

Gordon Noble noble@gnbk.com.au

Stuart Kay: stuart.kay@greenplaceassets.com