By Simon Whistler, Senior Specialist, Investment Practices, PRI
The role of real assets in tackling climate change is not a new concept. There is no shortage of research and literature discussing both the climate-related transition and physical risks that real assets and their investors face, and can potentially mitigate. Investors and project developers increasingly put this into action, whether through implementation of building regulations that drive ever higher standards in energy efficiency, or through the seemingly unstoppable rise of renewable energy in different parts of the world. Looking ahead, real assets feature prominently in the European Union’s proposed Green New Deal, and amid the chatter in jurisdictions around the world on the need for ‘green’ recoveries from the COVID-19 crisis.
Beneath the surface, it is clear that investors need to go further, starting with disclosure. In 2019, only 54% of signatories reporting on the property and infrastructure modules in the PRI’s annual reporting and assessment framework also submitted answers to the-then voluntary climate change module. This module aligns closely with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD), a framework for consistent climate-related financial risk disclosures by companies, banks, and investors, in order to develop greater understanding of climate risks and facilitate financing the transition to a more stable and sustainable economy. Supporting investor adoption of the TCFD recommendations has long been a priority for the PRI, and the recommendations provide a global framework for translating information about climate into financial metrics.
However, when investors do report against the TCFD (or other climate disclosure frameworks) further gaps emerge. In general terms, investors and corporates alike do better at identifying climate-related risks than on selecting appropriate targets and metrics for tracking performance over time. The real assets benchmark GRESB’s Resilient Real Assets report draws on findings from the 2019 reporting against its own resilience module and highlights how reporting on targets and metrics lags well behind other elements of the TCFD recommendations, such as governance and risk management.
Why does this matter? Simply put, without clear metrics for assessing progress on climate goals, investor action on the issue will remain haphazard. Many metrics already exist, but how many can effectively distil both transition and physical risks to real assets in a way that provides decision-useful information?
This point is critical in real assets investing: investors here are in a unique position where they are often both the compiler and user of TCFD disclosures. Decisions around targets and metrics may therefore be embedded at both an operational and investor level in a way that doesn’t happen in public markets, making it all the more important that these are suitably ambitious and drive performance in the right direction.
This process to define appropriate metrics, and ultimately targets, is not easy. What is the right type of data, for example, to assess the financial impact of physical risks of climate change on fixed assets over a 20 or 30-year timeframe? Those difficulties shouldn’t be an impediment to greater investor action, however. At the PRI, we’re starting to work on developing guidance for real assets investors to support their implementation of the TCFD recommendations, with a particular focus on this critical issue of identifying and setting the most appropriate metrics, as well as providing guidance on target setting.
Our work will identify advanced practitioners in the sector and assess the processes that they have developed to define coherent targets and metrics for their assets and portfolios. We’ll consider the core barriers within the industry to greater, and more informed, disclosure against the TCFD recommendations. We’ll also assess how approaches may vary, if at all, across different geographies and in individual sectors within the broad range of real assets investments.
Many real estate and infrastructure investors have already taken impressive steps on climate change. The growth in renewable energy, for one, has shown how certain investments can be a win for both climate mitigation efforts and for investors. However, the industry cannot afford to stand still, particularly given the continued growth of private markets and the ongoing debate of the role it can play in more sustainable economic development policy programmes.
Stronger TCFD disclosure is one means of continued progress, both reputationally (as evidenced by Canada’s tying of corporate COVID-19 bailout packages to TCFD reporting) and commercially as deeper consideration of climate risks allows better investment decisions to be made. We encourage real assets investors to be ambitious and to not shy away from the challenges that this demands. And we look forward to working with the industry to identify how to tackle these challenges in the most effective way.
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.
Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.
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