Institutional investors making an impact

• Institutional investors see climate risk and the journey to NetZero as critical to the value of an asset
• They are looking for transparency and accountability in reporting and management
• While environmental measures lead, social and governance interdependencies cannot be ignored
• Companies could accelerate their NetZero journey by being clear about what they want to achieve and setting interim targets.

Institutional investors hold more than US$1 trillion worth of infrastructure assets.¹ Many take an active role in their investments. Some have evolved into massive infrastructure operators. And that gives them significant room to influence how the infrastructure sector achieves the world's NetZero goals.

For institutional investors, the need to tackle climate change has been clear for some time. “De-risking the transition to a green economy is not just the right thing to do or the moral thing to do - it's the prudent financial thing to do,” argued Greta Talbot-Jones, Associate Director of Responsible Investment with Aviva Investors, a global asset manager with significant investments in renewables and green infrastructure.

Indeed, for large institutional investors and asset managers - pension funds and sovereign wealth funds in particular - investment decisions are highly influenced by an asset's potential NetZero journey. “Number one, we need to meet our return hurdles as value investors. But, number two, we need to demonstrate impact through our investments. If we can't make an impact, we won't invest through our Global Transition Fund,” said Ruth Kent, Managing Partner and COO of Brookfield's Renewable Power & Transition Group.

What is clear is that appetite for green and impact investments is strong amongst institutional investors and their clients. Brookfield's recent US$15 billion Global Transition Fund was oversubscribed. Aviva Investors wrote 80 percent of their 5-year target for sustainably loans in just 18 months. “I suspect that, within the next 5 years, all loans will have some sort of environmental or social KPI attached,” added Greta.

But what does impact actually look like? And how are institutional investors assessing impact on their existing and new investments? The reality is that there is no tried-and-true formula or checkbox list that applies universally across sectors and markets (that remains a topic of great debate and painstakingly slow progress at the supranational level). Different institutional investors are focused on different metrics and use different approaches.

Some, like Aviva Investors, are taking a data-up approach. “We've mapped out the Scope 1, 2 and 3 emissions across our illiquid investments and now we are mapping that back to financial performance over time,” Greta told me recently. “That allows us to complete the feedback loop in a way that really helps drive impactful investment decisions.”

Others are looking at impact holistically. “We have 4 As that we look at - Alignment to the Paris Agreement, Additionality to the NetZero journey, Accountability in terms of reporting, and Avoidance of negative impacts,” added Ruth. “As value investors, we're growing at pace, and this provides us with the flexibility to adapt rapidly where needed.”

Ultimately, however, it comes down to transparency and accountability. “Being able to verify your alignment with things like the Paris Agreement through science-based targets and then voluntarily reporting those results speaks volumes about your commitment to achieving NetZero targets,” added Greta. “It's easier for investors to get behind the NetZero journey story if there is historical data to back it up.”

More than decarbonization, carbon emissions and climate risk are certainly top of mind. But the larger institutional investors are also focused on ensuring they are able to make a broader impact on the 'S' and the 'G' of the ESG equation. “We're one of the world's largest renewables and hydro operators, so we know the importance of making sure we are partnering with the communities we work in and serve,” noted Ruth. “We want to remove carbon, but we don't want to negatively impact any of the other major areas of the ESG agenda by doing so.”

Social and political pressure to ensure the green transition is a `just transition' are influencing the debate. “It is often very hard to separate the environmental and social KPIs because they are just so intrinsic. As we are investing, we need to bring along different parts of the population and ensure that funding is distributed equitably. We need to prioritize those most affected by climate change. We need to upskill the population with the skills that contribute to a green economy,” added Greta. “The social side is much harder to measure, but it is equally important.”

So how are institutional investors and operators helping shape the NetZero pathways of their assets and investments? On the liquid investment side, many institutional investors are focused on improving stewardship through their investments. On the illiquid side - real estate and infrastructure in particular - investors are using innovative financing tools and operational capabilities to accelerate their portfolio company's journey to NetZero.

“We do a lot of active structuring to incentivize the results we want to achieve. We'll add covenants to debt structures, offer sustainability-linked loan structures, green loans and other vehicles that allow us to de-risk the investment and bring the portfolio company along the decarbonization pathway,” Greta noted of Aviva Investors.

As a clean energy supermajor with more than 6,000 generation projects in operation, Brookfield Renewable also uses their experience to drive change across the wider business ecosystem. “Our operations side works with corporate clients to help them transition their energy footprint to renewables, to shape their energy use and production, and to improve their energy efficiency across the business,” said Ruth. “We want our portfolio companies to be the catalysts that drive other businesses to NetZero.”

With deep experience helping portfolio companies and clients develop and achieve their NetZero journeys, what advice would these institutional investors give to others seeking to accelerate their decarbonization plans?

"One of the most important things is to set interim targets. There is a lot of focus on the end-goal of 2030 or 2050 but - to make that accountable - you really need to set and measure interim targets that move you towards your ultimate goal. You need to be proactive. And you need to move early,” advised Greta. Last year, Aviva Investors published a Pathway on how it plans to reach NetZero emissions across its entire Real Assets portfolio by 2040. The Pathway includes five explicit interim goals for 2025, providing proof-points of progress and ensuring long-term pledges are being met with material action.

“I think the first thing companies need to do is understand the problem they are trying to solve for. For most that journey begins with your Scope 2 emissions from the power you consume and there are products available now to fully decarbonize this through renewable power purchase agreements. Once they've stepped through that door, we find that our corporate clients can really pick up the momentum on everything else,” added Ruth.