March 23, 2023
Partner Content with Room 151: Rupert Sheldon from Fiera Real Estate explores how Local Government Pension Scheme funds can achieve their net-zero carbon targets through investing in natural capital and carbon credits as part of a balanced real estate investment strategy.
The acronym NZC, or Net Zero Carbon, was little known to investment professionals ten years ago but ignorance to its meaning and importance today would doom any manager to extinction.
Officially the UK government’s target is to achieve NZC by 2050, however, with a number of Local Government Pension Scheme (LGPS) funds prioritising NZC much sooner, there is no time to lose.
The world is now truly awake to the climate crisis and the stakes could not be any higher. Leading managers across the heavy carbon emitting real estate sector are in the spotlight and busy investing time (and money) seeking out innovative solutions for bringing that date forward.
Some LGPS funds are seeking NZC as soon as 2030. This can be a problem for those seeking exposure to the UK long leased real estate sector as most dedicated funds have official NZC targets of 2045 or 2050 thereby creating a mismatch.
Long income real estate investing is associated with full repairing and insuring leases which, by nature, devolve all responsibility for on-the-ground management and site operation to the occupational tenants.
At face value, it would seem a forlorn task for any landlord within such a vehicle to take back the NZC initiative to help drive a more ambitious target.
However, by leveraging strong landlord and tenant relationships, the savvy landlord can still set the agenda.
Before a commercial landlord can even begin the NZC journey they must first gain a clear understanding of their baseline position. In other words, you can’t begin to measure your progress if you don’t know where you are starting from!
By way of illustration, pro-active engagement with tenants across our own long income fund has given us access to 85% of all tenant energy usage data.
This market leading position has enabled us to map out a journey for each asset with a clear vision for what is required and over what time period in a bottom-up and granular way.
‘A good way for LGPS funds to achieve betterment is to invest into poor grade agricultural land and seek to improve it through various forms of regeneration.’
Armed with an accurate starting data point, the NZC journey ordinarily splits into two phases with an initial focus on carbon removal and a second phase of carbon offsetting, but could more be done and sooner? In short, the answer is yes.
If carbon offsetting is a last resort – a way of covering those final hard yards to NZC – carbon insetting is the opposite; an opportunity to get ahead of target by doing things the right way now and a chance for long income real estate investing to align to even the most ambitious LGPS funds’ NZC targets.
We have been spending a lot of time recently exploring options in this important area and believe that natural capital could offer a solution for the more innovative and forward-thinking managers.
Natural capital is the world’s stock of natural resources, including geology, soil, air, water and all living organisms. A good way for LGPS funds to achieve betterment is to invest into poor grade agricultural land and seek to improve it through various forms of regeneration.
It is estimated by the United Nations that the planet may only have 60 harvests left based on the current rate of soil depletion or degradation.
This would be a catastrophic outcome. The annual cost of reversing this process in the UK alone is estimated at £5.6bn.
However, this investment is unlikely to come from central government and therefore requires meaningful input from the private sector which is now focussed on making a case to invest.
This comes at a time when there is growing pressure on farming businesses around environmental regulation, environmental, social and governance conditional bank finance and supply chain requirements, all of which mean they are motivated to look at ways of extracting further revenue streams from their businesses via nature based solutions.
So, we have a willing buyer and a willing seller if the investment product can be created. Where this can happen within fund structures it provides underlying investors, including LGPS, with an opportunity to get ahead without needing to do the “heavy lifting” themselves.
‘Saving the planet whilst delivering out-performance and attracting new capital has a very progressive ring to it. For those managers who are able to successfully seize the initiative, the rewards will be meaningful on every measure.’
Long income investing
The case for investment could not be more compelling. It is overwhelmingly doing the right thing by the planet whilst having the potential to turbo charge the journey to NZC in a proactive and immediate way.
By acquiring low grade agricultural land and finding an operator to embark on restorative, regenerative projects over the long term, investors have the potential to take a long term income from land whilst knowing that any upgrade to underlying quality and productivity will go straight to value and help drive returns.
Through woodland creation, regenerative agricultural principles, biodiversity provision and consequential species protection, to name but a few, landlords will be able to generate excess carbon credits enabling both insetting within their own portfolios (thereby removing the need for future offsetting) and a resultant sale of any surplus credits to generate an income.
The prize for landlords who are successful in generating excess carbon credits is the opportunity to sell into an improving market place where demand and supply pressures are driving pricing.
The price per tonne CO2e of carbon increased by 34% from 2019 to 2021 and it has become clear that significantly higher prices are paid for carbon credits generated from projects that can deliver additional societal and environmental benefits.
At Fiera Real Estate we believe there is a first mover advantage and are looking to make the most of it. We also know that such an investment approach has significant appeal for our investors and their own carbon reduction agenda.
As a consequence, we have allocated capital within our long income fund to support our own ambitious journey to NZC by 2035 and anticipate making investments into the natural capital space in 2023 to ensure true alignment with our investors, whether LGPS, corporate or otherwise.
One thing’s for sure, the prize is worth fighting for in what is the ultimate virtuous circle. Saving the planet whilst delivering out-performance and attracting new capital has a very progressive ring to it.
For those managers who are able to successfully seize the initiative, the rewards will be meaningful on every measure.
Sources: 1. Savills, Nature Based Solutions – November 2022