Avoid, reduce, remove, align Finding climate transition investment opportunities in real assets

By Luke Layfield, Head of Portfolio Management, Private Markets & Zoe Austin, Portfolio Manager, Aviva Investors

Read this article to understand:

• Opportunities for direct investment in climate transition-aligned real estate and infrastructure projects

• How we approach early-stage emerging climate technologies

• The benefits of diversification and potential to harvest illiquidity premia

Climate change is humanity’s most daunting challenge. As global temperatures climb, the urgency of aligning greenhouse-gas (GHG) emissions with the pathway in the Paris Agreement intensifies Real asset investors can play a role in this process As buildings and infrastructure generate around 38 per cent of global energy related GHG emissions, decarbonising the built environment is a priority (source: RIBA, 2023).

By implementing a climate transition aligned strategy, investors can make a tangible difference to emissions pathways while generating long-term risk-adjusted returns

Our Climate Transition Real Assets strategy seeks to avoid, reduce and remove emissions from the atmosphere. The categories address different stages of the emissions lifecycle and different aspects of the problem. Most investment is in directly-owned infrastructure, real estate and forestry across Europe, but we also have lesser exposure to early-stage, emerging climate technologies Their value lies in their ability to diversify risk and provide insights into future developments, alongside potential for relatively high returns, albeit with higher risk

As the drivers of risk and reward vary across market segments, a multi-asset approach can contribute diversification benefits, illiquidity premia and uncorrelated returns

Avoid

The “avoid” part of our strategy focuses on preventing emissions. Our main focus is on low-carbon infrastructure, including renewable energy projects and battery energy-storage. Decarbonising transport is another important focus. By investing in EV-charging point operators, we aim to make low-carbon transport more accessible. The third thread involves digital infrastructure, such as investments in fibre broadband and data centres.

For every £1 billion invested, we aim to avoid over four million tonnes of CO2 by 2040 – equivalent to three million flights around the world.

We do not necessarily own assets directly. We also work alongside infrastructure developers in partnership at the earlier stages of platform or network roll-out. As there may be planning bottlenecks and cost challenges, we are working in areas we believe structural tailwinds will be supportive

Reduce

“Reduce” targets actions to decrease GHG emissions. In property, we employ a “brown-to green” strategy, concentrating on energy-efficiency Energy efficient buildings can generate higher rents, as tenants increasingly demand buildings that are cheaper to run, more comfortable and able to contribute towards net-zero targets. A prime example is Curtain House, a 50,000 square-foot former Victorian warehouse in London. We developed a plan to improve financial and environmental performance, by upgrading glazing, retrofitting insulation and introducing electric heat pumps The EPC ‘A’ grade building will use half the energy of a typical UK office.

There is a risk of overpaying for “brown-to-green” development opportunities, despite the fact that renovation involves planning risks

A deep understanding of what's required to create high-quality, energy-efficient space is essential for success.

Remove

Currently investors can offset emissions indirectly, by buying carbon removal credits, where they finance projects verified to remove or avoid emissions. Direct investment in nature-based solutions offers another solution through ecosystems which remove emissions and generate carbon credits

One of our major projects is Glen Dye Moor in Scotland, a 6,300 acre site, where we intend to plant five million trees The sustainable forestry should generate long-term returns, alongside carbon credits to hedge against rising carbon prices. By generating our own credits, we will not have to buy them in years ahead. We aim to sequester around 16 million tonnes of carbon over a hundred-year project lifetime, generating high-integrity carbon “removal” credits from afforestation

Some “avoidance” credits will be generated too through peatland restoration. The credits will fall under the well-regarded UK Woodland Carbon or Peatland Code schemes: only quality-approved projects are registered, independently validated, and verified.

Align

Finally, we invest indirectly into private equity solutions. To date we have invested in three venture capital funds aligned with climate tech, each addressing the transition in slightly different ways.

Using our strategic "avoid, reduce, remove, align " framework offers a forward-thinking blueprint to assess private markets opportunities. It endeavours to align climate transition focused investment with robust financial outcomes and ensure our real asset portfolios thrive in a rapidly changing world

Key Risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates Investors may not get back the original amount invested. Past performance is not a guide to future returns

Real estate/ infrastructure risks

Investments can be made in realestate ,infrastructure and illiquid assets Investors may not be able to switch or cash in an investment when they want because realestate may not always be readily saleable If this is the case,we may defer a request to switch or cashi n shares or units. Investors should also bear in mind that the valuation of real estate is generally a matter of valuersʼ opinion rather than fact

Sustainable investing risk

The level of sustainability risk to which the strategy is exposed, and therefore the value of its investments, may fluctuate depending on the investment opportunities identified by the Investment Manager

IMPORTANT INFORMATION

THIS IS A MARKETING COMMUNICATION

This article is intended for investment professionals only It is not to be distributed to or relied on by retail clients. The value of an investment and any income from it may go down as well as up and the outcomes are not guaranteed The investor may not get back the original amount invested Past performance is not a guide to future returns Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL) Unless stated otherwise any views and opinions are those of Aviva Investors They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment In the UK this is issued by Aviva Investors Global Services Limited Registered in England No 1151805 Registered Office :80 Fenchurch Street, London, EC3M4AE Authorised and regulated by the Financial Conduct Authority Firm Reference No 119178 www.avivainvestors.com 579900–31/03/2025