Daniel McHugh,
CEO.

More than nine-out-of-ten (93 per cent) of global institutional investors actively consider ESG and sustainability in their real assets investment decisions, with 17 per cent considering it a critical factor, according to new research from Aviva Investors, the global asset management business of Aviva plc.

The findings form part of the fifth annual ‘Real Assets Study’ from Aviva Investors, which canvassed views from 500 institutional investors around the world, including pension funds, insurers, global financial institutions and official institutions, together representing more than $3.5 trillion in assets.

The Study also revealed that two-thirds (64 per cent) of institutional investors plan to increase their allocations to real assets over the next two years, with 46 per cent planning to do so by up to ten per cent. The highest allocations are by investors in North America, where almost a quarter have greater than 20 per cent of their portfolio in real assets, compared to 19 per cent of European and 17 per cent of Asia Pacific investors.

Whilst diversification remains the primary driver for investing in real assets according to 57 per cent of respondents, the ability of these strategies to provide inflation-linked income is increasingly driving allocations. Aviva Investors’ research reveals 53 per cent of respondents allocate to real assets for its ability to provide inflation-linked income, versus just 33 per cent three years ago. With half of institutional investors having a net-zero commitment in place, the Study found 28 per cent of respondents allocate to real assets to capture its positive ESG impacts, compared to just 17 per cent three years ago.

Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors, said: “Inflation had an acute impact on the economic and investment landscape in 2022, making it increasingly expensive to hedge against it through traditional asset classes, whilst rising interest rates have eroded returns. The ability of real assets to provide inflation-linked income has woken investors up to the attractiveness of these strategies beyond simply being a diversification play. They are now playing a meaningful role in overall portfolios, offering investors a broad menu of options with varying degrees of risk and inflation protection built in.

“The Study shows that demand is also being driven by the ability to assess the positive impact of these investments beyond returns, such as contributing to sustainability-related objectives.”

Aviva Investors’ Real Assets Study found 67 per cent of institutional investors feel they have a responsibility to invest sustainably. Corporate values (61 per cent) and risk management (59 per cent) are both important factors for pension funds. Even so, more than three-quarters (79 per cent) favour a fund or strategy that prioritises financial returns whilst integrating ESG factors. This preference for a returns-based approach holds true for 90 per cent of investors in North America, compared to 71 per cent of European and 82 per cent of Asian investors. Investments supporting the energy transition are expected to secure the best financial returns according to 56 per cent of respondents, as well as being most likely to provide the best ESG impact (50 per cent).

Over the next 12 months, difficulty of finding opportunities (53 per cent), transaction costs, and valuations (both 50 per cent) are considered the greatest barriers to increasing allocations to real assets. Respondents also consider greenwashing the biggest material risk (52 per cent) to investment in sustainable real assets, ahead of concerns over valuations (44 per cent). Illiquidity (69 per cent) is the top concern for investing in real assets more generally, whilst valuation risk (57 per cent) is also a big concern, especially for pension funds (61 per cent).

Daniel McHugh added: “Whilst concerns about high valuations feature prominently in this year’s responses, just 22 per cent of institutional investors see climate-related obsolescence as the most material risk. Currently, capital pricing models do not adequately capture new factors such as this in their numbers, which carry material risk for investors. That has to change. As the market looks at assets through a net-zero lens, even prime assets could become vulnerable. Investors must be alive to how quickly – and to what extent – obsolescence could accelerate and the potential impact it could have on portfolios.”

Looking across the different sectors within real assets, real estate equity is the most popular among investors, representing 30 per cent of allocations. This is down from 31 per cent two years ago and is expected to remain at the same level over the next two years. In contrast, infrastructure equity is gaining traction, with institutional investors most likely to increase allocations to this area, rising from 12 per cent two years ago to 13 per cent today and 14 per cent in two years’ time. Direct investment (46 per cent) is the preferred route to market, followed by multi-asset pooled funds (40 per cent) and single-asset class pooled funds (32 per cent).

McHugh said: “It is clear real assets investors value the different access routes available to them. Gone are the days when allocations to each asset class within real assets would be looked at in isolation. Instead, investors are often looking for a multi-asset and outcome-led approach, which can align with corporate values. With 81 per cent of investors citing performance track record as being the most important criteria in selecting real assets manager for a sustainable mandate, it is hugely important they choose an asset manager able to make relative value calls that also understands the challenges involved in achieving long-term ESG objectives.”

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Daniel McHugh, CEO.

Aviva Investors has launched the fifth edition of their award-winning annual Real Assets Study and have taken a deep dive into investor attitudes towards sustainable real assets.

The Study has canvassed the views of 500 institutional investors — drawn from the UK, Europe, North America and Asia Pacific region, with US$3.5 trillion of assets under management collectively with 125 APAC (incl. 25 Australian) institutions included.

This story comes as responsible investment shifts from the margins to the mainstream and global debates surrounding the trade-off between achieving ESG impact and financial returns ensue.

Key findings

Asia-Pacific focus

• The use of real assets to make a positive ESG impact has climbed, with 31% of APAC investors naming positive ESG impact as a primary reason for allocating to real assets for 2023,
  • this has risen, up from 22%, three years ago.
• Our region’s investors are more becoming increasingly more receptive to strategies with a pure ESG real asset focus, than a returns-led approach.
• Compared to Europe and North America, APAC investors are also most open to pure ESG funds or strategies which focus on net zero/decarbonisation.

Our region’s commitment to ESG drives results:

• APAC institutions report the strongest intended commitment to a net-zero future,
  • however, there is considerable work to achieve this: only 15% of APAC respondents are already reporting on their progress to net zero.

Global view

• Almost two-thirds of organisations plan to increase their allocations to real assets in the next two years.
• More than nine in ten (93%) of global institutional investors actively consider ESG and sustainability in their real assets investment decisions, with 17 per cent considering it a critical factor.
• 56% of institutions were unsure or lacking confidence in their ability to meet their long-term net-zero and sustainability commitments.
• 46% believe direct investment is the best method for gaining exposure to real assets.
• 47% reported strategies with ESG/sustainability targets were of most interest when investing in sustainable real assets.

Read the report.

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Amanda Blanc

Aviva Investors, the global asset management business of Aviva plc (‘Aviva’), has published a report on the progress being made by its £47 billion Real Assets business towards net zero as it continues to improve the sustainability credentials of new and existing buildings and help investors navigate the transition towards a low-carbon future.

Last year Aviva Investors announced an ambitious Net Zero Pathway to reach net zero emissions across its entire Real Assets platform by 2040^[1], and Aviva plc unveiled its plan to become a net zero carbon emissions company by 2040^[2], representing the most demanding target of any major insurance company in the world.

The update details progress against five interim goals which Aviva Investors committed to achieving by 2025, providing proof points its performance can be measured against and to ensure its pledges are met with measurable and meaningful action. It follows the recent announcement that the business had surpassed its commitment to invest £1 billion into Sustainable Transition Loans, reaching its target three years ahead of schedule. In the report, progress made towards meeting these commitments and targets include:

• investing directly in and financing £1.4 billion of low-carbon and renewable energy infrastructure and buildings, making 56 per cent progress against a target of £2.5 billion by 2025
• expanding total renewable energy capacity to 1.1 gigawatts (GW), representing 48 per cent progress towards its commitment of reaching 1.5GW capacity by 2025
• originating £1.04 billion in climate transition-focused real estate loans, achieving over 100 per cent progress towards its 2025 target
• launching a  climate transition strategy, that delivered on its commitment to align to Article 8 of the Sustainable Finance Disclosures Regulation (SFDR) framework
• achieving a 25 per cent reduction in carbon intensity and six per cent decrease in energy intensity for direct investments, against targets of 30 per cent and 10 per cent respectively by 2025.

Amanda Blanc, Group Chief Executive Officer, Aviva plc, said: “As a major investor in UK infrastructure and real estate, Aviva has a significant opportunity and responsibility to ensure we finance projects that help the built environment in its transition to net zero. So it’s encouraging to see this progress, however we still have a long way to go before we fulfil our sustainability ambitions. Our investors and customers expect leading results, and we will maintain a laser focus on delivering them.”

Daniel McHugh, CIO, Real Assets, at Aviva Investors, commented: “Net zero targets must move on from being pledges to attract investor capital and instead be grounded in action if the real assets sector is to fulfil its potential in tackling the climate crisis. The five interim goals of our Pathway are arguably the most important aspect of our commitment to net zero. They provide proof-points against which our progress can be measured and are designed to give clients confidence in the investments we make on their behalf, and their impact in supporting the transition towards a low carbon future.”

In its update, Aviva Investors also outlines several factors which are likely to make net zero flightpaths more challenging for investors. This includes significant divergences in the level of disclosure across asset classes, for example in private credit where provision of ESG and impact data to lenders is uncommon, and in real estate where very little ESG data is available at the point of sale.

McHugh added: “Demand for more comprehensive sustainability data has risen dramatically and it is not inconceivable that even high-quality buildings in prime locations will become vulnerable to sustainability-related obsolescence. The importance of refurbishing and retrofitting of existing assets with energy-efficient materials and cleaner energy sources cannot be understated. Continuing variations and gaps in the quality of ESG data will cause polarisation in the performance of assets, making investment expertise and rigorous analysis more important than ever.”

Other challenges identified in the report include an increasing “green premium” for existing assets as the race to net zero intensifies. Heightened competition for core and core-plus assets with the best sustainable credentials is expected to increase, with poor-quality assets expected to attract a “brown discount” as a result. The report also highlights a growing trend for investors to prioritise renewables and already-green assets, rather than impact-focused investments which improve under-performing existing buildings and can be more effective in transitioning towards a low-carbon future.

Ed Dixon, Head of ESG, Real Assets, at Aviva Investors, added: “As highlighted in our most recent Real Assets Study^[3], the focus on net zero targets has resulted in a lot of money chasing sustainable assets with attractive decarbonisation pathways, as investors try to lock-in short-term reductions in the carbon footprint of their portfolios. There is also an overreliance on energy performance certificates and green building certifications, neither of which are correlated to energy and carbon intensity. However, if institutional investor capital is to be truly effective in supporting the transition towards a low-carbon future, it must be funnelled into more impact-based investment activities, such as improving existing buildings and infrastructure which underperform when it comes to energy efficiency and their ongoing carbon emissions.”

Read the report: Real Assets net-zero pathway: One year on.

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[1] Aviva Investors publishes net zero pathway for Real Assets
[2] Aviva becomes the first major insurer worldwide to target Net Zero carbon by 2040
[3] Aviva Investors Real Assets Study 2021 sees large uptick in institutional investors committing to net zero targets

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Daniel McHugh

UK real assets are expected to offer investors better growth prospects relative to continental Europe, according to the latest edition of the Real Assets House View by Aviva Investors, the global asset management business of Aviva plc (‘Aviva’).

The research also identifies long income and fixed-rate debt as strategies most likely to provide best risk-adjusted returns, particularly for those investors seeking investments with strong cashflow-generating characteristics.

The Real Assets House View brings together views and analysis from across the real estate, infrastructure and private debt investment teams, providing a foundation from which Aviva Investors can make relative-value investment decisions regarding multi-asset allocations, with clients increasingly allocating to Real Assets as part of an outcome-based approach.

Aviva Investors expects UK Real Assets to offer better growth potential than continental Europe, highlighting the broad reopening of the UK economy, stronger GDP prospects and supportive monetary policy lending itself to greater room for capital value growth. The asset manager also expects more flexibility in monetary policy to provide the UK with greater agility to react to the changing macro environment.

Daniel McHugh, CIO, Real Assets at Aviva Investors, said: “Pricing in European markets is at all-time highs. As a result, we expect UK real estate to outperform on a five-year risk-adjusted basis, where better pricing means there is more room for yield compression as income streams strengthen. With UK monetary policy having been able to adapt quicker to the changing macro climate, we think the UK market to be more favourable to investors. That said, our central assumption for inflation is that there will be significant increases over the short term, making the cost of using traditional liquid markets to hedge inflation punitively high. The result has seen Real Assets increasingly appreciated as a more viable solution for inflation-hedging purposes.”

With a challenging macro environment set to continue as the backdrop for markets, Aviva Investors expects cashflow-generating strategies such as long income and fixed-rate private debt to prove attractive with investors looking for best risk-adjusted returns. As an asset class, fixed-rate debt has offered a 30-50 basis point premium over liquid bonds of similar creditworthiness, which Aviva Investors believes makes it a much more attractive option for institutional investors looking to match long-term liabilities.

Daniel McHugh added: “Long income and private debt are two examples of Real Assets strategies which have the ability to deliver robust income streams, underpinned by consistent returns and lower volatility relative to other asset classes, despite the exceptional challenges presented by the pandemic over the last two years.  They have done so whilst continuing to offer an illiquidity premium relative to other asset classes. This is a further demonstration of the all-round qualities real assets can provide to a portfolio, including as part of credible return-seeking strategies.”

Aviva Investors also pointed out the impact that an intensifying race to net zero is having on Real Assets, with renewables and forestry as sectors experiencing strong investor demand as a result.

Daniel McHugh said: “Renewables form a central pillar of the UK government’s net zero policy, and we think there is large amount of value yet to be discovered in the sector particularly as funding mechanisms and policy support for nascent technologies becomes clearer. The focus on net zero targets highlighted as part of our Real Assets Study in November reflects investor reaction to this, pushing up demand for suitable opportunities. This might cause future values to be squeezed, however many investors are likely to consider wider environmental factors, not only total returns, as they look to ensure progress towards longer-term sustainability targets. Whilst forestry is likely to prove popular as one of very few investment options that provides a carbon sink, it is vitally important that investors take the surrounding habitats and communities into account as part of those activities. Our expectation is that an increased intensity of focus on net zero will cause greater polarisation between winners and losers in the future of Real Assets.”

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Ben will join Aviva Investors in January 2022 with responsibility for the direct real estate business. He will report to Daniel McHugh, Chief Investment Officer, Real Assets, and join the Real Assets Senior Leadership Team.

Ben has over 20 years’ experience in UK, continental Europe, and global real estate investment. He joins the business after 13 years at Federated Hermes, most recently holding the role of Executive Director, Fund Management, with responsibility for global real estate, UK residential and real estate debt investment programmes, as well as overseeing ESG strategy.

Prior to Federated Hermes, Ben was at M&G Real Estate for almost six years, where he held the positions of Fund Manager for the Global Real Estate Securities Fund and Head of Global Strategy and View Formation for private real estate investments. He is the current Chair of the UK Investment Property Forum.

Alongside Ben’s appointment, Aviva Investors also announces that James Stevens, who has successfully led the Real Estate business on an interim basis since February 2021, will take up the new role of Head of Real Estate Investment in January, reporting to Ben. In his new role, James will be responsible for delivering strong performance for our clients through the origination of investment opportunities and developments, as well as leading joint venture and co-investment programmes.

Daniel McHugh, CIO, Real Assets, at Aviva Investors said: “We are delighted that we have been able to attract someone of Ben’s calibre to Aviva Investors. Ben has demonstrable experience in leading teams and setting and executing business strategies, as well as strong pedigree in research and ESG. I look forward to working closely with him to further strengthen our direct real estate capabilities. I also want to thank James for leading the team over the past several months and to congratulate him on his new role.”

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In his new role, Daniel will report to Mark Versey and will be responsible for the strategy and growth of Aviva Investors’ integrated Real Assets business, encompassing Real Estate, Infrastructure and Private Debt. He will oversee around 300 professionals working across fund management, asset management, development, transactions, origination, underwriting, research, and business management. Daniel will also join the Aviva Investors Executive Team.

Daniel joined Aviva Investors in April 2018 as Managing Director, Real Estate. In that role, he was responsible for business strategy, product initiatives, and external engagement across Real Estate, as well as leading the firm’s direct investment activity across the asset management, development, and transaction teams. He is also a member of the Real Assets Senior Leadership Team. Daniel has more than 25 years’ experience in UK and continental European real estate. Prior to joining Aviva Investors, he was Head of Continental European Real Estate Investment at Standard Life Investments. He joined Standard Life Investments in 2000.

A successor as Managing Director, Real Estate, will be announced in due course. In the interim, James Stevens, Head of Development, Global Real Estate, will lead the team.

Mark Versey, Chief Executive Officer at Aviva Investors, said: “I’m delighted that we have promoted one of our own to the role of CIO for Real Assets, which is central to our commercial strategy and an area we continue to see strong demand from our UK and international clients. Daniel has an exceptional investment pedigree, with a relentless focus on clients and delivering strong performance. Since he joined the business, we have significantly built out our development, asset management and transaction capabilities in Real Estate, expanding our investment strategy in exciting new European locations and forging strong partnerships with key international investors. Daniel shares my ambition to establish Aviva Investors as a market leader in Real Assets, and I have every confidence the business will flourish under his leadership.”

Daniel McHugh, Chief Investment Officer, Real Assets, at Aviva Investors, said: “I’m excited and proud that Mark and the executive team have given me the opportunity to lead our Real Assets business and I can’t wait to get started. We have a fantastic franchise, with highly capable and motivated teams across Real Estate, Infrastructure and Private Debt, and an integrated ESG approach that I believe is a differentiator for our parent Aviva and our external clients. My objective will be to ensure we continue growing the platform by delivering the investment outcomes our clients demand.”

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[1] Subject to regulatory approval

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