As institutional investors become increasingly interested in assets supporting the energy transition, they must evolve their assessment processes in order to meet new standards, according to experts.
When the Public Sector Pension Investment Board was determining an official strategy around green assets, the team worked to develop a category it calls transition assets — those that aren’t yet green but are on the path towards it, says Herman Bril, the organization’s managing director and head of sustainability and climate innovation.
“There are already plenty of opportunities to invest in green. What is still more challenging is investing in transition assets.”
As well, investing in green assets requires investors to properly evaluate a significant amount of information. But while standardized environmental, social and governance metrics have become a key touchstone for green investments, more data is required, say Pascal Dudle, head of listed impact and senior portfolio manager at Vontobel Asset Management. “If you . . . just apply ESG filters [or] standardized ratings, I see some risks in that.”
PSP Investments is still very interested in assets in the transition period, says Bril, noting it isn’t easy to decarbonize quickly. The transition period can be significantly challenging for an asset, as well as for its management team in providing credible proof and meaningful disclosure about the change. “If you don’t report on your trajectory, it becomes a story only. And we like stories, but we also would like to see the evidence behind the story.”
Bril highlighted the real estate industry, noting it’s increasingly incorporating sustainability in construction plans, which has raised the desirability of new buildings for their green premiums. “There are already industries where you can see the valuation differences . . . . [That’s] something which we probably see more and more popping up in different parts of the world and in different industries over time.”
When it comes to green asset opportunities, Dudle is also interested in the evolution of buildings as a green asset, as well as the energy sector and the transportation value chain. And he’s interested in transition assets and the need to follow an asset through its path to becoming green.