Climate change, the momentum towards a net zero economy and the allocation of capital towards more sustainable development will significantly shape global markets over the next few decades. But how will COP26 impact the international real estate, infrastructure and energy sectors?
Net zero by 2050
World leaders are meeting in Glasgow for the 26th "Conference of the Parties" to the UN Framework Convention on Climate Change. The purpose of the meeting is for governments to assess progress under the Paris Agreement, signed in 2016.
The goal of the Paris Agreement is to limit global warming to no more than 2⁰C (preferably 1.5⁰C) above pre-industrial levels by 2100 and avoid the worst impacts of climate change. To do this, countries need to cut greenhouse gas emissions by at least 45% of 2010 levels by 2030 and then reach net zero emissions by 2050.
After Paris, each country was responsible for preparing its own climate action plan (called an NDC) to show how it would achieve its part of the goal. But many of the initial NDCs fall short and the focus of Glasgow is on strengthening commitments to net zero.
Climate risk is investment risk
Achieving the transition to net zero emissions relies on private finance. Mark Carney, the UK Prime Minister's Finance Advisor for COP26, says that the whole global economy will need to shift: "companies, banks, insurers and investors all have to adjust their business models and develop credible plans for the transition to a net zero economy and implement them". Major investors are already adjusting their approaches, recognising that climate change has become an important factor affecting their long-term goals: "climate risk is investment risk".
In major economies, governments are increasingly implementing policies and setting regulatory frameworks to ensure that every financial decision takes climate change into account:
- In France, the recently passed law for climate and resilience (Law no. 2021-1104 dated 22 August 2021) focuses on the ambition of the French government to develop renewable energy. It also contains specific measures aimed at promoting and financially supporting the energy renovation of private buildings.
- In Germany, the Federal Constitutional Court recently ruled the climate protection law (Klimaschutzgesetz) was not ambitious enough, binding legislators to be more specific and accelerate the reduction of emissions. The updated goals are to be attained through the fixing of annual emission reduction quotas for industries including transport and construction. A recent study estimates Germany needs an extra $860 billion to achieve its 2030 climate target, with calls for planning and approval processes to be sped up.
- In the UK, the government has already started work on aligning private sector capital flows with its climate goals, both by seeking corporate support and through regulation, with boards and management likely obliged to give climate related financial disclosures across the economy by 2025. It published its new climate target in 2020 with priorities including greener buildings, accelerating the shift to zero-emissions infrastructure and advancing offshore wind.
Real estate, infrastructure and energy
The real estate, infrastructure and energy sectors have a major role to play in driving forward international policy and supporting investors, developers and funders with the challenges and opportunities that are coming their way. These include:
- the deployment of electric vehicle charging infrastructure
- operation and maintenance of rooftop photovoltaic panels on existing logistics properties
- the adaption of existing building stock and planning of developments with alternative heating supplies.
Opportunities will be particularly visible in cities which are estimated to be responsible for 75% of global CO2 emissions. Climate change, the momentum towards a net zero economy and the allocation of capital towards more sustainable companies and projects will significantly shape the international real estate, infrastructure and energy sectors over the next few decades.
