Costs of climate mitigation will likely multiply if action delayed

One of the key points in the drive for sustainability is to integrate climate change into investment strategies, according to Catella Residential Investment Management managing director Xavier Jongen.

Jongen said that sustainability should not be treated as a peripheral activity and it is necessary to think about how climate change is hitting us and how investment strategies can mitigate and adapt to that.

Jongen discussed how this can be achieved practically. “One of the things that we talked a little bit about last year is getting the valuations right, and we did a lot of work on that. This year, we are focusing more on the cost ‘machine’ of decarbonisation,” he told Real Asset Insight’s Richard Betts.

Something that Jongen said is frequently not well explained is that mitigating climate change has both a substitution effect and a multiplying effect on costs. “Those two elements are key.”

Substitution is a “God-given present” which we should maximise. Citing the example of a gas boiler at the end of its life in a residential unit, exchanging it with a heat pump which is more environmentally friendly has a substitution effect. Something else would have been needed anyway, so the coincidental timing limits costs, making it a very cheap way of greening assets.

“We should maximise that because unfortunately in mitigation there’s not only substitution, there is also a multiplication effect on the cost.” Jongen explained that this is the other side of the balance sheet. “If we don’t mitigate enough, which means if we don’t green our economies and take down the CO2 levels enough now, then the cost of adapting to climate change will be incremental.”

While one component of costs incurred is adaptation, another is damages and the third is ultimately getting CO2 levels down to a normal level. “These three costs blow up if you don’t mitigate in time.”

The key to dealing with the huge challenge that we face is focusing on mitigation and integrating it into investment strategies. “We are asking our investors to pressure us and other co-investment managers to decarbonise as much as possible now. They are the long-term holders of these assets, so if they don’t push us – and we are very happy to be pushed to decarbonise now – the bill will only get bigger.”

And who will pay that bill? Jongen asked: The owner of the asset. “That’s the pension fund and behind that, well I guess that’s you and I again, right?”

Jongen said that kicking the can down the road is, “a really silly thing to do”, and not just for ethical reasons. What industry should do is focus on the financing and find the cheapest finance strategy possible to decarbonise our assets and do something good for the planet.

“That means we need to focus much more on mitigating than we have done,” Jongen concluded.