Pricing carbon risks a greater challenge for listed securities

The biggest challenge ahead for investors in publicly listed securities is properly pricing in carbon-related risks for portfolios of buildings at an individual stock level, said Andrea Palmer, responsible investment lead at PGGM.

Speaking to Real Asset Insight at the recent ULI European conference she explained that the public markets operate differently, and sometimes irrationally, compared to private markets, so while carbon risks are on everybody’s mind it is a particular difficult area for public markets.

She said that in the US some investors “from the other side of the aisle” are not just asking about sustainability measures, are perhaps asking for a list of every instance of investing in buildings that go beyond minimum standards with justifications.

“Portfolio managers are feeling this dance between decarbonised and the strict, old-fashioned interpretation of fiduciary duty,” Palmer said.

She explained that in relation to New York’s local law 97 – the most stringent in terms of carbon pricing in the US – PGGM undertook a cash flow analysis in order to price the move from current carbon performance to expected carbon performance and price that in to net operating income (NOI) to calibrate the risk to companies’ bottom line.

“That has both answered questions and created more questions,” Palmer said. The analysis was important, not only to understand the regulatory impact, but also the market impact

“If regulation only has marginal effects on the NOI outcomes, what about the market impact, what are tenants willing to do and how are they going to be part of this story?”

PGGM undertook a survey of about 500 corporate office occupiers in New York City to understand whether this bifurcation is real and whether tenants are willing to pay.

“We heard a lot of different outcomes, but the trend and the theme is – ‘yes they’re willing to pay for it, and they’re willing to pay quite a premium for it’,” she said.

“What we wanted to do was take our own accountability very serious and our accountability comes from where we place our assets. We decided by 2025, 60% of our assets under management for real estate, both public and private, need to be in companies and funds that set a science-based target.”

By 2030 the 60% target will rise to 100% and will be enshrined in the company’s mandate documentation making it a minimum eligibility criterion for providing capital for investments.

“We hope that starts to really stimulate the change that we’re looking for because what we’re asking is very concrete.”