Longevity Partners' founder and global CEO Etienne Cadestin asks four questions to Justin Travlos - Global Head of Responsible Investment at AXA IM Alts.
What are some of the biggest challenges you have faced in implementing sustainability at your properties, or across your portfolio?
For me, the biggest challenge has always been around change management.
Implementing sustainability related solutions is all about moving people far enough to be able to see a new opportunity and giving them the right technical support, and time, to deliver on the opportunity.
I call it ‘bridging the gap’.
First, it’s often a knowledge gap. Sometimes, you don’t know you have a problem. Only when you come to understand there is a problem can you start to think about a solution. Trying to deliver sustainability-related solutions when there isn’t enough understanding that a problem exists, can be really inefficient. Trying to get people to acknowledge there is a problem is an exercise in change management. The fastest way to get people to understand a problem is with meaningful, relevant and factual data that they do understand.
Then it’s a ‘data gap’.
Getting data takes time and dedication, but it’s the most effective way for a business to look at itself and to measure progress. ‘Getting data’ – as you well know – is also easier said than done. The challenge in collecting data is well known by the industry, but we see good progress being made globally, not just in the availability of data and of businesses which simplify data collection & analytics, but also growing consensus around targets, meaningful benchmarks and consistent performance indicators. Even so, once you have a reasonable view on data, there has to be an imperative to act.
Which is where you see the ‘value gap’
This is all about perception. In a world which looks at cost & benefit for breakfast, sometimes ‘reframing’ value as ‘risk’ helps people internalize an understanding of how things are connected & makes it more actionable for them. Often, people have to get a clear sense of value before they will act. One of the most effective shifts in perception in the past few months has been the growing realization of downside risk. Be it liquidity risk from poor energy performance, increasing physical climate risk and stranding of assets, or the sheer cost of bringing assets closer to long term alignment with what future owners will expect. This is the point at which a change in mindset occurs, the ability to identify new value and to mitigate new risks. It is a the broadening of capability which enables teams and individuals to move from single, project-specific outcomes to then apply a similar perspective across portfolios and new opportunities.
Once this happens.. ‘mind the gap’.
As is often the case after a tipping point, so much happens, quickly, and with different levels of understanding and plenty of enthusiasm. This is the point where the team have greatest need of trusted advisors, strong technical support and clear expectations of rigorous assessment and good governance to ensure that they continue to managing not only risk, but progress. There are many other challenges, from geographic differences to conflicting regulations and local policies, but the work of change management is fundamental to making meaningful progress.
Can you speak about how your conversations about sustainability have evolved in the last 12-24 months, both globally and in the United Kingdom?
In many ways, the change in perception and understanding discussed above has been accelerated in the past months and we have passed a tipping point, globally, in terms of ‘bridging the gap’. Thinking about the past 12 months, both the participants and the level of sophistication in the conversations about ESG has changed, both in the UK and globally, and investor prioritization of the importance of ESG have changed.
There are still knowledge gaps, and there always will be, but general understanding of ESG, and especially climate related risk, has profoundly changed the depth of conversation across the real estate industry. From niche and focused, to broad and thematic. The value associated with ESG is now both marketable and valued. To the point where its absence is noticeable and there has been a fundamental shift from ‘words’ to evidence of action’. This last point is the most critical, and it is also the only antidote to green-washing.
Our conversations about investment risk are more deeply understood, and discussed in forums simply were not considered a few years ago. Asset Stranding, Climate risk sensitivity testing, and new asset classes rising in natural capital. Do we include embodied carbon in a net zero pathway, or not? Many new questions, many which are difficult to answer yet, and importantly, new minds and innovation being put to work to solve some very pressing global problems.
What new conversations are you having with investors and/or tenants across your different asset classes?
In many cases there has been an evolution in conversations. If the ‘older’ questions from some investors were about whether or not we were signatories of PRI, for example, the questions over the past six months have evolved to add, ‘.. and then how, exactly, do you include ESG risk in your decision making? Please provide examples and evidence.’’
The specificity of questions in different asset classes has also changed. There is a growing understanding of the use of different certification labels and tools as more, or less, relevant for different asset classes &lastly, there has been a significant and material change in the demand for an increasing level of granularity of data from all investors and managers. This last has been at times excruciating, especially in private markets in real estate where much of the data is not, or has not been collected in a systematic and assessable way.
Two other conversations stand out.
First, carbon. The tone, urgency and understanding of potential underlying value of carbon has, at turns, a sense of both apocalypse, and ‘gold rush’ about it in the market. The ‘gap’ we are bridging is seeing the opportunity to engage, meaningfully, in decarbonisation across all of our work and to build the capability in our teams to identify and drive value for our investors, be it through infrastructure, development, energy efficiency, sustainable forestry or impact investing, we continue to work in a way which takes a much broader view of value and a deep integration of ESG risks and opportunities.
The second conversation is about social value. There is a huge demand to identify ‘the metric’ to measure performance on a social progress, but the reality is, like people, every asset class is different. It’s an exciting conversation, because it has at it’s heart, a very human need to connect and to work towards what actually matters for people. Be it calculating the net financial benefit of a social tenancy, or developing children’s playgrounds in shopping centres, the conversations around social value revolve around finding a meaningful human outcome from what has traditionally been built form and finance. This is an important conversation for two reasons, first, it has a clear long term impact on value, and second, it brings a new level of personal engagement and satisfaction to the teams working on the assets. When done well, the two go hand in hand to drive better business, and better outcomes.
Deploying a global net zero strategy is a huge challenge, how do you ensure your vision is implemented across all the continents in which AXA IM Alts have assets?
It remains a huge challenge. It has been made much easier by the change in market sentiment over the past 12 months and where, in the past, some geographies such as Australia were well ahead of the game, we see rapid catch up in many markets. To help us deliver with a reasonable level of consistency, we have set targets for our businesses and are getting better visibility of progress and performance across the globe. The reality though, is that our businesses are dynamic, acquiring, managing and disposing of assets to generate value for our clients, and this holds plenty of challenges in delivering a consistent pathway to net zero.
Helpfully, tools such as CRREM are helping the market consistently plot the path more specifically for different asset classes in different countries, making the measurement of progress more meaningful and precise for different teams.
Lastly, being able to rely on key advisors to help and support our teams in the technical delivery of our ambitions, be it in helping structure of due diligence frameworks, undertaking energy audits, reviewing large scale solar and low emission energy solutions, or creating bespoke energy management strategies, such as for Dolphin Square. Having consistent, market relevant solutions and up to date support from our consultant teams is ultimately the point at which our ambition becomes reality & we see meaningful progress towards a more sustainable future.