Climate change poses transition and physical risks to investors and their assets. A recent study of the VBDO (Dutch Association of Investors for Sustainable Development) shows that for infrastructure and real estate investments, these risks are not yet fully taken into account by Dutch institutional investors, effectively leaving them exposed to the risks of climate change.
- Of the largest Dutch institutional investors (insurance companies and pension funds), 39% invest in direct real estate and 54% in infrastructure;
- 16% of investors with direct real estate assets require these assets to be aligned with the 2050 net zero carbon emission target;
- 2/3rd of the investors with infrastructure assets use environmental criteria, mostly in the selection and evaluation of investments in this asset class.
Download the full report: Institutional Investors and Climate Change – Becoming part of the solution
Dutch Institutional Investors and Climate Change: becoming part of the solution
Our study looks at all asset classes and whether institutional investors take climate change risk into account, but also whether they are aware of the opportunities brought forward by the transition toward a carbon-free economy. While most asset classes are susceptible to transition and physical risks of climate change, this is especially true for real estate and infrastructure assets. These physical assets emit greenhouse gases through material use and the use of the asset itself, but also need protection from acute and chronic climate hazards, such as extreme weather events, sea level rise, and heat. A call to action is strengthened by their long lifetime, relative illiquidity of direct investments and their fixed location. In a recent study of Dutch institutional investors and climate change, the VBDO researched the climate change considerations of the largest pension funds (50) and insurance companies (29) of the Netherlands, representing €1.48 trillion in assets under management. Throughout this research, we distinguish three levels of considering climate change in investment decisions: mitigation of the causes of climate change, adaptation to the consequences, and solutions resulting in socio-ecological resilience. Especially socio-ecological resilience reaches beyond traditional views on the role of investors. Where mitigation and adaptation mostly concern only the asset of investors, socio-ecological resilience is also about being part of the solution to the effects of climate change. It is not only about resilience of the investors’ assets to climate change, but also about resilience of the environment and society surrounding those assets.
We found that the majority (61%) of institutional investors do not invest directly in real estate. Of the investors that do invest directly in real estate, 45% do not require adherence to sustainability standards for their assets. 39% of investors require adherence to minimum building standards and 16% require their investments to be aligned with a net-zero carbon in 2050 target or with lifecycle circularity. This shows that not only a few investors assess the risks involved in real estate investments, but also that these risks are mainly based on a mitigation perspective (with some exceptions, e.g. the use of GRESB’s Resilience Module). However, when analyzing direct real estate investments, the physical risks of climate change need to be taken into account: the location of the asset can be crucial for its expected lifespan, due to for example sea level rise, extreme heat, extreme precipitation, and floods. Only a few institutional investors apply an ambitious climate change mitigation approach and despitefully even fewer work on actual adaptation to climate change.
Almost half of the questioned institutional investors don’t invest in infrastructure. Of the investors that do invest in infrastructure, 35% do not make use of environmental criteria in the selection and evaluation of these investments. Environmental considerations include low-carbon infrastructure, energy efficient infrastructure, and infrastructure aimed at mitigating the effects of for example extreme weather. Infrastructure can be suitable for achieving socio-ecological resilience. Green infrastructure (infrastructure that contributes directly towards achieving low carbon and environmentally sustainable outcomes) can play a vital role in mitigating and adapting to climate change.
|Sustainable Infrastructure||Resilient Infrastructure||Green Infrastructure||Natural Infrastructure|
|Integrates ESG risk in planning/ building/ operations (E is in many cases related to mitigation)||Resilient for climate change effects (adaptation)|| Contributes to achieving environmentally sustainable outcomes (both adaptation and mitigation) |
• Low carbon (renewable energy; mass transportation)
• Environmental resilience
|(Semi-)natural structures as an alternative to building infrastructure (wetlands; vegetation providing water purification and flood risk reduction)|
Become part of the solution
Climate change is increasingly becoming a risk to people and to assets. It is up to investors how they deal with these risks in the near and long term future. De-carbonisation of the portfolio and divestments of real-estate in flood prone areas are effective tools to decrease risks in the short term. However, climate change also brings opportunities, due to the origin of new green sectors and the potential savings of climate adaptation related investments . With our climate change report, we aim to shift investors from a pure mitigation (CO2-reductions) perspective, toward a broader view: we know the consequences of climate change will become reality; the question is what investors are doing to adapt to these changes and become part of the solution. This requires an emphasis on actual benefits to society, rather than a green investment portfolio. Socio-ecological resilience is, after all, the most important condition to achieve returns on investment.
 WWF (2019). Greening the Belt and Road Initiative. https://www.ris.uu.nl/ws/files/41629075/greening_the_belt_and_road_initiative_14_.pdf
 Global Commission on Adaptation (2019). Adapt Now: A global call for leadership on climate resilience.
This article was written by Nina van Dam, Intern, Sustainability in the Financial Sector, at VBDO