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Taking impactful investment to the mainstream

All investment involves a degree of risk, but climate change has raised the stakes, dumping toxic stocks and stranding assets. With ambitious net-zero initiatives to meet, how does smart money make it happen?

The transition to net zero will require significant sums of capital investment, with estimates ranging from $120tn to $275tn by 2050. As governments and organisations plot a course to reduce emissions and meet their net-zero pledges, socially responsible and environmentally sound investments have been thrust into the spotlight.

In the UK alone, Legal & General Capital estimates that by 2030 up to £80bn will be needed for additional renewables infrastructure, plus at least £25bn more for assorted new technologies and assets, such as heat pumps and electric vehicle charging infrastructure.
The energy transition away from fossil fuels requires ambitious, long-term and holistic investment to move the dial on climate change while delivering the social benefits of a more sustainable economy.

Rising demand for low-carbon homes

The residential market in the UK is in the spotlight at present, as much for economic reasons as for environmental. With inflation driving up monthly mortgage payments and the cost-of-living crisis putting household budgets under pressure, the rise in domestic fuel bills is a hot topic in every sense.

YouGov research commissioned by Legal & General Capital, a leading energy transition investor, surveyed the consumer appetite for energy-efficient housing. The study revealed that homebuyers are willing to pay a ‘green premium’ for energy efficiency and performance in spite of - or even because of - the current economic squeeze.

Increasingly, sustainability and cost-efficiency are expected to fall in lockstep. Buyers looking for a new home are willing to pay a 10.5% surcharge for a low-carbon property, with prospective Gen Z purchasers willing to pay as much as 20%. When asked why they would buy or rent a low-carbon home, 65% cited environmental factors such as shrinking their carbon footprint or tackling climate change. Over a third would like to reap the cost savings from cheaper energy bills.

The clear-cut consumer engagement around the climate agenda is helping to cement the business case for investors and developers to commit to low-carbon homes, argues John Alker, head of sustainability at Legal & General Capital. He explains: “Climate change and energy efficiency have clearly risen right up the agenda for many people when choosing a home. With buyers and renters now prepared to pay a premium, spending smarter on sustainability may make a material difference to revenue and returns for investors.”

Transitioning the residential sector towards net zero

At present, housing remains part of the problem rather than the solution.

According to official Office for National Statistics figures, households are a major contributor to greenhouse gas emissions, accounting for some 26% of the UK total on a residency basis. The electrification and decarbonisation of heat are particularly critical.

Delivering on net zero involves the entire ecosystem of sustainable solutions available to decarbonise the economy and meet societal needs

Investors have a crucial part to play. Legal & General Capital, for example, is committed to ensuring all new homes it invests in will be operationally net-zero carbon from the end of the decade. But in a world where greenwashing is increasingly in the news, bold intentions demand consistent validation and innovation.

To tackle climate concerns on an infrastructural level, Legal & General Capital’s partnership model underscores the need for collaborative approaches to spark change.

In 2020, Legal & General Capital invested in the Kensa Group, the UK’s largest manufacturer and installer of electric ground source heat pump (GSHP) technology.

Not only does GSHP technology represent one of the most reliable and efficient ways to provide heat, but the units installed can also be used to offer affordable cooling. This dual function, coupled with Kensa’s deployment of networked heat pumps on a street-by-street basis, mimicking the gas grid model, will play a critical role in helping the UK deliver homes with zero operational carbon emissions as the country faces record energy prices and highs and lows in temperature swings.

Partnering with the UK’s only dedicated manufacturer of GSHP technology also enabled Legal & General Capital to invest in the creation and growth of green jobs and skills in the domestic economy.

Continuing its investment into the housing sector in January this year, Legal & General Capital led an investment raise alongside Hodge into industry-leading digital business Sero Technologies, which works to design and deliver cost-effective low-carbon solutions for new and existing homes. Sero’s work with housing associations also creates synergies between positive benefits in terms of both environmental impacts and social outcomes. As a result, homeowners and landlords can meet net-zero goals efficiently and affordably.
This more joined-up and holistic approach to sustainability aligns with the concept of ‘just transition’, a sweeping shift that delivers on climate goals in a fair and equitable way.

According to Alker, Legal & General Capital sees biodiversity and nature as the next frontier in supporting the transition within real estate and is actively exploring how to generate maximum value for both people and nature across its investment assets.

Modular efficiency

Modular housing is another investment proposition with enormous potential to benefit people and the planet. By being manufactured off-site, these residential units promise better thermal performance and reduced energy-use intensity per square metre of floor space. For the homeowners and people living in them, this translates into improved energy efficiency and, ultimately, lower fuel bills.

For example, Bristol’s Legal & General Capital-backed Bonnington Walk development includes modular homes designed for maximum energy efficiency. This modular made scheme will be EPC A-rated and 62% cheaper to run. In the future, this scheme will also offer Net Zero Regulated Carbon homes which will be 73% cheaper to run than a standard new build home.

This means that even with the energy price cap put in place by OFGEM, Bristol residents at this scheme could save up to £1,788 a year in energy bills.

The science of sustainability

Legal & General Capital’s synergistic approach is indicative of the broader sustainability vision underpinning the business’s investment strategy, explains Alker. “Our ambition is that for every pound or dollar we invest, we deliver both positive social and environmental impact. Furthermore, we seek to do this across the board — not in some strand of ‘impact investing’ that sits separate to the core,” he says. “The sustainability driver runs throughout everything we do. This is not about ticking boxes on ESG; it is a strategic imperative. As an investor with long-term patient capital, this is something we are able to drive through the whole investment cycle.”

For example, Legal & General Capital aims to demonstrate, with scientific rigour, an absolute reduction in Scope 1 and 2 emissions for its housing investments. Scopes 1 and 2 cover direct emissions from sources controlled or owned by an organisation and indirect emissions from how the energy it purchases and uses is produced. This puts the science of sustainability into action and allows investment to walk the talk.

To accelerate its ambitions, Legal & General Capital seeks partners and investors to work alongside it, driving forward change through pioneering new technologies. This collaborative approach allows profits and purposes to co-exist.

Working together towards the energy transition

As an energy transition investor, Legal & General Capital is committed to making a deliberate and ongoing shift into assets that can help tackle greenhouse gas emissions and support the transition to net zero. The company is part of the well-known UK institution Legal & General Group, which was established in 1836 and now has over £1.3tn in total assets under management.

Beyond innovations in housing, the clean energy lens at Legal & General Capital is focused on broad renewable energy infrastructure and clean-technology growth businesses. These span a spectrum of investment opportunities, from grid-scale to community level and mature to early-stage solutions.

Wind and solar power are proven and investible, with a range of mainstream players already active in this space, many of whom seek to satisfy the demands of environmental, social and governance (ESG) investment criteria.

This is not about ticking boxes on ESG - sustainability is a strategic imperative

As a true energy transition investor, though, the approach at Legal & General Capital is unique, according to John Bromley, managing director of clean energy, Legal & General Capital. “When we invest in a company, we work as partners. Our team does not simply view an investment from afar. We take a genuine interest in strategic decision-making, setting our sights on the successful long-term growth of the business,” he says.

“This means we gain a deeper understanding of the role that each business and its talented teams could play in the energy transition. It also opens the door to opportunities, from assets and infrastructure to innovations and ideas. Delivering on net zero involves the entire ecosystem of sustainable solutions available to decarbonise the economy and meet societal needs,” Bromley concludes.

In investment terms, the face of the future of the energy transition is changing.

Record-breaking renewables

In growth equity, Legal & General Capital has made various crucial investments over the past six years, focusing on decarbonising power, transportation, and the built environment.

In 2015, Legal & General Capital began investing in NTR Asset Management Europe, a sustainable infrastructure manager specialising in the construction and long-term operation of wind farms, solar plants and battery storage assets across the UK and Europe. In addition to investing directly into the management business to incubate its growth, Legal & General Capital has provided cornerstone capital for three significant fund raises. This ambitious model, which Legal & General Capital is looking to replicate in other areas, presented the opportunity for a range of investors to fund a blend of renewable energy assets and accelerate the transition.

Similarly, Legal & General Capital’s continued investment in companies such as Cambridge Electric Cement, Rovco-Vaarst, Brill Power, Tokamak Energy and Oxford PV, also provides a firm example of its policy of seeking innovations and technology that can accelerate progress to a low-carbon economy while offering strong potential returns for investors.

Oxford PV, for example, is a pioneer in solar photovoltaics and a University of Oxford spin-out. It has been working to commercialise a low-cost solar cell material called perovskite, which can help solar panels generate a lot more electricity from sunlight and accelerate the deployment of solar energy.

Investing in partnerships that ignite change

Whether addressing the chronic under-supply of climate-ready new housing, scaling the development of clean power infrastructure, or backing innovative start-up businesses and entrepreneurs, the challenge lies in decoupling economic growth from rising emissions.

Being an energy transition investor, therefore, can mean smart and sustainable solutions come in many shapes and sizes. But they all have one thing in common: purposeful partnerships that effect change.

Strategic support moves electric vehicles forward

When Legal & General Capital partnered with the electric vehicle (EV) charging business Pod Point in 2019, the EV revolution was barely off the ground in the UK. This was a year before the UK government’s groundbreaking announcement that it would effectively ban the sale of new petrol and diesel cars in the UK by 2030.

The involvement of Legal & General Capital so early in the sector boosted the capabilities, sending out a strong market signal in support of the scale-up of EV charging infrastructure in the UK.

The piecemeal roll-out of charging infrastructure nationwide had been identified as a potential roadblock to UK progress on the decarbonisation of transport. But, Pod Point offered an attractive investment prospect with its smart solutions for keeping vehicles topped up at home and destinations like supermarkets and workplaces.

Building on this promising partnership, Legal & General Capital soon increased its stake to about 23% in February 2020, forming a joint venture strategic partnership with energy giant EDF. The following year, Pod Point floated on the London Stock Exchange in a move that marked the maturing of both a dynamic young business and the UK charging market.

Going public also opened up the opportunity for many more investors to participate in the rapid growth of the electric vehicle market and help move the UK forward on its journey towards net zero.

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