Investment in real assets – from renewable energy projects and energy-efficient buildings to battery storage and forests – plays a vital role in the energy transition. Here, our experts examine how macroeconomic uncertainty is affecting this area and look at the trends supporting growth in private financing.
Now that governments have less money to allocate to major commitments in the energy transition, institutional investors such as pension funds and insurance companies are increasingly stepping in to help provide long-term finance.
As well as offering a potentially attractive risk-return profile, real assets can provide predictable cash flows to match such investors’ liabilities.
In addition, this asset class can act as a portfolio diversifier: returns tend to have a low correlation with traditional fixed-income investments or the wider economic cycle. Real assets can also provide protection against inflation risk.
However, this area is not immune to macroeconomic conditions or changes in the political or regulatory environment. The 2022 US Inflation Reduction Act had provided significant support for sustainable infrastructure projects, but Donald Trump’s election in November 2024 has caused considerable uncertainty.
“While private assets, and infrastructure in particular, are largely protected from market cycles and are a defensive asset class, recent developments may create short-term uncertainty,” says Karen Azoulay, Head of Real Assets.
“Over the mid to long term, however, the European market is set to benefit from solid fundamentals. For example, the European Union plans to implement a strong industrial plan which is essentially a roadmap for competitiveness and sovereignty. This should lead to more concrete action on the path to decarbonisation.”
Developments in real estate and natural capital
In the European real estate’s market, higher capital costs have shifted the focus of investors and developers from mitigation – reducing buildings’ carbon emissions – to adaptation, which involves making properties more resilient in the face of a changing climate.
“There are three main ways of making improvements,” explains Laurent Ternisien, Deputy Global Head of Real Estate Investment Management.
“Firstly, you can make capital expenditures to improve your building. The second involves spending on operational changes, while the third is stakeholder engagement – ensuring tenants share the owners’ views in terms of decarbonisation and energy efficiency. Capex is still important, but the other two elements are playing an increasingly crucial role.”
Investments in natural capital including forests, farmland, and ecosystem restoration offer low correlations to traditional asset classes as well as inflation-hedged returns. These are especially appealing during wider economic slowdowns.
Céline Claudon, Chief Commercial Officer at IWC, says: “After the global financial crisis, for example, there was a great interest in natural capital as investors were looking for assets that were uncorrelated.”
Europe’s leading role in the energy transition
With the US appearing to reduce its focus on sustainability, Europe has an opportunity to strengthen its position as a global leader in decarbonisation.
The continent has a potential advantage given its relatively stable political and regulatory climate. This year has seen the EU and national governments, including those in Germany and the UK, make significant new commitments to infrastructure investment.
“This kind of stability is a vital element of any long-term investment,” says Azoulay.
Ternisien adds: “The regulatory environment in European real estate can be a challenge at times, but it means we have a level playing field and a level of operating independence that you might not see in other parts of the world. We also have well-established industry bodies that allow market participants to share ideas and make collective progress.”
Claudon says that IWC uses EU-designed regulatory frameworks in many of its non-European activities. “For example, we might use an approach based on SFDR [the Sustainable Finance Disclosure Regulation] and the European Taxonomy elsewhere in the world. The beauty of private assets is that you can apply any level of sustainability you want, provided you meet minimum local standards – and these are invariably lower than the standards we would enforce.”
Opportunities and ESG allocations
Investors in private markets have remained committed to sustainability despite the recent uncertainty and change of political direction in the US.
Azoulay says infrastructure clients are not interested in sustainability for its own sake. “They are interested in the diversified pipeline of opportunities and the associated relative value in the energy transition space as it is crucial for Europe to have accessible and affordable energy for sovereignty and competition purposes.”
Over the last two years, Ternisien adds, the approach of investors to sustainability has matured.
“A few years ago, ESG was on everyone’s agenda, but it wasn’t always clear what people meant by it. Looking specifically at real estate, there was a strong focus on building certification, but we were dealing with at least five or six different standards and this lack of harmonisation made things difficult for investors. Now the market has matured and investors’ level of professionalism in terms of ESG has evolved.”
Claudon says that at the moment, ecosystem restoration is one of the most undercapitalised areas in the natural capital segment.
“There are a lot of opportunities that investors have not looked into, especially in Europe – the market in the US is actually quite well developed. There is also a huge need for investment to help farmers make the transition from industrial to regenerative farmland.”
“Meanwhile, in forestry, only 3% to 5% of the world’s forests are certified as sustainably managed – so if we want to continue to use wood that is produced in a sustainable manner, we need to invest more money in this sector.”
In terms of current deal flow, renewable energy remains ahead of other parts of the infrastructure sector. However, Azoulay points out, it is not just about investing in power generation. “There are interesting opportunities in areas like battery storage and sustainable mobility – and this is a positive in terms of potential portfolio diversification.”
She adds: “At the same time, when it comes to newer sectors, there’s a strong need for specialised skills when investing in hydrogen, battery storage or biogas. Very specific skills are required to be able to invest even in the more straightforward sectors such as renewable energy to assess development or merchant risk.
“At BNP Paribas Asset Management, we believe we have the internal capacity to analyse those sectors. At the same time, being part of a larger group that is at the forefront of financing energy transition is a true differentiating factor in our view.”
