Alternatives have the potential to be a game-changer for investors as they look to take action to mitigate climate risk, reduce portfolio emissions and maintain attractive long-term yields. Global Head of Alternatives Anton Pil and Global Head of Sustainable Investing Jennifer Wu explore the reasons why.
The power to effect change
As the transition to a low-carbon global economy gathers pace, the need to take action to mitigate climate risk in investment portfolios is becoming more urgent. Adding an allocation to private assets, such as real estate, infrastructure and forestry, can help investors navigate the transformational shift across industries and sectors, while reducing portfolio emissions and generating an attractive long-term return.
There are two main ways in which alternatives can help investors decarbonise portfolios: via reducing emissions from individual assets, and via carbon capture or removal strategies. In both cases, investing in alternatives can provide significant benefits thanks to the direct impact that investors can have on the private assets that they own, and because of the long tenure of the investments themselves.
The ability to take direct action is a key differentiator. In contrast to public markets, where investors can encourage environmental action indirectly by putting pressure on company management through corporate engagement and proxy voting, when it comes to private assets the impetus is on the investor themselves, as they are the direct owner. As a result, investing in private alternatives can have a more tangible impact on environmental targets and portfolio emissions.
Private assets, because of their long-term nature, also give investors the luxury of time to try new ideas and help develop (and profit from) new technologies. Rather than focusing on the next set of quarterly results, investors can allocate capital to help develop and trial experimental climate technologies that are higher risk, but could have a significant payoff in the long run. We look to own assets for at least five to 10 years (often much longer), so the investments we make now will help shape the world in the years and decades to come.
Emission reduction strategies
As the managers of the assets that they own, investors in alternatives have the power to take direct action to reduce future emissions. By targeting the reduction of real-world greenhouse gas emissions, we believe the results can be good for the environment and good for returns, providing many opportunities for investors to reduce their own carbon footprint while also benefitting from the potential financial outperformance of high-quality alternative assets that are well positioned from a climate risk perspective.
Take real estate, for example, where the environmental pressure coming from regulators and tenants means it’s critical for investors to upgrade the buildings they own to maintain returns. In Europe alone, J.P. Morgan Asset Management has committed EUR 1 billion to improve energy efficiency in the properties that we manage, such as building green walls and green roofs, or fitting solar panels and smart thermostats. While upgrading a property portfolio doesn’t come cheap, we expect the rental yields for upgraded buildings to be vastly improved compared to buildings that don’t meet minimum environmental standards.
Beyond real estate, some of the lowest hanging fruit when it comes to reducing emissions can be found in transportation. As the owner of over 100 ships currently, and with a fleet of liquefied natural gas (LNG) carriers under construction that, once delivered, will make us one of the largest shippers of LNG globally, we see first-hand the difference that can be made by deploying new technology to reduce emissions and improve fuel efficiency. We’re investing in new ships that are, in some cases, up to 60% more energy efficient than older generations; we’re making older ships more efficient by retrofitting bulbous bows that reduce drag and increase range; and we’re installing new technology designed to allow our LNG carriers to more efficiently use boil-off gas from their cargo as an onboard fuel source. Every upgrade we make aims to have a tangible impact on real world emissions.
Infrastructure is also a key focus for emissions reduction. We’re already one of the world’s largest private owners of renewable energy assets, both solar and wind, but some of the biggest opportunities to reduce carbon emissions come from transitioning the utilities we own to renewables-focused business models. We’re not only able to take action to build renewable energy infrastructure, such as wind turbines, but we are also able to actively decommission older, carbon-emitting equipment. We own the asset and can make the change happen. And we can monitor the effect of the changes we make in real time.
Carbon capture and removal strategies
A particularly exciting development in the alternatives space has been the introduction of strategies that aim to remove, or capture, carbon directly from the atmosphere.
These strategies can focus on nature-based solutions, such as timberland and forestry, where investors can help remove carbon emissions while tapping into stable income streams and benefiting from timber’s carbon offsetting capabilities. Investors can also focus on nascent mechanical solutions, via private equity and venture capital funds, which are much more speculative in nature but represent exciting opportunities for investors to profit from new technologies that have the potential to capture carbon and contribute to net zero targets in the future.
Currently, the most effective method to sequester carbon is through investments in timberland. Forests are a significant carbon sink, removing and storing as much as 7.6 gigatons of greenhouse gas emissions each year1. In 2021, J.P. Morgan Asset Management acquired sustainable forest manager Campbell Global, which has a global portfolio of sustainably managed forests, providing the potential for investors to contribute to global emissions reduction efforts, offset their own portfolio emissions and to profit from carbon credits. Forestry offers both an attractive income yield and – of particular importance in the current economic environment – the potential to hedge against inflation.
While the world’s forests and other nature-based solutions can never remove all of the greenhouse gas emissions that are currently produced by the world each year, they– along with emerging mechanical and technological solutions – do have a significant role to play if we are to honour the Paris Agreement and limit global warming to less than 1.5 degrees Celsius compared to pre-industrial temperatures.
Conclusion: Navigate the path to net zero
Climate change is a huge challenge for investors. The transition away from fossil fuels is having a far-reaching impact across sectors and asset classes. We firmly believe that alternative assets, thanks to the tangible link that they provide to emissions reduction, and the access they provide to innovative carbon removal strategies, represent an effective way to navigate a path to net zero and help cut real-world emissions as part of an overall portfolio solution.
At J.P. Morgan Asset Management, we have been helping investors access solutions across the alternatives space for over 50 years. Our $218 billion alternatives platform2 covers hedge funds, real assets and private equity, as well as offering a range of liquid alternative funds that have the ability to generate uncorrelated returns to traditional asset classes.
1 See “The Global Carbon Market: How Offsets, Regulations and New Standards May Catalyze Lower Emissions and Create Opportunities”, (ESG 3600 Kapnick on Climate, J.P. Morgan Asset Management, October 2021). Pg 10.
2 Source: J.P. Morgan Asset Management, as of 31 December 2021.