Q&A with AXA IM Alt’s Lavergne: ‘No major tech breakthrough needed to decarbonise real estate’

Laurent Lavergne, global head of sustainability at AXA IM Alts, talks to Natalie Kenway about decarbonisation, fossil fuel usage and meeting net zero targets in the real estate and infrastructure space.

What are the key challenges the real estate and infrastructure face when decarbonising? 

There are three key challenges that we see across real estate and infrastructure assets. First, to improve energy performance, one must consider the insulation of properties. In theory, it is relatively straightforward (eg, changing windows, internal or external insulation. However, in practice this can be complex to execute when properties are occupied (which is normally the case for properties held for investments), or under some form of protection.

Another challenge for the industry when moving to decarbonised energy sources can be the lack of infrastructure or physical space within a property. Moving away from the likes of oil and gas-powered boilers to electricity or district heating networks requires enough physical space for air source heat pumps to be outside and for the property to be in an area which would not impact surroundings with noise pollution.

The final challenge is that even if you have improved your insulation, shifted to electricity or district heating, there is still potential to be carbonised. The pace at which governments will deliver on the decarbonisation of energy mix for each country plays a key role, meaning there are still interdependencies to be managed.

From this standpoint, it is concerning when looking at CRREM projections as beyond 2040, properties which meet the energy targets, according to the model, would most of time be above their carbon budget.

Unfortunately, this implies that the pace of decarbonisation across energy networks is projected to be insufficient. These dependencies are more obvious in transportation infrastructure as, for example, decarbonising a motorway will largely be dependent on pace of electrification of vehicles.

What tools or frameworks can real estate companies use to understand their carbon emissions and therefore reduce them? 

We believe the best way to understand (and compare) properties is to use physical models to assess the energy required to heat and cool it. These are called Thermo Dynamic Studies (TDS) and are required as part of any building permit submission. In Europe, most of the EPC (a compulsory assessment to be provided in any sale or leasing agreement) is TDS, making it a very useful tool to assess the energy performance of properties on a consistent basis.

Leveraging TDS and coupling them with tools such as CRREM can give any landlord a comprehensive understanding of current energy consumption, including associated emissions. It’s also helpful in providing projected emissions, enabling adequate prioritisation of actions to be implemented to reduce emissions of the portfolio.

Are you seeing less usage of fossil fuels in real estate and infrastructure? What are they using instead? 

Absolutely, gas boilers are progressively disappearing and being replaced by either heat pumps, which use efficient electricity, or by connecting to District Heating networks, which are able to produce heat more efficiently from a carbon standpoint.

Where can some materials be replaced for greener options? 

For operational carbon emissions, the electrification of heating is clearly the right solution, given it is made economically viable due to heat pumps. For embodied carbon, timber can efficiently replace iron, steel or concrete, enabling a long-term storage of carbon (timber) that can replace carbon intensive material (steel & concrete).

There are some hurdles with this approach as there would need to be a cultural shift to accepting timber construction in some countries (particularly for insurers, fire brigades, local governments granting building permits, etc). The industry would also need to rely on efficient delivery of timber, in order to make it an economically viable and a scalable alternative

How can investors access this area?

Investors can access these assets and the required expertise through investment managers who have fully integrated these challenges into their investment process. Real asset funds have been witnessing increased interest from investors, notably in open ended funds where there is great flexibility on the timings of investments.

What’s your outlook for decarbonisation in real estate and infrastructure? Will we meet net zero by 2050? 

Long term, institutionally held portfolios will decarbonise significantly by 2050 due to a number of factors. All the technology needed to provide energy efficient building is reliant on decarbonised energy sources that are already available, but also the availability of the skill set in the real estate industry. The sector does not need a major technology breakthrough to decarbonise.

However, we need to be mindful that electrifying a property won’t be enough if the energy mix of countries doesn’t change massively to support this electrification of the entire economy. The biggest carbon issue in the real estate sector is that millions of individual homeowners don’t have the financial resources to invest in the required retrofits, nor access to the technical skills to execute it within the required timeframe.

Therefore, developing the correct infrastructure will be key, meaning there is a major investment opportunity for those interested in green energy generation, grid upgrade and energy storage, to support and benefit from the massive electrification that needs to happen.