Aviva issues £1bn in sustainability-linked real estate loans in two years

The UK insurer’s asset management arm is also raising a climate transition fund and has set a 2040 net-zero target for its £47bn real assets portfolio.

Aviva Investors, the asset management arm of UK insurance company Aviva, issued sustainability-linked real estate loans totalling £1 billion ($1.3 billion; €1.2 billion) between the start of 2020 and the end of 2021, the firm said in a report released this week.

The loans are part of Aviva’s pathway to achieving net-zero greenhouse gas emissions across its real assets portfolio by 2040, a target it disclosed in January 2021. The pathway set interim targets for 2025, which include originating £1 billion of sustainability-linked loans – which Aviva has now achieved, according to the update on the firm’s progress.

Aviva offers a discount on the margin of these loans subject to assets achieving decarbonisation KPIs. Borrowers are not required to use the capital for decarbonisation initiatives or refurbishment. KPIs and available margin discounts are asset-specific. The capital is from the general account of Aviva’s insurance business and external clients that Aviva invests on behalf of, according to Edward Dixon, head of ESG for Aviva’s real assets department.

Aviva declined to comment on the split.

On the road

Aviva is also raising an open-end, Article 8-aligned Climate Transition Real Assets Fund. The fund invests across real estate and infrastructure and has a 10 percent allocation to private equity, venture capital and nature-based solutions. Its private equity and venture capital investments may be direct or via funds.

Net zero

The decarbonisation KPIs for Aviva’s real estate loans are “no-regrets initiatives that will improve the quality of the building”, such as retrofits of renewable energy systems and green building certifications, Dixon told New Private Markets. “Our KPIs are going to get tougher as the low-hanging fruits are delivered by these borrowers.”

Dixon added: “It is generally accepted among our clients and our teams that a business that is aligning itself to net zero makes a better investment case and a lower credit risk in the long term. We can’t prove that with empirical data because – as an industry – we lack large empirical datasets that can prove this link to value, but that’s our hypothesis.”

Another interim target is to invest £2.5 billion in low-carbon and renewable energy infrastructure and buildings by 2025. Towards this target, Aviva invested £1.4 billion into renewable energy infrastructure between the start of 2020 and the end of 2021. The majority is deployed as direct loans and equity stakes in greenfield developments including solar, offshore wind, onshore wind and electric transport.

On track from brown to green

Across its real assets portfolio, Aviva had reduced its carbon intensity by 25 percent at the end of 2021, against a December 2019 baseline, according to company’s statement. This follows Aviva’s plan last year to aim to reduce the carbon intensity of its real assets portfolio by 30 percent by 2025 against the December 2019 baseline as part of the company’s pathway to net zero.

On decarbonising Aviva’s real estate portfolio, Dixon said: “Our research into the green premium last year found that buildings face an obsolescence premium of between 3 [percent] and 10 percent over a 10-year period as a result of carbon intensity.”

Dixon’s team uses this – and the CRREM, a platform that produces stranding dates for properties – to model “what is appropriate in terms of capex to get an asset up to standard”, Dixon said.

“There’s a clear value opportunity there – we can often refurbish properties by replacing gas boilers with air-source heat pumps and improve the facade or the quality of how the building is managed.

“There will be some assets where the opportunity to refurbish an asset isn’t quite right for the risk profile of the fund. In those cases, we are prepared to sell. But most of our investments are in value-add or balanced funds, so we usually have the opportunity to make incremental improvements to the fund.”