Prospective growth in earnings: Discussion with Alvarez-Dominguez from Brunel on the perspective of natural resources
The Brunel Pension Partnership, a £35.9bn local government pension pool, is leading the charge in sustainable and responsible investment, particularly focusing on long-term, diversified private market investments such as infrastructure and renewables. This approach, anchored in their commitment to climate stewardship, aims to deliver environmental benefits and support natural capital.
At the forefront of this strategy is Jaime Alvarez-Dominguez, who will speak at the upcoming Climate Solution Summit on 11 September. Alvarez-Dominguez remains optimistic about the broader outlook for carbon markets, driven in part by demand from large corporates with net zero targets. However, concerns about concentration risk due to the scale of exposure to renewables have been expressed by the Brunel infrastructure team.
One of Brunel's significant investments is in Aurora, a US forestry credits firm. This investment, backed by 600,000 hectares of mixed hardwood with more than 120 species of trees, was made through one of its infrastructure funds. The aim was to reduce harvesting by 50% and generate additional revenue through carbon credits. This strategy proved successful, as evidenced by Microsoft's recent 10-year carbon removal deal with Aurora.
Brunel's investment model includes access to global private markets through fund investments, co-investments, and direct investments in infrastructure and renewables. These categories are critical for transition assets aimed at decarbonization and natural capital preservation and enhancement. The partnership's stewardship team emphasises the importance of alignment between investment managers and owners in advancing climate solutions, suggesting a strategy where stewardship and engagement form part of their natural capital investment approach.
However, the returns on renewable energy investments have been lower than expected due to the overall decarbonisation of the grid. Assets with 10-year PPA agreements are being priced similarly to 20-year deals, according to Alvarez-Dominguez, which is not the same thing. This has led Brunel to question whether partner funds will still benefit from an optimal risk-return balance in the more crowded renewable energy market.
In response, Brunel began speaking to partner funds about broadening the remit of investments beyond renewables by the third vintage. Payments in Clear Frontier Meadowlark I, a first-time agriculture fund that includes long-term land leases to family farmers willing to transition to organic, are structured to "cover the J-curve of the transition." This strategy reflects Brunel's commitment to diversifying its investments and mitigating risks associated with concentration in renewables.
The UK government's broader agenda to make the UK “the sustainable finance capital of the world” and to accelerate transition finance supports the environment in which Brunel operates. This includes growth opportunities in clean energy sectors and transition finance markets that likely influence Brunel’s investment strategy toward transition assets, promoting private investment in natural capital and sustainable infrastructure.
However, the UK government's push to consolidate LGPS assets could potentially dissolve Brunel or merge it into another pool in the coming months. Regardless of these changes, Brunel's commitment to sustainable and responsible investment remains steadfast, positioning them as a leader in the transition to net zero and the preservation of natural capital.
[1] Brunel Pension Partnership: https://www.brunelpensionpartnership.org.uk/ [2] Brunel Pension Partnership - Sustainable Investment: https://www.brunelpensionpartnership.org.uk/sustainable-investment/ [3] Brunel Pension Partnership - Climate Stewardship: https://www.brunelpensionpartnership.org.uk/climate-stewardship/ [4] Brunel Pension Partnership - Infrastructure: https://www.brunelpensionpartnership.org.uk/infrastructure/ [5] UK Government - Sustainable Finance: https://www.gov.uk/government/topical-events/uk-sustainable-finance-week-2021
- Recognizing the need for diversification in investment strategies, Brunel Pension Partnership is expanding its remit beyond renewable energy to include agricultural funds like Clear Frontier Meadowlark I, in an effort to mitigate risks associated with concentration in renewables.
- As a leading advocate for climate stewardship and natural capital preservation, Jaime Alvarez-Dominguez, from Brunel Pension Partnership, is set to speak about the potential of carbon markets and the importance of alignment between investment managers and owners in advancing climate solutions, at the upcoming Climate Solution Summit.
