IPE Real Assets January/February 2025: A year of climate and political risk?

As fires spread across the Los Angeles metropolitan area in California in early January, scientists confirmed that 2024 had been the hottest year on record, with average temperature more than 1.5°C above the pre-industrial baseline for the first time. Meanwhile, the concentrations of carbon dioxide in the atmosphere rose more quickly last year than any other on record.

It all serves to disastrously undermine any efforts to meet the goals set in Paris in 2015 of limiting global warming to 1.5°C.

As we have reported, considerable progress has been made on decarbonisation and the shift to renewables and clean energy, but countries are a long way from meeting their net-zero targets.

Analysis by Climate Action Tracker puts the median temperature rise by 2100 at 2.7°C if current policies continue. “This brings us closer to precarious tipping points, with climate models increasingly regarded as potentially under-estimating the compounding effects as weather patterns start to change,” says Lucy Heintz, partner and head of energy infrastructure at Actis.

As IPE Real Assets went to press, Donald Trump was due to be inaugurated for the second time as US President. Since taking office, Trump has sought to withdraw the US from the Paris Agreement, and Heintz says this “potentially leaves a huge void in global climate leadership”.

But while a second Trump presidency could potentially aggravate climate risk for investors, it is likely to keep geopolitical risk high up on the agenda as well. To the dismay of the diplomatic world, Trump has been very vocal about the geopolitical importance of Greenland, Canada and the Panama Canal.

And before that he was very clear about his intentions to embrace the power of the tariff, promising 25% tariffs on all foods from Canada and Mexico and an additional 10% on those from China.

A concern for US real estate markets? We look here at the implications. Peter Locke, managing director of real estate at Arena Investors, warns: “[Tariffs] will likely keep inflation in the minds of monetary policymakers and the bond market, thereby keeping interest rates elevated… possibly extending the timeline for a sharp rebound in property values.”

As for global real assets more broadly, China could be in a position to become “the world leader of clean-energy technologies”, as Ulrik Fugmann, co-CIO at BNP Paribas Asset Management suggests. “As the US is likely to pull out of the Paris Agreement, China is likely to take centre stage in clean-energy technologies and decarbonisation efforts.”

There is no doubt then, that climate change and the global energy transition will be key themes of 2025. The role of carbon offsetting will therefore remain under the spotlight and this has important implications for fast-growing asset classes of natural capital, especially the timber and forestry sector.

As part of our latest special report on natural capital, starting on page 33, we look at reforestation strategies and carbon credits and what these mean for the traditional timberland asset class.

In the second half of 2024, Meta, the tech giant behind Facebook, signed an agreement with BTG Pactual Timberland Investment Group (TIG) for 1.3m nature-based carbon removal credit, with the option for a further 2.6m between now and 2038. The credits will be delivered from BTG Pactual TIG’s $1bn (€898bn) reforestation and restoration strategy in Latin America.

As we report, forestry investment managers are increasingly juggling the carbon offsetting requirements of corporates with the objectives of their traditional institutional investor client base.

Decarbonisation is an urgent global challenge, but so is biodiversity loss and the need for ‘nature repair’. As we report on page 41, unlike climate, where there is one common bottom line – the reduction of CO2 – nature is much more complex and reductions of nature impacts, such as area restored or untouched, has a very different value depending on the location.

It is easy to see why natural capital, which is fast replacing the traditional forestry and agriculture assets classes, is a complex area. As we report in our cover feature, holistic natural capital strategies, built on a bedrock of sustainable forestry and agriculture, are taking shape.

The special report also includes rankings of the 50 largest investors, principally made up pension funds, and the top 40 specialist investment managers in the sector. The aggregate assets owned by the former has grown from €63.7bn in 2024 to €70.6bn.

It includes interviews with the two largest investors – Public Sector Pension Investment Board and British Columbia Investment Management Corporation, which combined own nearly €15bn.