Prospective growth in gains: Alvarez-Dominguez discusses the future perspective of environmental assets, according to Brunel
Brunel Pension Partnership, a UK Local Government Pension Scheme Pool managing over £35.9bn in assets, is broadening its investment strategy to include transition assets beyond renewable energy. This move is aimed at supporting decarbonization and environmental sustainability, including natural capital assets.
The pension partnership's strategy for investing in transition assets includes developing a dedicated standalone portfolio focused on natural capital. This aligns with Brunel's strong emphasis on impact investing, as the fund aims to capture environmental benefits alongside financial returns.
The natural capital investment plan is likely to include opportunities such as sustainable land use, ecosystem restoration, and carbon credit mechanisms. However, detailed specifics on carbon credits were not explicitly referenced in the available sources.
Brunel's intent to build a natural capital portfolio and engage with carbon-related investments is part of an expanded transition focus. Much of Brunel's investment in energy transition has come through infrastructure strategies with a significant allocation to renewables. But the pension partnership is now actively diversifying into related transition assets.
One of the key co-investments made by Brunel was in Aurora, a US forestry credits firm. The investment was backed by 600,000 hectares of mixed hardwood with more than 120 species of trees. The aim was to reduce harvesting by 50% and generate additional revenue through carbon credits. If the carbon credits didn't materialize, Aurora would fall back on sustainable forest management.
The payments to the farmers involved in these projects are structured to "cover the J-curve of the transition." Brunel targets returns above 8% from natural capital assets, which in practice has excluded most UK forestry.
While returns on renewable energy investments have been too low, according to Alvarez-Dominguez, even for construction-ready assets, Brunel's infrastructure team has expressed concern about concentration risk due to the scale of exposure to renewables. This has led to the pension partnership's active approach to delivering sustainable, impact-oriented investment outcomes linked to climate transition objectives.
The market for renewable energy investments has become more crowded, leading to concerns about whether partner funds will still benefit from an optimal risk-return balance. However, Alvarez-Dominguez remains optimistic about the broader outlook for carbon markets, driven in part by demand from large corporates with net zero targets.
Looking ahead, Brunel's Chief Executive, Jaime Alvarez-Dominguez, will speak at a Climate Solution Summit on 11 September. The UK government is pushing to consolidate Local Government Pension Scheme (LGPS) assets, which may result in the dissolution or merger of Brunel Pension Partnership in the coming months. Despite these challenges, Brunel continues to play a significant role in supporting the UK's energy transition, as demonstrated by the carbon credit deal with Microsoft.
The pension partnership has also invested in Clear Frontier Meadowlark I, a first-time agriculture fund that includes long-term land leases to family farmers willing to transition to organic. This investment further demonstrates Brunel's commitment to impact investing and its broader approach to transition assets, which incorporates investments in innovative areas such as battery storage, electrification of transport, district heating, and other energy transition technologies.
The Brunel Pension Partnership is expanding its investment strategy to incorporate a dedicated natural capital portfolio, aligning with their emphasis on impact investing that targets both environmental benefits and financial returns. This portfolio may include opportunities like sustainable land use, ecosystem restoration, and carbon credit mechanisms, as demonstrated by their co-investment in Aurora, a US forestry credits firm.
Besides the natural capital investment plan, Brunel has also invested in Clear Frontier Meadowlark I, an agriculture fund that supports family farmers transitioning to organic practices, further demonstrating their commitment to impact investing and diverse transition assets.
