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          Why Investors Need to Rethink Their Infrastructure Allocation

          Global Sustainable Infrastructure

          Written by: Rahul Bhushan

          Published: 24 November 2023

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          Key takeaways

          Investors can no longer rely on the old categories of "safe" and "high-risk" infrastructure assets. Instead, they need to consider a wider range of factors, including climate change, technological disruption, and sustainability.

          Government initiatives are creating a dynamic climate for private investment which in turns is turbocharging infrastructure development.

          The environmental infrastructure sector is diversifying beyond clean energy and attracting significant investments.

          In the dynamic landscape of global infrastructure investing, the traditional perceptions and approaches no longer hold true.

          The changing face of infrastructure – influenced by technological advances, sustainability imperatives and evolving economic needs – presents a unique set of challenges for investors. This evolving landscape necessitates a material shift in how investors approach their investment allocations to the infrastructure asset class. In this blog, I delve deeper into this evolving landscape.

           

          Introduction

          The world of infrastructure investment has historically been seen as a path to stable returns, backed by investment in ‘real’ things, including regulated asset utilities in water and waste, toll roads, railways and ports and even telecommunications networks. However, this perspective is increasingly becoming challenged in the face of rapid technological, environmental and social disruption.

          A significant challenge lies in the perception around infrastructure risk. For nearly 50 years, the traditional risk calculus has separated infrastructure assets into ‘low risk’ and ‘high risk’ categories. Today, this is being upended by factors ranging from climate change to technological innovation. For instance, a weather event, such as a heatwave, a hurricane or a flood, now has the potential to pose a significant threat to even traditionally considered safe assets. Traditional infrastructure assets like oil and gas facilities and pipelines face enormous energy transition risks. Similarly, freight railways face the potential of being substantially disrupted by the advent of fully autonomous electric trucks. These shifts underscore the need for investors to proactively reassess their traditional assumptions what they deem to be ‘safe’ infrastructure assets.

           

          Infrastructure investment risk and return

          Navigating Future Needs Responsibly

          Infrastructure serves as the essential backbone of any thriving civil society, underpinning everyday services while also driving economic growth. Given its pivotal role, it is crucial for sustainable development. Sustainable infrastructure strives to harmoniously balance economic, environmental and social objectives. Importantly, the decisions we make in infrastructure today create a lock-in effect, where their impact reverberates for decades. This longevity underscores the urgency to prioritise sustainability in our current infrastructure choices.

          What is sustainable infrastructure development

           

          It is against this backdrop of long-term effects that a new concern emerges. Building on the momentum of sustainable infrastructure’s importance, there is a pressing concern gaining traction globally: the infrastructure gap.

          This gap, where demand outpaces supply, is expanding at a staggering rate of $USD 1 trillion each year, spanning both developed and emerging markets.1

          Developed countries, with their aging infrastructure, are equally affected as their emerging counterparts. Addressing this gap is not merely a matter of quantity but quality. The urgency to bridge this disparity is paramount and it is crucial to do so sustainably, taking into account the enduring nature of infrastructure and the long-term consequences of today’s decisions.

          Infrastructure gap investment

          Recognising the urgency, governments worldwide have been proactive in mobilising resources. Significant legislation, such as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act in the United States, sets the pace. The European Green Deal Industrial Plan in Europe and specific country initiatives like the UK’s Infrastructure Bank Bill 2023 and Germany’s €EUR 212 billion Climate and Transformation Fund, further demonstrate this commitment.23 These laws channel substantial funds into various infrastructure areas, from roads and bridges to investments in clean energy infrastructure and the modernisation of the power grid.

          The Role of Private Capital

          While government initiatives are vital, the limitations of public funding necessitate the involvement of private capital, especially in developing markets where the need for infrastructure is greatest. According to the World Resources Institute, about 75% of the infrastructure required by 2050 is yet to be built, with a significant portion of this demand coming from emerging markets.4 Encouragingly, the UN has stepped forward with a call to channel $USD 500 billion annually into emerging economies, targeting projects that align with the Sustainable Development Goals.5

           

          No SDGs without Infrastructure

          Number of SDG goals that are directly, or indirectly influenced by infrastructure assets

          SDGsDirect InfluenceIndirect Influence
          Goal 1: No Poverty1/73/7
          Goal 2: Zero Hunger1/86/8
          Goal 3: Good Health and Well-being1/1312/13
          Goal 4: Quality Education0/108/10
          Goal 5: Gender Equality1/95/9
          Goal 6: Clean Water and Sanitation6/82/8
          Goal 7: Affordable and Clean Energy4/51/5
          Goal 8: Decent Work and Economic Growth0/127/12
          Goal 9: Industry, Innovation and Infrastructure4/84/8
          Goal 10: Reduced Inequalities0/106/10
          Goal 11: Sustainable Cities and Communities5/105/10
          Goal 12: Responsible Consumption and Production4/114/11
          Goal 13: Climate Action1/42/4
          Goal 14: Life below Water2/104/10
          Goal 15: Life on Land0/126/12
          Goal 16: Peace, Justice and Strong Institutions0/127/12
          Goal 17: Partnership for the Goals1/187/18

          Yet, the real game-changers in this narrative have been countries like Vietnam and Chile. Their success stories exemplify how a judicious mix of governmental foresight and enticing risk-return profiles can attract private capital, especially in sectors buzzing with potential, like renewable energy:

            • Vietnam: A recent PWC report showered accolades on Vietnam, highlighting its capability to surpass global stalwarts. The country’s dynamism in crafting a fertile market for both local and international investors, enriched further by pivotal government reforms, has paved the way for investments in large-scale wind and solar initiatives. The resulting risk profile now stands shoulder-to-shoulder with certain developed markets, while promising far superior expected returns.6
            • Chile: On the other side of the Pacific, Chile stands tall, its political stability and crystalline regulatory framework acting as its pillars. The nation’s ambitious pledge to touch the 100% renewable energy mark by 2050 has further burnished its appeal. Currently, wind and solar ventures dominate Chile’s power generation construction scene.7

          These success stories underscore a pivotal insight: When governmental endeavors nurture a conducive climate for private investments harmonise with the appetites of private allocators, the outcome can be a robust alliance that turbocharges infrastructure development. Indeed, this effective blueprint for success is not limited to energy infrastructure but is increasingly applicable to the expanding field of environmental infrastructure.

          From Clean Energy Generation to Environmental Infrastructure

          Reflecting a growing trend, the environmental infrastructure sector is attracting significant investments, branching out from its roots in clean energy generation. The sector’s horizon has broadened to encompass an array of critical subsectors including transmission and distribution, advanced equipment and platforms, innovative monitoring technologies, conservation initiatives, sophisticated pollution control systems and smart grid systems. This expansion is a testament to the sector’s vital role in our sustainable future and signals a growing recognition of the necessity to invest in environmental resilience.

          Reflecting on a few recent milestones in 2023:

            • In April, Acciona, a Spanish engineering group, collaborated with Danish wind energy giant Orsted, to innovate a pioneering platform for floating offshore wind turbines. Those unfamiliar with this technology should note that while floating wind installations typically have higher costs than fixed-bottom offshore counterparts, they offer considerable advantages. Floating wind turbines can be positioned in deeper waters, harnessing more reliable and robust wind currents. This strategic partnership between Acciona and Orsted aims not only to reduce both implementation costs and environmental impacts but also to position the companies as leading suppliers in the offshore wind sector.8
            • By October, EDP Renováveis, a leading Spanish renewable energy group, made headlines by more than doubling its installed solar capacity in the Asia Pacific region – a leap from 480 MWp in February 2022 to an impressive 1 GWp. This growth epitomises EDP’s commitment to spearheading the energy transition across the Asia Pacific. With a significant presence spread across nine regional markets and a diversified installed capacity, the company has specific stronghold areas like Vietnam, Singapore, China and other APAC nations. Notably, distributed solar generation (DG), which constitutes 53% of their 1 GWp capacity, has been identified as one of EDP’s fastest-growing segments. EDP aims to triple this capacity by 2026, reflecting the increasing emphasis on decarbonisation in the region.9
            • Lastly, Brookfield’s October 2023 investment into Banks Renewable, the UK’s premier independent developer of onshore wind farms, underscores the broader regional commitment to renewable energy. Banks Renewables, with approximately 300MW of power from around ten onshore wind farms in Northern England and Scotland, sought financing to establish an additional 15 farms, aiming to contribute an impressive 900 MW of fresh power.10

          These examples underscore the need for change and the benefits of embracing sustainability and innovation in infrastructure investment.

          Showcasing how innovation and collaboration are pivotal in crafting a sustainable future, these instances mark the route towards transformative investment in environmental infrastructure.

          Conclusion

          As the infrastructure investment landscape evolves, it demands that investors adapt. The old dichotomy of ‘safe’ versus ‘high-risk’ infrastructure assets no longer holds up under the pressures of climate change and technological disruption.

          Instead, today’s investor must look to sustainable, innovative solutions that address the urgent infrastructure gap and anticipate future societal needs.

          Governments are setting the stage with significant legislation, but the onus is on private capital to take the baton and run the distance, especially in emerging markets. The success stories of Vietnam and Chile demonstrate the potential for high returns when investment strategies align with sustainable development goals.

          Ultimately, a re-evaluation of infrastructure portfolios is not just about economic prudence; it is about investing in a resilient, equitable future. The new era of infrastructure investment calls for a blend of vision, adaptability and a commitment to the environment and society that will define the success of portfolios and the progress of communities worldwide.

          References

          1

          Nature, “Infrastructure for sustainable development”, April 2019. Available at: https://www.nature.com/articles/s41893-019-0256-8

          2

          UK Parliament, “UK Infrastructure Bank Act 2023”, March 2023. Available at: https://bills.parliament.uk/bills/3158

          3

          EURACTIV, “German government passes €212bn climate fund”, August 2023. Available at: https://www.euractiv.com/section/energy-environment/news/german-government-passes-e212bn-climate-fund/

          4

          World Resources Institute, “IPCC 1.5° Report: We Need to Build and Live Differently in Cities”, October 2018. Available at: https://www.wri.org/insights/ipcc-15deg-report-we-need-build-and-live-differently-cities

          5

          United Nations, “Guterres calls for G20 to agree $500 billion annual stimulus for sustainable development”, February 2023. Available at: https://news.un.org/en/story/2023/02/1133637

          6

          PWC, “Closing the green infrastructure gap”, November 2022. Available at: https://www.pwc.com/gx/en/issues/esg/the-energy-transition/closing-global-green-infrastructure-gap.html

          7

          Ibid.

          8

          Reuters, “Orsted and Acciona team up to make floating wind more affordable”, April 2023. Available at: https://www.reuters.com/business/sustainable-business/orsted-acciona-team-up-make-floating-wind-more-affordable-2023-04-19/

          9

          EDP, “EDP Renewables surpasses the 1 GWp installed capacity milestone in Asia Pacific”, October 2023. Available at: https://www.edpr.com/en/news/2023/10/19/edp-renewables-surpasses-1-gwp-installed-capacity-milestone-asia-pacific

          10

          Power Technology, “Brookfield to acquire Banks Renewables for $1bn”, October 2023. Available at: https://www.power-technology.com/news/brookfield-acquires-banks-renewables/

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