As we approach 2024, the infrastructure asset class is facing a number of challenges, largely linked to the global issue of sustainability.
According to PwC, the global urban population, which currently stands at around 3.9 billion people, is expected to rise to 6.3 billion by 2050. This is putting pressure on the industry to undertake projects to meet the needs of these rapidly growing cities.
A second major, more obvious, issue is climate change, with the need to switch to greener practices pressing. Figures from the OECD suggest that $6.9 trillion per year is needed up to 2050 for investment in infrastructure to meet development goals and create a low-carbon future. This, combined with the world’s advancing population, is creating a huge challenge.
But how is the sector coping? And what part do investors play in helping infrastructure move towards sustainability?
The move to net zero…
At the forefront of the sustainability conversation in infrastructure is the idea of achieving net-zero carbon by 2050. Despite the sector making a lot of progress already, there is still a way to go. Aaron Scott, Patrizia’s head of sustainable transformations, says: “There are considerable headwinds to achieving net-zero carbon by 2050, as the IEA and IPCC have confirmed in the past few months.
“The critical question is at what standard of living for humanity? The challenge for the infrastructure industry is to scale new technologies and ways of working that align with a sustainable way of living for all of society.”
One issue highlighted by Scott and others is the need for green infrastructure to meet both stakeholders’ and investors’ needs. There needs to be a balance, one that recognises the need for decarbonisation as well as the importance of well-functioning infrastructure to wider society.
The number of green infrastructure assets is steadily increasing across the globe. New Private Markets’ analysis of Article 8, Article 9 and Impact funds investing in infrastructure found 90 such funds in market targeting Europe, 46 funds in market for North America and 32 funds in market for the Asia-Pacific region.
However, Sophie Durham, European head of ESG at Igneo Infrastructure Partners, warns that investors must look at net zero with a long-term approach. “By focusing on creating value that is sustainable in the long term, managers will inevitably invest in decarbonisation alongside other improved ESG outcomes.”
… and the move away
The transition to a more sustainable future has also resulted in some negativity and mistrust regarding ESG. Recently, many portfolio managers have come under fire for not communicating well enough to their clients that ESG is not a definitive solution to climate change, which has in turn led to mistrust from investors.
Anj Chadha – CEO and co-founder of ESG360, which helps businesses mitigate ESG risks across their supply chains – argues that investors should take a different approach and try to understand how ESG can affect future performance and look at how prepared they are to minimise negative impacts. “A good ESG strategy looks at ESG issues from risk and opportunity perspectives and then has a clear action plan to manage them.”
Mirza Baig, global head of ESG at Aviva Investors, reiterates that ESG covers a complex range of issues, and agrees that miscommunication has led to increased negativity as well as investors relying too much on ESG indicators. “No company has achieved perfection against every metric, and it is unreasonable to believe there will be one in the future that does. Companies may excel in some areas and struggle in others.”
In order to tackle this mistrust, George Roffey, chief sustainability officer at specialist financial advisory firm Centrus, encourages firms to work together to establish quality ESG standards and reporting across the industry. “Show transparent measurement of impact data, case studies and any other evidence that builds proof of ESG’s financial benefit.
“Set targets and accountability across E, S and G.” Roffey further argues that governments and regulators have a role to play in minimising ESG mistrust.
Data inconsistency is also an issue when it comes to ESG reporting, and so firms must put more effort into improving data quality, as this will help combat greenwashing concerns.
Seven secrets
In this year’s Sustainable Investing report, we have identified seven secrets to sustainable success. Key among those is understanding the regulations and policies in place to ensure firms are making progress on sustainability as they also look to address greenwashing.
The EU in particular is making headway when it comes to creating robust regulations, with the SFDR introducing a classification regime for investment products. Meanwhile, the EU has been followed by many other jurisdictions in creating a taxonomy for determining which investment activities can be defined as ‘sustainable’.
Lars Meisinger, head of international client advisory at Aquila Capital, says the SFDR’s system for classifying investment products is “a helpful contribution towards establishing certain standards”. He does warn, however, that it should “not be the sole indication for credentials”.
For investors looking to make headway on sustainability, the UN Sustainable Development Goals are a good place to start, says Vuyo Ntoi, co-managing director at Africa Infrastructure Investment Managers. “The SDGs serve as a valuable reference for investors in determining where to allocate resources in high-quality infrastructure projects that are crucial for raising economic productivity and sustaining growth.
“Aligning investment priorities with the SDGs not only supports this economic development, but also helps investors make informed and responsible choices and consider the broader impact of their investments on society and the environment.”
Even though SDGs provide a good jumping off point for investors, some argue they are not sufficient to measure performance. “If you are actually going to ask someone to create a mandate with specific deliverables, normally it is a level of granularity higher than the SDGs,” says Adam Fitzwilliam, director at Spark Energy Services.
Among the other secrets identified is putting nature first, as infrastructure investors begin to notice the sector’s impact on biodiversity, which is in crisis as animal populations continue to suffer steep declines.
“For a long time, climate has been the focus and net zero has been the focus, but, increasingly, the complete correlation between climate and biodiversity is coming to light,” says Ruth Murray, investment director in the sustainable infrastructure team at Gresham House. “I think people are becoming much more aware of how infrastructure does have a really big impact on biodiversity.”
Even certain infrastructure projects designed to address climate change issues can have a negative impact on biodiversity. Murray adds that understanding biodiversity in an infrastructure context is a lot harder than understanding carbon.
But there is progress being made: the COP15 biodiversity conference in Montreal in December 2022 produced a historic Global Biodiversity Framework. Meanwhile, governments committed to extend protected areas to cover 30 percent of the Earth’s land and oceans by 2030. And in September 2023, the Taskforce on Nature-related Financial Disclosures launched its framework for firms to disclose their nature-related risks, impacts and dependencies.
The demand for data
Making the right investments is half the battle in terms of achieving sustainability, and new technologies may provide a path for investors. For instance, demand for data centres is on the rise, but there are concerns about how environmentally friendly they are. “There is no getting away from the fact that data centres are power hungry,” says Stephen Beard, head of data centres at UK-based real estate firm Knight Frank.
Data centres use huge amounts of energy to cool and run their facilities, and this will only worsen with climate change.
Dominic Ward, CEO of data centre experts Verne Global, adds: “The increased frequency of temperatures above 30 degrees is requiring massive additional infrastructure to ensure the cooling of racks is possible on those days.”
What are the solutions? One way is through carbon offsetting, with some data centre companies introducing ESG strategies and investing in renewable projects. New technologies that enable a more efficient cooling process are also being explored.
“The industry has moved increasingly to be a proactive participant in the creation of new renewable energy generation to offset their energy needs,” says Morgan Laughlin, global head of data centre investments at PGIM Real Estate.
There are plenty of interesting infrastructure subsectors beyond data centres. The opportunity in offshore wind has been growing in light of the energy transition and ports are being used as a way to roll out these projects.
“Now, more than half our work is in the renewables space, particularly in offshore wind,” says Steve Chisholm, operations and innovation director at GEG. “Offshore wind is growing spectacularly and will continue to do so. That is going to form the backbone of what we do going forward.”
In order to hit net-zero targets, the UK has set a 50GW goal for offshore wind by 2050, up from around 14GW today. And so, infrastructure investors are looking to ports as a way to capitalise on the offshore wind opportunity.
Ports in particular are seeking investment as floating designs for offshore wind are set to become widespread. For example, in UK waters, around 40 percent of planned offshore wind capacity is set to use floating turbines. This means that turbines can be deployed much further from the coastline, taking advantage of higher wind speeds and ultimately delivering more reliable power.
Despite the opportunity that ports and offshore wind present, rising costs have led to a drop in optimism over the past year, making investors more reluctant to invest.
A circular economy
One area where investment appetite is growing is in the circular economy, which is being fuelled by a focus on decarbonisation. The drive to reduce, recycle and reuse resources is providing opportunities.
“The circular economy is an attractive space because there is a lot of infrastructure that needs to be built to make it happen,” says Aaron Church, partner at private equity and infrastructure firm 3i. “There are currently not enough sorting and recycling plants to deal with the waste we are producing.” Church adds that there is a need for more waste-to-energy plants, which is where he is seeing developments in new technologies such as carbon capture.
Energy security is another driver of the idea of a circular economy, with the war in Ukraine pushing the EU towards producing gas from organic waste as it looks for alternatives to Russian fossil fuels. “This is providing a lot of scope for current portfolio company growth and for potential new investments – there is an explosion of opportunities in this space,” says Church.
This explosion of opportunities – not just in the circular economy space – is great news. Sustainable investing is firmly on the agenda.
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