The latest Net Zero Investor roundtable brought together a group of investment professionals to discuss the role of infrastructure in the net-zero transition.
ATTENDEES
- Sofia Bartholdy, net-zero lead – responsible investment, Church Commissioners for England
- Graham Cook, CIO, Environment Agency Pension Fund
- Jill Davys, head of LGPS, Redington
- Matt Deane, business development associate, First Sentier
- Sophie Durham, managing director, head of ESG, Igneo Infrastructure Partners
- George Kendall, responsible investment manager, Border to Coast
- Mohammed Khalil, ESG equity strategist, Phoenix Group
- Chris Marchant, senior reporter, Net Zero Investor
- Will Martindale, co-head of sustainability, NOW: Pensions
- Devina Parasuraman, director for infrastructure investments, Igneo Infrastructure Partners
- Kaisie Rayner (chair), founder and director, A future worth living in
- David Russell, head of responsible investment, USS
- Paul Watchman, special advisor to the UN on climate change and ESG
In the “decade for delivery” a tsunami of private capital will be unleashed on infrastructure to help deliver net zero. Not all of it will be wisely invested and risks abound as competing capital jostles for the best opportunities.
Net Zero Investor convened a roundtable to explore the burgeoning appetite for infrastructure investments that will underpin the net-zero transition, the ideas driving innovation and the pitfalls for private markets’ investors facing stiff competition and issues of scale.
The infrastructure debate was part of a wider net-zero discussion that also covered the role of asset owners, fund selection and manager research. The infrastructure section began with Sophie Durham from the sponsor of the event, Igneo infrastructure Partners, explaining the role that infrastructure can play in the journey to net zero.
Sophie Durham
Igneo manages about €16bn of assets globally, mainly in the power, utilities and transport sectors. Some of our businesses operate in sectors traditionally thought of as hard-to-decarbonise, but they’re also essential to the economy and provide essential services.
Infrastructure is an asset class that is going to deliver a lot of solutions to net zero.
So we’re doing two things: we’re investing in climate solutions and working with more carbonintensive companies to help them transition.
We have invested over 1.8 billion Euros in the last three years in pure play renewable energy businesses. We own the third largest wind power producer in Portugal, the greenest district heating provider in France, and the largest renewable energy producer in Estonia.
We could, of course, buy more and have a nice green portfolio, but that isn’t our investment mandate, and it also doesn’t address the challenge of businesses in other sectors, such as district heating, that may be more carbon-intensive today but are also crucial to the energy transition.
Igneo owns MVV, a German integrated regional utility business. Today, MVV has some coal- and gas fired power generation in its portfolio. We invested in the company two years ago and it originally planned to phase out coal, in line with the German government’s policy, by the mid 2030s and reach net zero by 2050.
We found opportunities not only to generate value for our investors, but also to have a significant positive environmental impact – taking millions of tonnes of CO2/year out of the air ten years earlier than was going to be the case before we fully invested
Sophie Durham, Igneo Infrastructure Partners
There are climate solutions that are ‘green-green’ and climate solutions that are ‘brown-green’.
Kaisie Rayner, A future worth living in
We worked with our co-shareholder, the city of Mannheim, to make that plan more aggressive. So MVV is now phasing out coal by 2030, maybe even earlier. And they’re going to reach net zero by 2040. The targets have been verified by the Science Based Targets initiative (SBTi) – the first German energy company to get that stamp of approval.
MVV is an example of a business where many people might not have made that investment because it’s carbon-intensive at the moment. But through working with the company and our co-shareholder we found opportunities not only to generate value for our investors, but also to have a significant positive environmental impact – taking millions of tonnes of CO2/year out of the air ten years earlier than was going to be the case before we fully invested.
Kaisie Rayner
What I’m hearing is that there are climate solutions that are “green-green” and climate solutions that are “brown-green”.
It’s not just about the ‘clean’ stuff. It’s about transitioning the other stuff, and I think that’s really important.
David Russell, USS
David Russell
We have £1.9bn already invested in renewables and renewable energy tech, and have been invested in this sector since 2001. We have another half a billion allocated and that’s all in our private markets. It’s not just about the “clean” stuff. It’s about transitioning the other stuff, and I think that’s really important. One of the challenges is people coming to us selling green stuff. We’d love to buy it, but usually it’s too expensive. And when we invest a lot in direct infrastructure, we are outbid quite frequently by deep pocketed oil and gas companies.
It’s how you transition everything that I think we’ve got to focus on, not just the fact we have to allocate to renewable energy, clean tech or the assets of the future which are really difficult to invest in if you are a really big pension fund. And VC funds are tiny. So yes, how you transition everything is the issue.
Kaisie Rayner
So it used to be about exclusions, and then it was about the super green stuff. The stuff in the middle is harder. So do you think we’re getting to a place now where we’re having to tackle this bit in the middle, which is neither “black dirty” nor “super green”? Do you think that’s where the shift in focus is going to be over the next five years, as the low-hanging fruit on either end has started to be grabbed?
Devina Parasuraman
I think the challenge we’re dealing with to address the energy transition is that the green is very easy. There are lots of funds out there seeking those opportunities. The grey and the really dirty, no one wants to touch that. The middle is where the most amount of work needs to be done.
At Igneo, we are infrastructure investors seeking high-quality assets where we can engage with those companies to help them on their transition journey. So for us, we find these opportunities very exciting.
We recently acquired an energy from waste company in the UK, one of the largest ones. The company’s operations save the UK almost 600,000 tonnes of CO2/year compared to the alternative of landfill. However, it is still one of the highest direct emitters in our portfolio. We’re working there on carbon capture solutions. These are not technologies that are feasible today, but we’re working on the solution now. And it’s always those types of opportunities we’re looking at where we can add value and make those businesses longterm sustainable enterprises.
Jill Davys
I want to address the point about why people aren’t putting lots of money into illiquid assets. If you’re not a defined benefit pension scheme, in most instances, you’re closed to future accrual. And you’re actually looking to get out to buy out within the next five to ten years. So do they care what happens after ten years? Probably not. It is about funds like the USS and the LGPS where the longer-term horizons really do make a difference.
We are going to be paying out pensions more than 80 years into the future. This really does impact on our beneficiaries
Jill Davys, Redington
Two of the most important aspects that do not get enough attention when looking at infrastructure are natural capital, and physical risk and adaptation.
Graham Cook, Environment Agency Pension Fund
We are going to be paying out pensions more than 80 years into the future. This really does impact on our beneficiaries. I think the other issue with illiquid assets, particularly in the DC space, is around the costs. You cannot access these assets particularly cheaply. And you still have caps in terms of how much you’re allowed to pay in fees. So how do we negotiate with the fund managers to get those fees down?
George Kendall
We have around £2bn committed capital from our partner funds for our Climate Opportunities fund, which is essentially a mix of infrastructure assets, private equity and private debt. It’s geared towards looking at opportunities, not just at the green end, but those businesses that are ripe for transition as well.
One of the challenges with emissions-intensity disclosures in isolation, is that they may be ranked. In other words, portfolio A has higher emissions-intensity than portfolio B. This can lead to perverse incentives.
Will Martindale, NOW: Pensions
Graham Cook
For us, infrastructure sits within our net-zero action plan as an enabler of the transition. And that’s distribution and grid scale storage and all those things that need to be in place for us to move to a post transition world. Two of the most important aspects that do not get enough attention when looking at infrastructure are natural capital, and physical risk and adaptation.
Will Martindale
One of the challenges with emissions-intensity disclosures in isolation, is that they may be ranked. In other words, portfolio A has higher emissions-intensity than portfolio B.
This can lead to perverse incentives. For example, it may incentivise an investor away from investing in emerging markets, as emerging markets tend to have higher GHG emissions, even though it is emerging markets that require the capital to transition.
As such, the emissions intensity of a portfolio requires context, such as the jurisdictions represented or the type of assets.
The fees issue is also very real. For example, impact investments tend to be higher fee. As is illiquidity, particularly in the consequences of the LDI crisis. Another issue is currency risk if we’re looking for overseas transition opportunities.
Addressing these issues seems to me like a relatively light policy fix.
David Russell
On the illiquid assets point, we’re very lucky in that we have been able to fold our in-house infra into our DC offering (because we are a hybrid scheme). But the mark to market issue is one that really needs to be sorted out and that is a regulator issue.
And the fee cap means that basically it’s not going to be possible because most funds charge more than 70 basis points. There needs to be a way round that.
Final point, we can’t divest our way to net zero – we have to transition. We can’t just invest in the clean tech, even if it is infrastructure or other assets. It’s all about how we transition.
Paul Watchman
Leadership is really important from both the corporate side and the investment side. I truly believe in renewable energy local enterprise zones.
Chris Marchant
Can portfolios truly have science-based targets with the current quality of ESG data?
Will Martindale
Science-based targets is a really important intervention. It allows investors to understand a company’s decarbonisation objectives, per sector and geography, consistent with prevailing understanding of the science.
However, this is because each sector is dependent on other sectors to create a decarbonisation budget. As such, their interpretation requires constant monitoring and care.
Graham Cook
You can have targets based on the science; they don’t have to be science-based targets.
Devina Parasuraman
In terms of the net-zero infrastructure outlook, I think the current energy crisis has highlighted concerns around security of supply and affordability of energy sources. And what that has meant is in terms of the speed of the energy transition, we might be going backwards in the immediate term, when some countries are talking about reopening coal mines and restarting coal plants.
But I think in the medium to long term, it’s expected to speed up the energy transition for two key reasons. One is the concerns around security of supply. That has meant there is an increasing focus on energy independence, on decarbonisation, and also affordability of energy sources. And, two, is those low-carbon solutions, such as green hydrogen CCS, are becoming more cost-competitive.
And also on the investment side, we haven’t seen a slowdown in commitment to developing more renewables, more low-carbon solutions. And just a quick fact: it’s expected that we’ll need around $4trn in investment in this decade to achieve net-zero infrastructure.
Sophie Durham
My closing comment would be to say that we need faster progress. The financial industry, for asset owners and managers, has been good at setting targets and getting better at reporting. Where we need more progress is in translating those targets into action.
Jill Davys
If we’ve got any hope of achieving net zero by 2050, we need to see action on the part of policymakers, government, asset owners, companies, you name it, we’ve all got to do our bit. We can only do so much as asset owners.
Sofia Bartholdy
The first thing is to identify what needs to happen in the world and understand what your role is and where your unique levers are. And focusing where you can have impact and collaborating. And then sometimes a coherent and impactful net-zero strategy is not the same as a good-looking strategy. That’s another challenge for the industry.
Mohammed Khalil
Depending on what organisation you’re a part of, your investment agenda, your stewardship engagement agenda, how you deal with your own affairs, do have to be aligned if you’re going to make this net-zero transition. I don’t want to say it won’t be painful, but hopefully smoother, so that it may not necessarily be the best looking. But at least it will be a lot easier if stakeholders and counterparts are working towards the same goal as you.
George Kendall
The commitment is there from the financial sector, the commitment is there from LGPS funds. Opportunity is there for policy to follow, but when we look at the outcomes of the COP27 conference, it doesn’t seem like everyone is singing from the same hymn sheet and that’s got to change.
