Why Investors Need to Rethink Their Infrastructure Allocation

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.

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.

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.

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

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.