01 August 2022

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Infrastructure’s irreplaceable role in the global ESG revolution

By Jeremy Anagnos, portfolio manager of Nordea’s Global Listed Infrastructure strategy

Over the last several years, no other theme has seen such asset growth as ESG. We expect the market to continue to rise, with the overwhelming majority of investors interested in sustainability and integrating ESG into their portfolios. The coming shift in asset allocation should not be underestimated.
Infrastructure is uniquely positioned to lead and financially benefit from global sustainability initiatives. Electric utility companies are at the forefront of net-zero action – as these groups are installing solar modules, constructing wind turbines and upgrading transmission lines to charge electric vehicles (EVs) and convert our heating to electricity. Meanwhile, these same utilities are pushing aggressively to shutter high-carbon, fossil-based generating stations like coal-fired power plants.

Water utilities upgrade antiquated lead pipes and filter waste to provide clean drinking water. In telecommuting and edge computing, data centres and cell towers reduce Scope 3 emissions and optimise logistics, while rails and roads invest to lower the need for long-haul trucking – producing 75% less greenhouse gas in the process – and to reduce congestion.

Because of these investments, infrastructure companies should grow cash flows substantially and sustainably. Over the next two decades, we expect over $100trn in investments across the utility, water, digital infrastructure and transport sectors. Investors seeking sustainability and ESG, with a desire to make an impact with their capital, should consider the suite of infrastructure companies that will control the initiatives they care about, and which will grow sustainably into our future.

The under-represented asset class

Given infrastructure’s central role in achieving global sustainability goals, it is unfortunate that major ESG funds allocate so little to the asset class. All in, the top 20 global ESG funds have only 5% exposure to companies leading environmental stewardship and energy transition, while they have a 33% exposure to tech and communications services.

This is a clear shortcoming for investors who wish to prioritise climate change, as the companies in listed infrastructure are leading industries that are spending half of every dollar on decarbonization over the next several decades.

For example, one of the largest renewable developers in the world, NextEra Energy, commands a $137bn market cap, but still only appears in a minority of ESG funds, whereas Alphabet and Microsoft dominate the lists. While not commenting directly on Microsoft or Google, we would hazard that NextEra, which owns a >24GW renewable portfolio that should double in three years, will build more clean energy than the creators of Windows 95 and Gmail.

Heavy exposure to volatile segments

When we put aside broad ESG strategies, and examine ESG and clean tech ETFs, we find a larger exposure to energy transition, but also a concentration to businesses with uncertain financial futures. The more popular ETFs have roughly 50% exposure to solar installers, manufacturers, wind turbines and clean EVs – which have a history of booms and busts.

By contrast, listed infrastructure companies either have long-term contracts or regulated rates of return, which provide stability to its cash flow. Cyclical clean tech tends to make money on energy transition only once, with each sale of a car or solar panel, whereas listed infrastructure will earn on a renewable asset for years. Tesla and the module makers might be the hares in an energy transition race, but infrastructure is the tortoise – it is the steady and secure way to invest in energy transition while offering an attractive and growing income yield.

When we examine the sustainable investment market, and consider what investors care about most, we see global listed infrastructure as an essential, and under-represented, asset class for ESG portfolios. Listed infrastructure offers an unparalleled exposure to environmental stewardship and energy transition, with a chance for investors to make an impact while earning a compelling total return derived from secure cash flows that should grow for decades.

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