Climate Impact through Infrastructure Investing

Why invest in Climate Impact through Infrastructure Investing

• Long-Term Value: Emphasizes long-term value creation, suiting LPs seeking sustained returns. Terms typically range from 10 to 15 years.
• Low volatility of return: Infrastructure assets generally show lower volatility due to stable demand and regulatory support.
• Stable Cash Flow: Infrastructure investments, particularly in renewable energy and sustainable transport, often come with stable and contractually secured revenue streams. This stability can withstand economic fluctuations and crises.
• Diversification: Investing in climate-focused infrastructure diversifies an investment portfolio, offering an alternative to traditional assets like public equities and fixed income. This diversification can reduce overall risk.
• Market Opportunity: Taps into growing sectors like renewable energy, clean tech, and sustainable infrastructure

What are the main risks of Climate Impact through Infrastructure Investing

• Regulatory and Policy Risk
• Interest Risk
• Construction Risk
• Operational Risk.
• Technology Risk
• Stranded Asset Risk
• Liquidity Risk
• Climate Risks
• Social and Community Risks

What characterizes Climate Impact through Infrastructure Investing?

• Investment Strategy: Varies from core to opportunisic strategies - Climate-focused infrastructure investment aims to support a low-carbon economy while generating financial returns. The strategy typically involves investing in renewable energy, sustainable transportation, energy storage, and other projects that promote decarbonization and sustainability. The focus is on long-term, stable cash flow and alignment with environmental, social, and governance (ESG) principles.
• Industry/Sector: Varies, but key sectors include renewable energy (solar, wind, geothermal), sustainable transport (electric vehicle infrastructure, public transit), and waste management. These sectors are essential in the transition to a sustainable economy and contribute to reducing carbon emissions.
• Instruments: Equity (debt impact covered in separate Allocation Theme). 
• Target Company/Asset Size: Infrastructure investments typically focus on medium to large-scale projects, with substantial capital requirements. Smaller projects might also be considered, especially in emerging markets or niche areas within the asset class.
• Return Profile: The return profile is generally characterized by stable cash flow and lower volatility compared to traditional equities. Infrastructure investments are often secured by long-term contracts or revenue agreements, providing predictable returns. However, the return profile might vary depending on the specific sector and project stage.
• ESG: Impact / Positive Screening / Best-in-class 
• Geography: Climate-focused infrastructure investments are global, with a strong presence in North America, Europe, and Asia-Pacific. Specific investment locations are chosen based on regulatory environments, market potential, and regional commitments to climate goals.

Question 1. What is driving the evolution of the opportunity set in Climate Infrastructure investing?

Reichmuth Infrastructure

Climate impact focused infrastructure investment is driven by an intricate, multifaceted feedback loop of societal, regulatory and economic drivers, fueled by the common imperative to combat climate change. Shifts in demand as well as governmental action have created a significant push away from high-impact business activities and have attracted investor capital globally, fostering technological innovation, which in turn creates a wide array of opportunities for capital providers. With the recent awareness of the importance of sustainability, the formalization of sustainability in regulations such as the EU taxonomy and concerns about energy independence and security on the rise, the opportunity set has increased further with technologies for hydrogen, sustainable fuel and batteries moving to the forefront. As a resilient asset class providing an essential service for economies globally while proving stability in a high inflation and rising interest rate environment, climate impact infrastructure will remain a core asset class and is likely to continue to experience fast paced growth in the coming decades.

Energy Infrastructure Partners

There are several drivers deriving predominantly from two main trends:

Energy transition and climate-related commitments

• Countries are working on meeting Paris Agreement commitments. This means there is a need for additional energy infrastructure (generation, transmission & distribution, and storage) to allow for a progressive and just transition to more decarbonised energy mixes. 
• Countries and regions (EU, US) are becoming more aware of the need to invest into Climate Infrastructure and of the necessity to involve private capital in the transition phase. 

Investment strategies and priorities

• Investors, including pension funds and insurance companies, have climate-related strategies and policies and are looking for investments which contribute to tackle and/or increase resilience to climate change. 
• Moreover, investors have further integrated ESG factors into their investment decision-making process, including climate risks. Hence, they see climate infrastructure and energy-related infrastructure assets as a way to help mitigate some climate-related risks across their portfolios.
• Increasingly, investors want to contribute to positive environmental and/or social impacts, while not necessarily investing only in impact funds. Climate Infrastructure is linked to such positive impacts.

Question 2. Investing to drive Climate Impact, do you see the Opportunity or Restriction for Asset Managers?

Energy Infrastructure Partners

Private Equity is still witnessing a challenging fundraising environment and sluggish exits are taking place. That being said and given that some types of infrastructure or subsectors have interdependencies, that might result in a decrease of climate infrastructure investments. For example, with the increase in renewable energy projects, there is also a need to increase transmission and distribution lines in some regions. Also, with hydrogen, there is a need for demand, but no demand can be created without the right infrastructure and vice versa. Furthermore, some investors and other stakeholders are reluctant to support investments in some transitional technologies (e.g., gas) despite the fact that such investments will play a significant role in the energy transition, particularly if we want this transition to be just. In the energy transition we must consider the so-called “energy trilemma” which is about finding the balance amongst security of energy supply, energy affordability, and environmental and social sustainability (i.e., avoiding and, where not possible, mitigating adverse environmental and social impacts). Lastly, energy infrastructure can be linked to ESG (e.g., environmental permitting), regulatory and other risks that need to be carefully managed. 

On the other hand, there is also a considerable number of opportunities in the space. There is an increased appetite from investors to get exposure to the PE infrastructure asset class- more specifically energy infrastructure – as it is crucial for the development and growth of any country and for the well-being of its citizens. At Energy Infrastructure Partners, we manage investments in energy generation, transition & distribution, and storage as we strive to contribute to security of energy supply and to the energy transition. We do not only focus on renewable energy, although this forms a very significant part of our portfolio, but we also consider and invest in other technologies, with a particular focus on gas transportation as we believe it is necessary for the energy transition.

Reichmuth Infrastructure

Asset Managers today have to handle a multitude of challenges when focusing on climate focused investment: With growing demand and larger focus on low-impact asset classes, markets become increasingly hot, resulting in highly competitive pricing processes of assets and shifts on the risk spectrum especially in traditional, mature technologies such as wind power. With regulations on sustainability tightening and the associated insecurity, product design and the choice of coherent sustainable investment strategies with attractive risk-return profiles proves increasingly challenging. 

Question 3. Where are the capital gaps and best impact investment opportunities in the infrastructure climate space?

Reichmuth Infrastructure

Energy angle: Concerns about energy security and independence have created a push for new technologies in the energy sector from a multitude of technologies for sustainable fuels such as bio-methanol and hydrogen to a reshaping of traditional energy carriers like biogas. Further key opportunities present themselves in opportunities not directly linked to carbon emission reduction but to reduce fossil fuel demand overall and address further challenges such as the global waste issue.

Transportation angle: On the transportation infrastructure side, new challenges arise with the targeted decarbonization of Europe’s second most polluting sector, especially as opposed to energy investments in the generation space, transportation infrastructure is commonly marked by its attribute as a net energy consumer. This in combination with the ever ageing infrastructure in place today, there is a significant need for clean capital investments. Yet, given the increased requirements for operational integration of such new transport infrastructure and the size of investments required, it becomes obvious that state-backed enterprises as well as classical capital market / debt financings will not be sufficient to enable such new operational-interlinked solutions, increasing the capital gap to be filled by equity investors, arranging financing solutions for the next generation of transport infrastructure in Europe.

Energy Infrastructure Partners

There is a tendency from investors to focus only on renewable energy and not so much on other types of infrastructure, which remain and will continue playing a key role in a just energy transition, such as gas infrastructure. It is important to see that gas still has a crucial role to play and that some of the companies leading the transition to hydrogen are companies being very active in gas transportation and distribution. Furthermore, investors are still overlooking the benefits of platform investments, which constitute integrated companies owning the entire value chain (example ENI Plenitude), create economies of scale and have various sources of revenues. When investing in the entire Value chain within energy infrastructure it provides you with the advantage of being diversified (across technology, regulation, geography and sub-sectors, like wind-solar-onshore-offshore-EV charging, hydrogen etc.) and simultaneously offering the defensive characteristics of infrastructure investments with relatively stable (and often regulated) income and longer-term visibility.