EdR: Conviction-led investment

Making conviction-led choices to achieve long-term value creation is key to the energy transition, says EdR’s Jean-Francis Dusch.

This article is sponsored by Edmond de Rothschild Asset Management

Infrastructure projects are of fundamental importance to the energy transition, spanning a wide range of asset classes. As well as the traditional infrastructure that will require further acceleration to meet society’s needs around renewables, green mobility, energy efficiencies for social infrastructure, decarbonisation of utilities and more, digital infrastructure will also play an increasingly important role.

Jean-Francis Dusch, global head of infrastructure and structured finance at Edmond de Rothschild Asset Management and CEO of Edmond de Rothschild UK, considers the importance of infrastructure debt to sustainable development and responsible finance. He believes debt enables investors to have genuine real-world impact while still prioritising diversification, stability and long-term returns. The advantages inherent within infrastructure debt, however, can only be secured by working with an experienced, conviction-driven asset manager.

How does infrastructure investment contribute to the decarbonisation of economies?

Jean-Francis Dusch
Jean-Francis Dusch

We were an early supporter of the energy transition. Of course, we looked at it from a renewable angle because there were a lot of projects being launched in this area. But as we grew our platform and assets under management, we saw that decarbonisation also depended on digital infrastructure.

The covid-19 pandemic accelerated the development of – and highlighted the need for – digital infrastructure. All of a sudden, we needed remote education, shopping, entertainment, healthcare, and more. So, we realised we could rethink how we worked and travelled in more sustainable ways.

Green mobility is another area set to play a major role in the energy transition. Being able to adequately finance the construction and operation of a robust charging network is critical to the growth of decarbonised assets such as electric vehicles. More and more investment is required here.

Social infrastructure is another consideration. Lately, there has been a lot of talk about energy efficiency. Again, we moved quickly here to bring attractive spreads to investors and fund the building of hospitals and schools using sustainable materials.

As well as the construction itself, how these assets operate is important for decarbonisation, too. Optimising operations can greatly decrease the consumption of energy.

Utilities is one more area where heightened investment can contribute to the energy transition. Ensuring that utilities can meet the needs of society without relying on fossil fuels is key.

So, the energy transition depends on a broad spectrum of support. Even if you go back to looking at renewable energy, there is a lot of technological development, including battery storage and hydrogen fuels, hydroelectricity and floating offshore, among others. There are many routes to decarbonisation – greener infrastructure is one way to contribute to a better planet.

What makes infrastructure debt, in particular, so well suited to supporting the energy transition?

If you look at how you finance an infrastructure asset, so much is financed by debt. So, by definition, we are greatly supporting the energy transition.

Also, infrastructure debt has benefited from regulation that is incentivising further investment. This ensures projects are green and meet the Sustainable Finance Disclosure Regulation (SFDR). As early as 2018, when we launched an energy transition senior fund as part of our global offering, we were aware of SFDR and kept it in mind with our investments.

The way you source, structure, monitor and report funds is important and taxonomy is high on the agenda. So, with these various regulatory challenges that investors must meet, infrastructure debt represents an attractive opportunity for individuals that wish to have an impact through SFDR Article 8 or 9 funds.

It is also important to mention that there are financial benefits to working with infrastructure debt. It represents a good way for investors to access the features they expect; infrastructure debt is predictable, fixed income, largely safe and produces attractive yields.

How large a role do regulation and politics play in supporting the energy transition?

We have advised a number of governments over the last two decades. The way that governments around the world have tendered infrastructure projects as part of PPP schemes shows that ESG has always been high on the agenda.

New regulations are not totally new. They now tend to aim to generally provide good methodologies for asset managers to quantify the impact of their investments – but an ESG focus has always been a key pillar.

Today, as well as purely environmental concerns, energy independence has also become more important. The main issue here is how each state wants to implement or accelerate the transition. In France, for instance, governments have included nuclear power; Germany has selected gas. The way we have analysed investment has always kept these nuances in mind, although nuclear is an exclusion.

However, one of the things that has kept infrastructure debt appealing has always been the way that it is pretty insulated from and resilient to macroeconomic shocks. Even if you look back to the pandemic, the most effective asset managers, like us, demonstrated that by structuring debt wisely, our portfolios were not adversely affected.

Diversification has always been important for investment portfolios. How essential is it for investors looking to support the energy transition?

We are being more and more diversified. In 2021, for instance, we deployed more than €800 million across 19 investments. Last year, the figure rose to €1.5 billion across more than 30. The energy transition touches upon all sectors of the economy.

Looking at social infrastructure, this diversification is similarly important. Companies based across a broad spectrum of industries are on board, supported by regulations at the governmental and supranational governmental levels. For asset managers, if you have a bit of an industrial background and public sector/regulatory advisory track record like us, you are well suited to capture opportunities to diversify portfolios.

Geographic diversity also applies to the energy transition. It is a broad playground. Having said that, development in the US is especially interesting. With regard to its infrastructure, there is still a lot to do, as programmes have taken longer to be implemented – but this is one of the richest economies in the world, hence the infrastructure projects can be developed fast.

We will invest in the US in 2023, as well as progressively target Asia, the Middle East and Africa. Our goal is to become truly global. We have the skills to achieve this but there remain some questions about investor appetite for expanding geographies.

Looking ahead, what kinds of opportunities and risks should investors look out for?

Overall, I am hugely optimistic. The energy transition is needed, not just to create a new asset class but to meet the challenge facing the planet. The energy transition is taking place; it is not a question of optimism, but conviction. We have to identify investments within certain risk profiles; this is the task of an asset manager.

When we made our first green mobility investment four years ago, it was a bet. A measured and well thought-out one; we worked really hard and questioned ourselves. We analysed the risk and took an informed and substantiated view, working with the sponsors and consultants. Now, nobody would question this investment.

Risk analysis and mitigation is part of investment and how we can support the energy transition with sustainable financing solutions. We are doing all we can to further the energy transition, and I think this is a key selection criterion for many investors too.

weighing scales balance

How important are data and transparency to driving the energy transition?

We always measure the impact of our investments. Of course, it can be difficult to provide relevant data but there are ways to achieve this. We took a head start, we believe, from the way we designed our infrastructure debt platform.

Article 8 is not just a self-proclaimed classification. It shall be documented and audited, which we do for our funds. You can create a dialogue with the regulator and include this in the documentation underpinning your funds: which UN SDGs you are following, what percentage of assets will be fully green against a particular definition, how you will monitor ESG and what the impact of the investment will be. We also measure and audit independently the CO2 emissions saved and the alignment against the global warming reduction goals for each of our assets.

It is more a question of whether an asset manager has the knowledge, commitment and resources to provide all the necessary reporting. That can be quite a labour-intensive process and it remains a work in progress from a regulatory point of view.

Each day, we try to understand regulations better and discuss how they should be interpreted. We try to ensure we are working with the right consultants, who can help us to measure impact. So, data collection and analysis may present challenges, but they are surmountable ones.