‘Sustainability, resilience, diversity: driving infrastructure for the next generation’ – that was the tagline of the 2022 edition of Infrastructure Investor’s Global Summit, the industry’s premier event, which gathered more than 2,000 delegates last week in Berlin.
It’s a fine tagline, capturing many of the themes that were discussed at the Summit. It’s also a tagline from another world, one that was shattered into a million pieces when Russia launched its war against Ukraine.
On or offstage, there was one issue to rule them all: what will be the impact of Russia’s invasion?
The impacts, of course, will be myriad – impossible to capture in this letter. But there was one theme that came to the forefront over and over, certain to drive infrastructure investment for many years to come: energy security.
In front of a packed audience, legendary political scientist Francis Fukuyama recalled how, “when the Soviet Union fell apart, there was a belief, especially among American economists, that somehow private markets would spontaneously arise once you got rid of the state”. What arose instead were oligarchs, leading Fukuyama to conclude that “you need a state to have private markets. You need a system of law and enforcement of rules.”
Russia’s war on Ukraine is now also forcefully demonstrating that, when it comes to directing markets, the invisible hand is no match for the state’s iron fist.
Does that mean the big themes of the day, like decarbonisation and ESG, are now out the window? Of course not. As Macky Tall, partner and chair of The Carlyle Group’s infrastructure arm, told attendees: “The energy transition is not an option… that terrible war doesn’t change that reality.” Speaking what was on the minds of many, he added: “This current situation will accelerate that already existing strong trend toward renewable energy and other sources.”
Energy security will now play a larger role in shaping how the transition unfolds, at least in the short to medium term.
Take natural gas infrastructure. Many investors had been grappling with the question of whether it fit in their portfolios in the age of ESG and decarbonisation, a theme we discussed at length in our March Deep Dive. Thanks to the energy security agenda, the role the ‘right’ kind of natural gas investments can play is now considerably clearer. That gave many investors a newfound comfort with the sector, which they expressed on the sidelines of the Summit.
Even nuclear – not exactly core for our audience – started to look appealing, with some investors considering Sizewell C’s request for £3 billion ($3.9 billion; €3.6 billion) of equity and up to £15 billion of debt more seriously than they previously would have.
In the same vein, energy security is going to leave its mark on ESG. As Alex Waller, Patrizia’s head of infrastructure debt, pointed out, LPs are likely to challenge managers to do more on ESG in the wake of Russia’s war on Ukraine.
Energy security is also injecting a rough-and-tumble dose of realpolitik into the ESG agenda, posing difficult questions. For example, can ESG investors now stomach defence companies in their portfolios as net-positive contributors to ‘social sustainability’, if their arms will support Ukraine? Those investors willing to do so would seek to remedy a situation caused in part by Europe’s Russian gas dependency – arguably compounded by their own ESG criteria.
Calling out some of its contradictions, Tesla CEO Elon Musk threw down the gauntlet recently, when he tweeted: “ESG rules have been twisted to insanity. ESG should be deleted, if not fixed.”
Megawatt-X managing partner Laurent Segalen, a speaker at the Summit, echoed that sentiment in the 14 March edition of the excellent Redefining Energy Minutes podcast he co-hosts with Alexa Capital co-founder Gerard Reid. And then he took it up a notch, foreshadowing the kinds of discussions that are likely to make ESG purists uncomfortable:
“Or maybe ESG should have a new meaning: Energy Security or Gulag.”