This article is sponsored by Eurazeo
Digital infrastructure can be considered problematic from an environmental perspective because of the energy consumed by data centres, for example. But to what extent is digital infrastructure also positively supporting the energy transition?
Digital infrastructure’s share of total energy use is actually quite small at somewhere between 3 and 4 percent, of which 75 percent comes from manufacturing the equipment. Digital infrastructure is also powered by electricity, meaning the carbon footprint of these assets can be reduced relatively easily through the sourcing of renewable energy; a lot of work is going into improving energy efficiency in the digital space. Perhaps most importantly, however, digital infrastructure plays an essential role in the energy transition.
Take France as an example. In the nineties, there would have been a few hundred energy producers at most. Today, there are tens of thousands. It is very challenging to manage all those energy producers in the same way they were managed when there were only a few. Microgrids are coming online, bringing energy producers together with local users. Data is facilitating that decentralisation process of energy infrastructure management.
Data is also supporting the operation of distributed assets, including storage capacity, flexibility systems and electric vehicle charging points. We have recently invested in an EV charging company in France called Electra. Electra will need to manage several thousand charging points as one single network, and that requires a robust digital overlay. It is a bit like managing myriad telecom towers on a single network. Customers don’t care which tower they are connecting to, but what matters is being provided with the service in a seamless way.
The energy sector is entering a new paradigm where energy will be decentralised, local and decarbonised, and that is being made possible by digital infrastructure.
How is digital infrastructure supporting waste management facilities as well?
The challenge here is to ensure end-to-end tracking of the waste so that you can certify that it has been effectively recycled. Again, digital infrastructure can make that happen.
For example, we have just made a new investment in the first large-scale plastic waste sorting facility in Denmark, called Resource, which will be operational end-2023. It is easy to assume that Denmark has an efficient recycling system – after all, they have seven separate bins per household in certain cities. But the reality is that until the infrastructure and value chain are built, close to 60 percent of the waste is incinerated, more than 25 percent exported (mainly to Germany) and only 15 percent recycled. The country is missing the infrastructure it needs to make use of those different bins and to put the waste back into use through the circular economy. That requires real assets and digitisation.
Why did you take the decision to become an Article 9 fund, and how do you see the outlook for sustainable infrastructure fundraising in light of SFDR?
We devised our investment strategy focused on transition and decarbonisation before we elected to become an Article 9 fund, because of our conviction that, as long-term investors, pursuing sustainable investments and steering away from potential stranded assets is critical. At the same time, we prioritise doing no harm to the ecosystems in which our assets operate, be they water ecosystems, terrestrial or air.
When the time came to choose a classification, Article 9 was therefore a natural fit. The entire taxonomy is built around this issue of sustainability, around reducing carbon emissions and achieving net zero, and on the principle of doing no significant harm, which is entirely aligned with our investment strategy.
In terms of how the industry is likely to evolve in light of this regulation, my view is that investors in real assets that have a direct impact on the environment will have to take that impact into account in their decision making and in their reporting. There will, of course, be transition assets where the phasing out of fossil fuels needs to be managed, be that a gas pipeline or oil storage facility, and there may be funds that specialise in that area.
But going forward, I think the whole industry will move towards Article 9, not least because that is where LP appetite is heading. More and more pension funds, insurers, funds of funds and family offices are actively looking to avoid stranded assets and to invest in what is sustainable. That means the universe of LPs looking to invest in Article 6 and 8 funds is declining.
What opportunities do you see to decarbonise legacy infrastructure assets?
We take a holistic approach to decarbonisation. Achieving net zero is about far more than just energy generation. That has to continue, of course, because Europe is still far too reliant on fossil fuels, but we also need to focus on the decarbonisation of other forms of infrastructure including transport, buildings, industry, water and waste management, and upgrading energy networks.
“When we first started talking to investors about mixing energy and digital assets, we did face some scepticism”
There are a lot of exciting businesses being created to address these challenges. Obviously, the big utility companies are also developing their own networks of charging points, but I am always sceptical about incumbents moving into new sectors because there tends to be a lack of focus and a view to firstly protect their core business. We saw this with the transition of broadband access from copper to fibre. Incumbents like BT are reluctantly developing fibre, but dozens of altnets have emerged across the UK to accelerate this transition and propose fibre access.
Why do you think it makes sense to combine the energy transition and digital transition within a single fund, and how would you describe LP appetite for the opportunity?
When we first started talking to investors about mixing energy and digital assets, we did face some scepticism. Investors would ask why these two seemingly separate strategies should be targeted by the same manager. As time has gone on, however, LPs have started to understand that data networks are essential to the energy transition, allowing for crucial innovation and the provision of more efficient services.
The most sophisticated LPs, those that co-invest or invest directly on their own behalf, in particular, recognise the power of having both digital transition and energy transition assets in the same place. If you only tackle one of these two mega-trends with an investment strategy, you will miss out on the majority of the value created by the other.
What is your approach to measuring and benchmarking environmental objectives? What are some of the challenges involved in this, and how can they be overcome?
We try to keep things simple, both for our investors and for our portfolio companies, because we need them to be on board with our decarbonisation agenda. It is scientifically clear that climate change is primarily the result of rising greenhouse gases in the atmosphere, and particularly CO2. We aim, therefore, to invest in businesses that have a direct impact on reducing that carbon footprint and use external consultancies to measure Scope 1, 2 and 3 carbon emissions.
“Data is facilitating that decentralisation process of energy infrastructure management”
The challenge in all of this is access to quality data. We have invested in a company called Ikaros Solar, for example, a Belgian provider of photovoltaic solutions. At its heart, that business transforms sunlight into electricity, which is a carbon-free process. But then you have to start looking at the amount of carbon that has been embedded to manufacture the solar panels and then transport the solar panels to the site where they are used. That will depend on the energy mix of the country where production takes place, of course, as well as the mode of transportation. This is where there can be challenges around accessing reliable data.
The good news, however, is that the more we seek to gather this type of data, the more accurate it becomes.
To what extent are you taking social objectives into account as well as environmental objectives?
The E in ESG is perhaps the easiest piece to tackle because there is quantitative data that you can report on, particularly around carbon emissions. The S and the G can be more challenging. But the way we approach it is to set minimum standards in a number of areas, including minimum wage, social and health coverage, and diversity. We have detailed ad hoc KPIs that we monitor and then, depending on where the company stands at the point of investment, we look to make material improvements.
How hopeful are you that we can reach net-zero objectives, and what do you see as the role of infrastructure in achieving those goals?
We cannot reach net zero if we don’t act on infrastructure and the way that infrastructure delivers essential services. I do hope and believe that we will get to net zero at some point. But I am concerned about how long it might take. Our current economies have developed on the back of fossil fuels for the past century. Unwinding a century of development may take more than 20 years. Of course, we have to do this as quickly as possible, but we also have to be pragmatic – it may take longer than we would ideally like.
The good news is that we have the financial resources and the proven technologies that we need. The question now is how do we build the regulatory framework required to ensure the effective deployment of capital to support the continued decarbonisation of our societies.