Kommunalkredit: Sustainability is key to future-proofing society

This article is sponsored by Kommunalkredit Austria AG.

The industry shift towards green financing has been decisive in recent years, even against the backdrop of a war in Europe and fears of a global recession. Debt fundraising and transactions have noticeably targeted the energy transition and, if anything, the return of energy security concerns and resource nationalism have accelerated many of those trends. 

The pandemic has also highlighted the critical importance of social infrastructure and opportunities for financial institutions to raise quality of life. Populations are getting older, and nations will soon have to contend with the associated social and economic implications of this shifting demographic. Bernd Fislage, CEO at Kommunalkredit Austria AG, a specialist for infrastructure and energy financing, explains why it is an exciting time to be part of the Venn diagram of social infrastructure and sustainable green financing. 

How has infrastructure financing changed over recent years?

When the pandemic first broke out, the assumption was that infrastructure would nosedive, whereas actually it dropped only about 10 percent. In 2021, the pandemic and supply chain disruption persisted and inflation started to creep up, yet the European infrastructure market still grew to €300 billion. 

In 2022, we saw geopolitical crises like the Russian war in Ukraine and hostilities in the South China Sea. But despite these geopolitical tensions, which effectively triggered rising global energy prices and fuelled inflation further – plus central banks were slow to raise interest rates – the market grew by another 20 percent to €360 billion. 

Monetary policy must be tightened further to achieve a lasting reduction in inflation. Rising liquidity costs, a difficult capital market environment and the resulting lower issuing activity of financial institutions need to be addressed. Fiscal policy measures must cushion the immediate effect of the higher cost of living on consumers and businesses, energy consumption must be reduced and the security of energy supply increased.

Infrastructure is the backbone of society. It is the glue that binds economic dynamism and social responsibility. From here in Vienna, 500km away to the east a war is being waged in Europe. There was a great British prime minister that once said, “never let a good crisis go to waste”, and I totally agree; we need to use the crisis to invest and I think that is what we are seeing today. 

What is the role of infrastructure investments in meeting sustainability and social needs?

Infrastructure is by its very nature essential to the efficient functioning of society. It has significant impact on economic growth at local, regional, national and global levels. Demand and need for infrastructure is – and will also keep – increasing due to mega-trends such as digitalisation, decarbonisation, e-mobility and the ever-ageing population. 

Health and population ageing is another big topic. Before the pandemic, the last penicillin production in the Western hemisphere, which is located in Tyrol, Austria, was about to be shut down because it was no longer competitive with Asia. Politicians have since woken up, because in the context of political risks we cannot have China as the sole production home. 

Again, never let a good crisis go to waste. Politicians mobilised capital to save that production site and I am convinced we will see other production sites of similar scale and nature emerge. 

Another aspect worth considering is people’s rights, because while we love green energy from the sea, we do not like a transmission line crossing the countryside or a windmill blocking the blue sky or rooftop solar as opposed to conventional rooftops. 

We need to ask ourselves how far should this go? Germany is heavily dependent on low-cost Russian gas but refused an LNG terminal for 15 if not 20 years. But against the backdrop of the current energy crisis, a terminal was erected in Wilhelmshaven in under a year. Many motorways in Germany are also in poor condition and there is heavy debate in parliament about the acceleration law to implement infrastructure. 

How can impact goals be balanced against profitability?

Working in the financial industry, you cannot be entirely altruistic. And when you consider the financial crisis, and the irresponsible acting that was bailed out by the taxpayer, banking is rightly advised to be humble. 

At the same time, the world is changing. Sustainable infrastructure is a business model that is future orientated and adapting to the environment almost like a chameleon. You need to evolve in Darwinian fashion. It is about being mindful of how we preserve the planet, and I believe that profitability and sustainability are two sides of the same coin. 

The energy transition is also accelerating and fuelling a lot of money into decarbonisation. For us, that means financing activities like renewable energy, hydrogen and innovative technologies. We invest to improve the quality of people’s lives. 

I mentioned hydrogen. While there is currently no market for pricing hydrogen, you need to take risks sometimes. 

What is the role of debt finance in the infrastructure space?

If debt was not available, a lot of investments would not move beyond the start-up phase. The other point is that interest rates have gone from negative or 0 percent less than a year ago to somewhere between 3 and 4 percent. And in the US, it is even higher on a refinancing basis. 

Suddenly, big investments have gone from 1.5 or maybe 2 percent to 6 or even 7 percent, so clearly the cost of debt is pressuring investment. You need to look at the transactions that are not just nice to have but where there are no obvious alternatives. Transactions that need to be done and cannot wait. What are we going to do because Russian gas is gone? We cannot afford to deindustrialise. 

From that perspective, debt plays an important role and will always play an important role. I think it is good that debt is costing money. You have Greta Thunberg for the younger generation advocating for decarbonisation, but where is the Greta Thunberg of financing? To some degree, the negative cost of interest pressed down on the middle class and from that perspective we are in a good territory now that cost of debt is higher. 

With the macroeconomic picture very uncertain, how will the infrastructure debt space evolve this year?

We had a heavy debate at the end of last year about whether we would go into a recession. I was always convinced that investments would come out at higher cost and growth would go down, but we would not dive into a deep recession. That seems to be the consensus from the second week of January. 

People will continue to raise interest rates and I think this will take place until some point in the summer. The future is never going to be exactly the same as looking at historical trends, but when you consider the interest rate curve, I think they will peak in the second quarter. There will be stabilisation and I would not be surprised if as early as the fourth quarter central banks are trying to reduce interest rates because they have had to overdo it a little after doing nothing for two or three years. 

Infrastructure will also become even more of a focal point in the future, not just as an asset class, but as a major factor for preventing new epidemics and economic collapse, as well as for modernising and realising other agendas such as digitalisation and the European Green Deal.

What are some examples from your portfolio that illustrate your focus on decarbonisation? 

Firstly, there is the green hydrogen project that will be Austria’s largest electrolysis plant and built on the site of the Schwechat refinery. Construction started in August, and from the third quarter will produce up to 1,500 tonnes of green hydrogen per year.

This will prevent up to 15,000 tonnes of CO2 being emitted into the atmosphere every year, the equivalent of around 17 million buses driven per year taken off the streets. Hydrogen is set to play a central role in attaining climate targets and, as a result, has great potential for the future.

Another project worth highlighting is the construction and acquisition of a 146.4MW onshore wind farm in central Sweden, providing clean energy to 46,000 households. What was interesting about that project was that debt funding was structured in accordance with Long Market Association’s Green Loan Principles, refinancing through a green bond.

Finally, the transaction of roof-mounted and ground-mounted photovoltaic in Italy. This investment will expand the capacity of more than 280 PV systems to around 500MW by the end of 2024. We will probably top up that investment in 2023, and we are contemplating substituting some of the equity for mezzanine, so that the equity could be freed up and spur further investment. This is an example of an innovative approach to sustainable green financing, an important goal for an institution of our size.