The right balance

Over the years, focusing on sustainability and adhering to ESG principles have become important aspects of private investing, particularly in infrastructure. The incredible pressure placed on the environment and the resources it offers has driven the need for more responsible investment across the board and firms like EQT are taking the lead in demonstrating how investments can be made sustainably without compromising on returns.

The Nordic region is one of the most important geographies for EQT Infrastructure in terms of capital invested and investment advisory professionals, with 10 members of its team based in the Nordics. “The whole idea has been to have an investment advisory team with a local presence and local experience in infrastructure investing,” explains Masoud Homayoun, partner at investment advisor EQT Partners, who leads the infrastructure team in the Nordics. EQT also has a network of around 250 independent industrial advisors who are established business leaders and experts with experience from different industries and regions from around the world.

Homayoun says having a team entrenched locally is a big advantage – a necessity even – for a manager focused on identifying proprietary investment opportunities. “The overarching strategy for EQT Infrastructure is to invest in good, operational infrastructure companies and then to develop them into great, sustainable companies,” he stresses.

Sustainability is key for EQT. It fits right into EQT Infrastructure’s investment strategy, which is based on identifying long-term trends within certain sectors and then searching for good, operational infrastructure companies within those sectors. EQT Infrastructure is focused on energy, transportation & logistics, environmental services, telecommunications and social infrastructure.

It is precisely because EQT places such a strong focus on long-term trends that it needs a sustainable investment strategy. “In our view, right now there is an unprecedented change in several infrastructure sectors globally. That’s the result of sustainability ambitions, technological changes, demographic changes and the like,” Homayoun says.

These factors are pressuring companies to become greener and more efficient, and those that do, will prosper, he adds.

According to Homayoun, many of these long-term trends are having significant implications in the Nordic markets. “If you take the energy sector, you have traditional utilities that are struggling as generation, storage, transmission and distribution of energy are evolving quite rapidly, with a clear shift to sustainable solutions,” he offers.

Transportation is another sector in which “we see an increased flow of goods and people and there is also a clear shift toward more sustainable transport solutions – for example, the increased focus on rail”.

These trends are having a very practical impact on dealflow. In the energy sector, for instance, EQT Infrastructure owned Adven, a provider of energy infrastructure in Finland, Sweden and Estonia, between 2012 and January 2016. EQT Infrastructure saw growth potential in the company, particularly in supporting its transition from fossil fuels to biofuels. In fact, under its ownership, the company became markedly more sustainable, witnessing a decrease in CO2 emissions by more than 35 percent, which helped reduce its own and its customers’ carbon footprint. The company also saw a 50 percent increase in employment.

Another area, where EQT Infrastructure is invested, is environmental services. One of the companies that it has invested in is NORD, which it acquired in 2010 and exited in 2015. NORD owns the largest facility for taking care of hazardous materials and waste in Denmark, which it incinerates and detoxifies, supplying district heating and electricity to the local district heating network and electricity grid.

But EQT Infrastructure’s embrace of sustainability goes beyond capitalising on the dealflow created by some of these ongoing long-term sectoral shifts.

Anna Sundell, director at investment advisor EQT Partners in Stockholm, says that in the infrastructure sector in particular, factors such as health, safety and environmental performance are key in the due diligence process. “As these factors are critical to the nature of the business, we work closely with the portfolio companies to ensure attention remains on these issues also during the ownership period,” she adds. One example of this is EQT Infrastructure’s investment in Hector Rail. (See Case Study: Hector Rail).

“Sustainability is a fully integrated part of EQT’s business,” Sundell concludes. “So we don’t look at it separately, but as part of the entire investment process, from sourcing, acquisition, and throughout the ownership period.”

She elaborates: “When EQT evaluates an investment opportunity we are guided by a responsible ownership approach and industrial growth strategy. This implies that we always assess how to continue to create value and build companies well positioned for the future.”

EQT also has a dedicated responsible investment team, which comprises individuals who help the firm integrate ESG into both the investment process and the ownership, and whose expertise is tapped into when needed. In implementing sustainability initiatives, the teams work closely together.

That is not to say it has all been plain sailing when it comes to implementing the firm’s ESG strategy. According to Homayoun, one of the key challenges has been adhering to ESG principles and pushing for greater sustainability when times are not so good.

“We strongly believe that sustainability is good for businesses in general. Sometimes, when the cost focus becomes predominant, sustainability tends to become less prioritised. In such situations, EQT as an owner stimulates long-term thinking and ensures that decision making has a longer perspective. We want the companies to also continue to grow after EQT’s ownership.”

And then there are those instances where companies and their management need to be educated about ESG principles and the need for sustainability. “I think the level of understanding varies a lot,” Homayoun says, adding that in certain companies in certain sectors, awareness is a lot higher.

“Despite that, I would say that we really try to identify companies – regardless of sector – that have a greater awareness, as we think those companies will make for good investment opportunities.” It is a view that elegantly summarises EQT Infrastructure’s investment approach – that a focus on sustainability goes hand-in-hand with superior returns.