The infrastructure asset class has no shortage of inherently sustainable options for fund managers to evaluate, from renewable energy platforms to battery storage and the entire ecosystem around electric vehicles. Looking forward, if the industry is to have a substantial impact on reducing carbon emissions and slowing global warming, advancing sustainability will need to do far more than build green assets and alternative power systems.
Net-zero-adjacent verticals gaining particular traction in the asset class include ‘greening’ power-hungry data centres, reducing the carbon footprint of infrastructure project construction, measuring the sustainability of supply chains and developing decarbonisation technologies that can be applied across sectors.
Tax credit potential for every metric ton of CO2 sequestered by US companies, which the IRA has boosted from $50
Year by which the IEA says carbon emissions from data centres need to halve in order to comply with its Net Zero Scenario.
Today, sustainability is a key consideration for individuals and businesses everywhere. Across the entire industry, demand from LPs for ESG transparency, reporting and improvement will prevail for as long as the threat of climate change looms large, meaning fund managers are faced with little choice but to factor sustainability into their portfolios.
There is a return imperative here, too, with plenty of research indicating that investing in sustainable assets provides returns above the market average. They also offer impressive levels of longevity: financial services firm Morningstar found that 77 percent of ESG funds that emerged 10 years ago have persisted, compared with just 46 percent of conventional funds.
Will a particular asset continue to perform well if the planet warms further? What is its value likely to be in five or 10 years’ time? As the industry mobilises against climate change and environmental, social and governance issues will be top of mind. Fund managers may remain cognisant of investment risk, but there is no shortage of appetite for opportunities.
Tapping into CCS
Asset managers see long-term promise in carbon capture and storage technologies
Although transitioning to a world powered by low-carbon sources may be the ultimate aim, it is an undeniable truth that much of the global economy relies on fossil fuels, and probably will do for some time yet. As such, there is a great deal of excitement around carbon capture and storage (CCS) technologies that can remove CO2 from industrial processes before transporting it for long-term sequestration.
Many asset management firms have identified CCS as a worthwhile investment. Brookfield’s Global Transition Fund, for example, announced a joint venture with California Resource Corporation this year, alongside an initial $500 million investment. Although a significant amount of capital will be required to scale this technology, financial backing from fund managers is not hard to find. But there are barriers to investment.
“CCS is not new,” says Ivan Rodriguez, sustainability director at Bridges Fund Management. “It [has] been a viable approach to building developments for a long time – partly because it is a broad umbrella term for a multitude of different methods, from sustainable timber frames and cross-laminated timber (which have stored carbon during their lifetime) to green roofs, onsite trees and plants, recycled concrete and other more modern carbon storage methods, and bio-based materials. The number of technological advances in this area is encouraging. However, the industry is still lacking clear regulation on this topic.”
Political developments do suggest that CCS will form part of sustainability programmes going forward, however. Prior to the recent Inflation Reduction Act, in the US, the 45Q tax credit meant CCS companies could earn up to $50 for every metric ton of CO2 sequestered, whereas the IRA has boosted this to $85. Such provisions should move the technology closer to realising its full potential.
Monitoring ESG in the supply chain
In this globalised world, measuring sustainability in extensive supply chains is vital
Evaluating ESG performance may be hard enough when assessing the sustainability of a single company, but it becomes much more difficult when entire supply chains are being monitored. These may stretch for thousands of miles and provide insufficient access to robust, reliable data.
“In our view, tackling sustainability in the supply chain is a challenging step in a manager’s ESG improvement plan,” Valeria Rosati, senior partner at Vantage Infrastructure, told Infrastructure Investor. “The diversified, multi-layered and transnational structure of most infrastructure companies’ supplier webs can appear such a roadblock that one of two things tend to happen: managers and investments either focus on basic issues for box-ticking purposes or relegate the entire topic to tomorrow’s to-do list.”
Beyond the compliance risk of not considering ESG at all levels of an investment, improving sustainability in the supply chain could have other benefits. Increasingly, fund managers will leverage supply-chain ESG management to underpin reputational longevity, improve the risk profiles of investments and boost valuations at exit. We are therefore likely to see more attention being focused on this area.
The UN Principles for Responsible Investment has issued guidelines on how companies can engage with ESG supply-chain risk. The incentive to do so may strengthen over time. “Ignoring ESG risks in value chains can be a costly blind spot for managers, whereas addressing this area systematically should prove a worthwhile investment in the long run,” explained Rosati.
Tackling the industry labelled the world’s top consumer of raw materials and a huge source of CO2 emissions is no mean feat, but momentum is building
The carbon footprint of real assets projects is perhaps the main reason why some continue to question the sustainability credentials of assets in this field. Construction is the world’s largest consumer of raw materials, using three billion tonnes of them to manufacture building products around the world every year, according to the World Economic Forum.
However, work is underway to improve the construction industry’s green credentials. A movement towards the greater use of low-carbon materials and recycling, where possible, is gathering pace.
“Regulating, targeting, measuring and monitoring both operational and embodied emissions is needed to minimise the impact of construction, not only for new developments but for standing assets that go through any scale of refurbishment and retrofit,” says Chris Bennett, co-founder and managing director of sustainability services company EVORA Global.
“Regulating, targeting, measuring and monitoring both operational and embodied emissions is needed to minimise the impact of construction”
“We face a risk of inaction due to the lack of standardisation, as regulations are still catching up with voluntary frameworks, best practices and technological improvements.”
As Bennett says, more work needs to be done in terms of retrofitting existing constructions to enhance their sustainability. Green retrofitting strategies that enable continued development and enhancement of much-needed infrastructure projects are being pursued – but managers are also working hard to improve the ESG performance of greenfield projects.
Detailed, early risk assessment can make greenfield investments highly attractive. Emerging markets, in particular, represent a significant opportunity for investors, especially where public-private funding structures can be identified, alongside potential areas for collaboration in terms of risk mitigation. This is helping fund managers overcome market barriers to scaling investment and meeting net-zero objectives.
“Decarbonising construction requires a common vision between investors, developers and designers at the forefront of decisions at building level as well as policymakers, industry organisations and material manufacturers providing support and direction at a higher level and through the supply chain,” adds Bennett.
As the decarbonisation movement gathers momentum, fund managers’ remits will likely broaden. In addition to greenhouse gas emissions, they may target other areas where construction has traditionally been associated with negative environmental impacts, such as waste, water consumption and air pollution. It will not be easy for the construction sector to clean up its act, but maintaining the status quo is not an option. The world’s construction needs remain great, but the sustainability agenda is equally important.
Greening data centres
As demand for data grows exponentially, increasing the sustainability of data centres is a priority for many digital infra investors
Digital services make the modern world go round. And digital services rely on data centres. We are generating more and more data every day and this needs to be managed and stored, usually on servers that require continuous cooling to maintain their functionality.
It is little surprise, therefore, that the data centre industry represented 0.9-1.3 percent of global electricity demand in 2021, according to the International Energy Agency. Although greenhouse gas emissions from data centres have grown relatively little in the past decade, the IEA says they must halve by 2030 in line with its Net Zero Scenario.
There is now a concerted effort to reduce the environmental impact of data centres around the world. By 2030, Google plans to use 100 percent carbon-free energy in its data centres. Earlier this year, Quinbrook Infrastructure Partners launched a $1.68 billion green data storage project in Queensland, Australia.
“In some of our locations where we are investing or where our assets are located, we can offer green sources of power to our tenants”
“The increased specialisation that Quinbrook is embarking upon is looking at areas of industry that are needing to shift to renewable energy as part of their net-zero power plans and also as part of their forward procurement needs to power energy-intensive industry in the case of data centres,” David Scaysbrook, Quinbrook’s co-founder and managing partner, told Infrastructure Investor earlier this year.
As well as harnessing renewable energy sources, data centre projects are also exploring innovative cooling techniques to minimise their carbon footprint. Cooling can contribute as much as 40 percent to a data centre’s total energy consumption, according to the European Commission, but the use of newer technologies that can withstand higher temperatures can lower this figure significantly.
Creating entire lifecycle assessments when data centre projects are incepted will help the industry play its part within the circular economy. This could involve the use of remanufactured, refurbished or used equipment as an alternative to buying new technologies, as well as working with vendors and organisations that promote circular initiatives. Location is also important.
“In some of our locations where we are investing or where our assets are located, we can offer green sources of power to our tenants who care a lot about the sources of power,” Jennifer Gandin, an investment principal at CIM Group, told Infrastructure Investor.
Wherever a data centre is located, there are likely to be untapped green opportunities. It is up to fund managers to ensure that their assets continue to increase in value by not only meeting customers’ data demands, but also investors’ sustainability objectives.