This article is sponsored by Macquarie Infrastructure and Real Assets
Macquarie Infrastructure and Real Assets has been investing in infrastructure since the dawn of the asset class. What are the most significant changes you have witnessed in the past 10 years?
The biggest change has been the sheer scale of growth that the infrastructure asset class has experienced.
There is significantly more equity under management in the sector today than there was a decade ago.
At MIRA, alone, we have doubled our equity under management in the past
10 years. And that growth shows little signs of slowing with many institutional investors indicating that they are planning to increase their allocations.
Looking ahead to the next decade, what dominant themes do you think will shape investment opportunities?
There are several pronounced macroeconomic trends that are shaping society’s infrastructure demands. Firstly, the requirement for replacing ageing infrastructure around the world is enormous. Then, we have increasing demands placed by growing populations, and in particular, growing urban populations. More than half the world currently live within urban areas and 1.5 million people are added to that urban population each week. A staggering 90 percent of that growth takes place in Africa and Asia. That has huge ramifications for the infrastructure required, and represents a major opportunity. Obviously, climate change and broader environmental concerns are also creating opportunities as the need for energy transition becomes ever more apparent.
And, finally, rapid technological advancement is impacting the asset class. Technologies such as smart metering are opening up new service channels, for example, while technology around the Internet of Things can support predictive maintenance capabilities.
Elsewhere, technology is giving rise to whole new sub-sectors of infrastructure investment altogether.
Another critical theme that has come of age over the past 10 years is the role of sustainability. Why is this so important?
Infrastructure is a long-term asset class and requires a responsible, long-term investment approach. All the sectors we invest in touch people’s lives on a day-to-day basis and we have an important role to play with respect to communities and to the environment. Ultimately, we are custodians and we need to create strong, sustainable infrastructure businesses that can be relied upon by the customers they serve.
“There is still variability among investors but, for most, ESG has now progressed beyond a box-ticking exercise. It is fundamental to decision-making and analysis of a firm’s investment strategy”
What role do you think private capital will play?
There is undoubtedly a growing gap between what countries spend on infrastructure and what is required. Estimates vary between $5 trillion and $15 trillion over the next 15-20 years. At the same time, of course, government spending has been declining as a percentage of GDP for decades. The private sector, by contrast, has an estimated $1 trillion ready to deploy. The role that responsible private sector participants have to play in filling this infrastructure gap is unquestionable.
Is it primarily the underlying fund investors that are driving this focus on ESG?
Our investors are often pension funds and sovereign wealth funds who need to represent the values and perspectives of the millions of savers they represent, so ESG is certainly high on their agenda. Investors also increasingly recognise that not only is it the right thing to do, but robust ESG credentials underpin strong investment performance over the long-term. There is still variability among investors but, for most, ESG has now progressed beyond a box-ticking exercise.
But it isn’t only LPs that are driving this growing emphasis on ESG. Other stakeholders, and particularly governments, want to make sure the investors buying assets are responsible long-term investors who will leave those assets in a better condition than they found them. It really comes back to having that social licence to operate.
Interestingly, our employees are also a major driver. Our people want to feel they are doing genuine good when they come to work. That is also a really important motivator for us as a business.
What would you say to those who argue that ESG doesn’t always correlate to good returns?
As well as there being an ethical imperative to ESG, we believe it is central to long-term value creation. We are often invested in businesses for well over 10 years, so it is vital we understand all financial – and non-financial – factors that can influence investment performance. Resource efficiency measures can materially help reduce operational costs, for example, while diversifying revenue streams away from conventional energy will protect long-term asset value.
“As well as there being an ethical imperative to ESG; we believe it is central to long-term value creation. We are often invested in businesses for well over 10 years and so it is vital we understand all financial – and non-financial – factors that can influence investment performance”
What does environmental best practice mean for an infrastructure investor?
When it comes to the environment, resilience, efficiency and the transition to a low carbon economy are the key components. Resilience is all about understanding how a changing climate may impact the future operations and performance of an asset. MIRA is invested in a geothermal power producer in the Philippines, for example, which is investing in measures to mitigate extreme weather and seismic risks, including the reconfiguration of pipelines, reinforced cooling towers, geo-hazard early warning devices and modelling of landslide and slope risks. And at Australian electricity distribution company Endeavour Energy, we’re exploring the application of geospatial analysis to light detection and ranging data of vegetation near its transmission lines, alerting the risk of vegetation encroachment and reducing the risk of bushfires.
Efficiency is all about reducing an asset’s impact on the environment, including measures focused on energy and water consumption. For example, at Brussels Airport, all new buildings now include rooftop solar generation and above-standard insulation, which resulted in an 11 percent decrease in energy consumption against a 44 percent increase in passenger growth over the same period. At Techem, we invested €1 billion in the formulation of new energy-efficient product lines, resulting in new revenue streams and 6.9 million tonnes in CO2 savings each year.
The final component of the ‘E’ in ESG is about investing in a low-carbon future. For example, investing in energy efficiency, increasing a portfolio’s exposure to renewables or minimising its direct and indirect exposure to assets that derive revenues from conventional energy.
Has there now been a shift in emphasis to wider social issues as well?
Yes, there definitely has been. While the environment has traditionally received the most attention, investors are increasingly aware of how they can help drive improvements through social and governance measures. Health and safety, for example, is critical, with training and enforcement fundamental to operational performance. We work with around 120,000 employees and contractors across our investment portfolio, so this is an absolute priority.
At Elenia, a Finnish power grid company, for instance, rewards were introduced into the safety incident reporting system, incentivising staff and external contractors to report incidents. Safety for customers is also important.
With our Indian roads portfolio, we have installed solar powered lighting at key access streets, intersections and communities along a 58km stretch of highway – aiming to reduce the risk of road traffic accidents and improving the safety of the community using these roads.
We also should not forget the real and growing focus on diversity and inclusion policies – we firmly believe that a diverse workforce brings many benefits, including a positive impact on business performance.
To what extent are there regional differences in the approach to ESG?
There are definite regional variations in maturity when it comes to ESG practices and that is reflected in the number of requests we receive for more detailed disclosures and reporting.
In Europe, ESG awareness is very mature, with a strong focus on the environment and climate change. In the US, it is also relatively mature, but with a greater emphasis on workers’ rights, conditions and safety.
In Australia, both areas are key, while in Asia, ESG is still a relatively immature theme but is growing in focus, particularly around corruption, bribery and workplace safety.
Martin Stanley is head of Macquarie Asset Management and a member of Macquarie Group’s executive committee. He leads a team of approximately 1,700 people in more than 30 markets, managing more than $385 billion on behalf of investors.
MIRA recently announced its ambition to become the world’s leading sustainable real asset manager. Why have you made that move and what does it mean in practice?
Focusing on sustainability is no longer a choice, it’s a necessity. As the world’s largest infrastructure manager, we have a responsibility to our investors and the assets we manage to ensure that we are building highly valued, sustainable businesses that support the communities in which they operate.
Practically speaking we want to embed sustainability across everything we do – from the investment decisions we make, to how we approach asset management, to how we measure and disclose our impact as well as looking at how we can create product offerings to meet investors’ sustainability needs.
We want to be ambitious in this area. We know we have a long way to go – but I’m sure we won’t be alone on this journey as we embrace the challenges and opportunities ahead of us.