Vauban: The transition ‘spans every vertical’

This article is sponsored by Vauban

The energy transition has historically been seen as a process of greening energy generation. However, it is now better understood that a true transition necessitates the decarbonisation of every infrastructure vertical.

Far from being a problem, Mounir Corm, deputy CEO and founding partner of Vauban Infrastructure Partners, sees this as a distinct opportunity. Decarbonisation can serve as a strong value-creation tool, not just in energy generation, but beyond.

Wind and solar power generation have previously dominated the energy transition investment universe. But where else do you see interesting opportunities today?

Most people still overwhelmingly think about the energy transition in terms of electricity generation. In reality, in order for the world to meet its climate objectives, there is a huge amount of work required right across the infrastructure spectrum.

The energy transition relates not only to the entire energy production value chain, but also to the entire energy consumption value chain. In fact, the whole economy needs to be decarbonised.

We have made a significant number of investments in the district heating space over the years, in Spain, Italy, Norway, North America and France. We have also invested in waste-to-energy solutions and in energy efficiency with smart meters. So, you can see, for us, the energy transition spans every vertical within infrastructure.

This is why, at Vauban, we have also viewed the energy transition, not as an isolated sector, but as something that impacts every sector. We think about the energy transition when we invest in mobility, in digital infrastructure and even in social infrastructure. Each of these sectors presents its own energy transition investment opportunities.

How do these other infrastructure sectors fit into the energy transition thesis?

Mobility is clearly a sector that contributes significantly to global emissions today. We are supporting the energy transition in this space, in particular through the transition of freight movement from road to rail. We have done this through the establishment of one of the leading freight railcar leasing businesses in Europe, Wascosa Holding, which boasts a fleet of around 20,000 railcars in over 20 countries.

Meanwhile, in the digital infrastructure space, we are invested in a data centre business in Iceland that is exclusively powered by green energy sources. It is also extremely energy efficient, with one of the lowest power usage effectiveness ratios in the industry.

What are some of the other ways in which the energy transition plays a role in your asset management approach?

There is a wealth of opportunities to improve assets through energy transition initiatives and we frequently deploy capex with the objective of enhancing the carbon efficiency of the businesses that we back, thereby adding significant long-term value for all stakeholders.

For example, we acquired a portfolio of eight district heating and cooling systems in the US early in 2022. The platform supplies 190 buildings across the education, healthcare, government and retail sectors and, at the point of acquisition, the majority of the energy came from non-renewable sources. We are now actively working on a decarbonisation plan that should involve 10 years of capex in order to improve the energy efficiency of the networks, most notably through the use of renewable gas.

This kind of approach reinforces the long-term value of assets for our investors, while diminishing transition risk. It also creates value for other stakeholders including users and public sector counterparties.

Another good example of the incorporation of energy transition plans into asset management involves Indigo, our car parking and local mobility platform. We have taken a number of steps to enhance the car parks from a carbon emissions perspective, first and foremost with a target for reaching net zero on Scope 1 and 2 emissions by 2025, and we are already well advanced in reaching that goal.

We have also implemented a plan to deploy more than 10,000 EV charging stations within the car parks to support the electrification of the mobility sector, thereby tackling Scope 3 emissions as well. Last but not least, we are contributing to develop the concept of ‘circular infrastructure’ by refurbishing the first floor of the car parks to support last-mile logistics and providing cycling solutions for last-mile mobility.

Presumably, then, you see a direct correlation between the effective transitioning of the assets you own and the returns you can achieve on exit?

Absolutely. We believe that transitioning assets has a positive effect on exit in two ways. First, by acknowledging the negative impacts of climate change and taking steps to mitigate that through both asset selection and asset management, you are avoiding the risk of having stranded assets in your portfolio in 10 years’ time.

You can also enhance EBITDA through the deployment of energy transition initiatives. For example, we own a regulated utility in the Nordic region where we are adding green sources of energy to the network. That is enhancing long-term capital appreciation for the company.

When we incorporate EV charging slots and last-mile logistics facilities in our car parks, that will result in additional value for those assets. And when we decarbonise our district heating networks, resulting in additional years of contracts with counterparties, that is adding financial and stakeholder value as well. The energy transition is undeniably a very strong source of value creation and will result in superior returns and yields over the long term.

How are investor attitudes evolving towards the energy transition?

Many institutional investors are facing strong pressure from their own stakeholders to invest in energy transition-related investments, but it does still vary slightly from region to region. In Europe, a laser focus on the energy transition is now a must for any GP looking to raise institutional capital.

All European LPs expect to be investing in carbon-free or energy transition-friendly assets. I would say, however, that this sometimes results in too narrow a focus on renewables, leading to bubbles as prices are pushed up. That is why we have a far broader definition of the energy transition, incorporating a wider array of investment opportunities and tackling decarbonisation across all infrastructure sectors.

The situation in the US is a little different because of the divide among institutional investors. Many are keen to support sustainable investment in infrastructure but others are putting pressure on GPs not to exclude fossil fuel assets.

In Asia, meanwhile, the energy transition is becoming more of a priority after receiving little focus in the past. Europe is leading by example, however, supported by sustainability regulation such as SFDR, which is helping to pinpoint which funds within the infrastructure space are genuinely contributing to the energy transition, albeit that further clarification is needed in some areas to avoid greenwashing.

How is the new macroeconomic environment impacting energy transition?

The current macroeconomic and geopolitical environment is creating both risks and opportunities in terms of the energy transition agenda. High levels of inflation are clearly impacting capex and there are pervasive questions around the cost of the energy transition in that context. But overall, I believe the opportunities are greater than the risks.

The macroenvironment, coupled with war in Ukraine, has led to a dramatic increase in the cost of fossil fuels, as well, of course, as concerns around energy security. This in turn means that energy transition capex is becoming more affordable on a relative basis and increasingly makes sense.

The decarbonisation of district heating represents a fantastic opportunity today, for example, given the extremely high cost of gas. In this sense, the macroeconomic and geopolitical situation is acting as an accelerator of decarbonisation because governments and other stakeholders understand that this is not only the right thing to do from a climate perspective but that it makes sense from an economic perspective as well.

Indeed, there is no doubt at all that in order to create a resilient and sustainable society, a massive amount of investment into the energy transition will be required over the next few decades. The OECD predicts that at least $7 trillion will be needed in the next 30 years to reach Paris Agreement goals. I firmly believe, therefore, that the energy transition will remain the primary area of infrastructure investment focus for a very long time to come.

Are there energy efficiency investment opportunities you would deem too risky today but that you are keeping an eye on with a view to the future?

The energy transition space offers opportunities at every point on the risk/reward spectrum. You can make venture capital investments in innovative tech solutions supporting decarbonisation or you can invest in greenfield value-add projects predicated on capex and scaling up. But there are also myriad opportunities in the core space involving regulated assets.

I would add that there are situations where we wouldn’t invest in a particular subsector directly due to the risk/reward dynamics, but we do invest in that sector through our portfolio companies. For example, we do not invest in EV charging companies because we do not deem the risk/reward profile to be core, but we do invest in EV charging solutions as part of our asset management of existing portfolio companies. That is one of the ways in which we add value to core assets without taking the same risk.