What is the premier impact investment in infrastructure? We’d hazard most infrastructure investors, when confronted with that question, would come back with a one-word answer: renewables. Yet the renewables build-out that has taken the world by storm had almost nothing to do with traditional impact investors.
This seemingly paradoxical statement illustrates a valuable point – that infrastructure can be a highly impactful form of investment even if the people investing in it are not necessarily committed impact investors.
“It was a bunch of financial engineers that in 2001-03 changed the way the US renewable energy industry could be financed,” Equilibrium Capital chairman Dave Chen told us last month. “There was no impact investor in the room. There was a bunch of financial engineers that said: ‘Look, I have ITCs and PTCs that are tax credits; I have developers that don’t have profits so they can’t take advantage of the tax credits; I have IRS codes; I have investors with tax appetite – how do we use that to our advantage and re-align the interests so that we can actually take what is a marginal IRR and turn it into a mid-teens or high-teens IRR? That’s what sparked the industry.”
The end result, as Chen pointed out, was that only about $1 billion of the $300 billion to $400 billion committed to American wind and solar over the last 16-17 years came from impact investors.
On the face of it, impact and infrastructure investing should be natural bedfellows, considering that almost every infrastructure investment will have some kindof impact on the communities where it will be located. The real question is whether the people designing and making those infrastructure investments are thinking about what that impact will be and adjusting their strategies to make sure it's as positive as possible.
What we found with our impact investing In Focus, published in the May issue of Infrastructure Investor, was twofold. One, that the people investing in infrastructure are increasingly aware of the impact their investments will have on their surroundings and are working to make sure those impacts are beneficial; and two, that investors looking to allocate funds to impact investments are increasingly seeing infrastructure as a means to an end. As Linda Broekhuizen, chief investment officer at Dutch development bank FMO, highlighted: “One-third of the food that is produced in Africa doesn’t reach people because there’s no infrastructure to transport it.”
Both are positive developments. As Chen put it: “Until very recently, the conversation around impact investing actually centred on microfinance and social venture capital – it did not include infrastructure. That’s a relatively recent addition.” They are also interwoven, in that, to use Broekhuizen’s example, for a road in Africa to maximise impact it would have to be designed and constructed to a certain standard and take into account other factors (the environment, land expropriations, etc) in addition to the beneficial impact of transporting food to a starving region.
Impax Asset Management’s David Richardson made a similar point when he explained that his firm does not automatically assume that it is making a positive impact just because it is investing in a renewable project – it also looks at how much CO2 a project is cutting, what is the power source it is offsetting and whether it has any adverse impacts on wildlife, for example.
What the renewables example drives home, though, is how the right conditions – the right alignment of interests – can transform infrastructure into a highly impactful investment. As Chen argued, the more interesting conversation in impact investment today is: “How is the market used and how are the tools used to create intentional impact?” Designed well and backed by thoughtful policy-making, infrastructure can play an important role in that conversation.
Write to the author at firstname.lastname@example.org