The Importance of Infrastructure in the Transition to Low Carbon
Part One: The Urgent Need to act Now and the Role of Infrastructure
From an investment perspective, infrastructure assets have many appealing characteristics. They provide investors with a solid yield and capital returns, underpinned by defensive and stable cash flows, as well as inflation protection and downside protection in negative markets. At the same time, global warming, which has been dubbed “the challenge of our lifetime”1, is reshaping the industries which generate or facilitate greenhouse gas (GHG) emissions. Serious changes need to be made in the coming decades. For example, electricity and heating must shift entirely away from fossil fuels, and transport must shift to fully electric or green fuels. Importantly for investors, the sectors impacted most by climate change and our response to it make up a large part of the investible infrastructure universe, and so infrastructure is at the forefront of these required changes. Along with the adaptation burden, however, genuine investment opportunities arise.
To protect against capital losses from the imminent and rapid regulatory and market-driven disruption, not to mention the physical risks of climate change, investors must be active in assessing and managing these risks. On the one hand this involves avoiding impacted businesses and those slow to adapt, such as oil and gas pipelines which will become stranded. On the other hand, investing in assets set to benefit from the changing environment will serve investors well. For example, through assets like electricity distribution grids, investors have the opportunity to participate in the energy transition, with stable and consistent growth in dividends, while avoiding the boom-and-bust cycles of green field renewables. This will be critical to the future performance of infrastructure investments.
This paper is a climate change tryptic and for the reasons outlined above, is a must-read for the infrastructure investor. Part One looks at why the climate change situation is so serious, and what role infrastructure can and must play in the transition to a more sustainable future. The second part in the series examines the various risks and costs which an investor needs to bear in mind when investing into the infrastructure asset class. Finally, Part Three looks at how markets are already responding to climate change, and how to be on the right side of change from an investment perspective.