Sustainable infrastructure is proving an attractive asset class for long-term investors with an eye on the green transition. According to figures from the Bloomberg New Energy Finance Renewable Energy Investment Tracker, in the first six months of 2023, investors channelled USD358 billion of new capital to renewable energy projects.
This marks an increase of 22 per cent rise on the amounts invested in 2022 and represents an all-time high for any six-month period.
The potential benefits from such investments are clear: long-term, often inflation linked returns; alignment with ESG strategies; support for the Net Zero by 2050 targets.
Indeed, just last month Gresham House announced the closure of its second British Sustainable Infrastructure fund after securing GBP450 million in investment from 12 institutional investors, including eight separate UK local authority pension funds.
Heather Fleming, Managing Director, Institutional Business at Gresham House, says: “Investors are looking for innovative investment opportunities that support regional levelling up and the green agenda in the UK. We are giving LPs [limited partners] a platform for place-based investment, providing exposure to our portfolio companies and supporting the regions and sectors that most align with their sustainability targets.”
Yet a report from investment consultancy Bfinance – What Is Sustainable Infrastructure Investing Now – warns that labels and classifications, specifically the Sustainable Finance Disclosure Requirements (SFDR), may not provide an altogether reliable indicator of an asset managers’ positive ESG impact.
Anish Butani, Managing Director of Private Markets at Bfinance and co-author of the report, says: “Whilst SFDR regulations have gone some way to standardise approaches, we do not consider the classifications to reflect an impact or non-impact strategy. For example, recent research has highlighted, that only 70 per cent of Article 9 strategies have a formal impact process.”
Butani continues: “Instead of looking at labels, impact minded investors should vet prospective managers for intentionality, additionality and measurability.”
Bfinance says there is a “very large variability of approaches and differing degrees of commitment” across the asset managers offering sustainable infrastructure, and he advises that, notwithstanding the data challenges in assessing strategies, “investors should still demand high standards from asset managers”.
Sarita Gosrani, Director of ESG and Responsible Investing and co-author of the report at Bfinance, says: “Strong pre-investment due diligence and post-investment monitoring are key: fund names and regulatory status are poor indicators of a manager’s approach.
Further, the report points to a danger that investors are being shepherded away from putting capital to genuinely good use in helping carbon intensive industries transition to net zero, and towards allocating to funds that might be spuriously labelled sustainable.
Gosrani says: “Amid the increasingly varied manager offerings, we would encourage investors not to disengage too readily from essential infrastructure and services that involve high emissions in the near term. There is a risk that carbon emission/reporting objectives disincentivises investors from involvement in these sectors, despite the overwhelming social and economic importance associated with their transition.”
An estimated GBP40 billion of annual investment in infrastructure is required over the next decade if the UK is to meet its net-zero commitment. Across the EU, this figure is approximately EUR737 billion every year until 2035.