3 minCan infrastructure be a profitable ESG investment opportunity for Privat Capital?
Nicole Thomé ESG can represent an attractive investment opportunity for private capital as the necessity for infrastructure projects around the world continues to rise. In fact, ESG regulation accounts for 25%– 40% of the higher allocation to infrastructure investments made by public institutional investors, and research indicates that it is also an attractive prospect for private capital investments1.
According to a study entitled Pension Fund Investments in Infrastructure published by the University of Maastricht in June 2023, “…infrastructure has been among the best-performing asset classes, as measured by net returns.” The fact that infrastructure assets have the potential to offer environmental, social and political benefits makes investors with strong ESG preferences or subject to ESG regulation more willing to invest in the asset class. This is typically the case of public institutional investors such as government agencies, sovereign wealth funds and public pensions funds.
But is infrastructure of interest to public bodies alone? Nicole Thomé Head of Business Development, Banque de Luxembourg says not. She believes that there is a sound body of evidence to support her call for more private capital in infrastructure to achieve ESG objectives, accrue profit and diversify investment portfolios. “ESG related infrastructure is an attractive opportunity for private capital as the need is great and the demand for investment high.”
The need is great…
“According to the World Bank, over 1bn people live 2km from a road, 675 million people lack electricity at home and 450 million people have no shelter,” explains Thomé, “and the threats of climate change have also increased the demand for green infrastructure and renewable energy.”
She continues, “We are about halfway through the 15-year period of sustainable development goals and the progress is not looking good for emerging economies.” The UN conference on trade and development reported earlier this year that developing countries need roughly 4trn USD annually to meet their sustainable development goals by 2030.
…and demande is high
According to the Maastricht study, “The World Bank's Global Infrastructure Outlook (2018) forecasts a global infrastructure investment need of USD97 trillion by 2040 and… a USD15 trillion gap between the projected and needed infrastructure investments… The amount of capital required to close the infrastructure gap far exceeds the resources that countries can raise in a fiscally and macroeconomically responsible manner.”
“As a result, calls for institutional investors, pension funds and insurance companies to invest in public infrastructure projects have intensified,” says Thomé. “For example, half of the European Green Deal’s USD1.2 trillion investment plan to eliminate or offset all EU greenhouse gas emissions by 2050 is expected to come from institutional capital.”
The necessity for infrastructure projects and the lack of available funding sources represents a significant investment opportunity for private capital.Nicole Thomé
Attractive and sustainable performance
The increasingly important role that infrastructure investment plays in institutional investors’ portfolios in highlighted in the Maastricht study. With long-term stable returns, low risk, low correlation with other asset classes and a natural fit with long-lasting and often inflation-linked pension liabilities, infrastructure has been among the best performing asset classes as measured by net returns. Over the 2008 - 2019 period, the return of the MSCI Global Infrastructure Benchmark series, a composite index of publicly traded infrastructure companies, outperformed other asset classes, behind only Private Equity, and delivered inflation-linked returns.
“We have one very good example among our clients of a sizable infrastructure fund, invested by European Pension funds and other private capital mainly into renewable energy, that confirms this superior performance” concludes Thomé adding, “The combination of increased ESG regulation, lack of infrastructure funding and the great performance of infrastructure as an asset class is testament to the effectiveness of ESG investing in achieving its goals.”
1Private Capital refers to funds or investments that are sourced from Institutions, entities or well informed individuals. Public Capital refers to funds or investments that are sourced from the general public or through public markets such as stock exchanges.
Contact our team to discuss how we can help
