Acciona

Dec 7, 2023

Infrastructure's stable return reputation becoming more nuanced Rahul Bhushan Share Rahul Bhushan looks at the previously bankable infrastructure sector and explains why he believes it is time to rethink allocations... Infrastructure has long been, justifiably, viewed as a safe bet by investors. It's backed by "real", tangible assets like roads, railways, and ports. And the sense of security this provides has often stood in stark contrast to the prevailing volatility of many other asset classes. But this now looks to be changing. Technological advances, sustainability imperatives, and evolving economic needs mean infrastructure's reputation as a path to stable returns is becoming increasingly nuanced. Such factors are necessitating a major shift in the way the space is approached. So, with this in mind, here are three key considerations for all would-be infrastructure investors to take into account before settling on an asset allocation strategy... 1. Safe as houses? For nearly 50 years, infrastructure assets were divided into two primary categories - "high risk" and "low risk". Today, this status quo is being upended by factors ranging all the way from climate change to technological innovation. A weather event like a heatwave, a hurricane, or a flood, for instance, now has the potential to threaten even the more conservative of safe haven assets. Meanwhile, many traditional infrastructure assets are coming up against challenges we couldn't have comprehended just a few decades ago. Take oil and gas facilities and pipelines, for example, which face enormous energy transition risks as public opinion swings increasingly in the favour of greener alternatives. Or what about freight railways? There's a very real risk of these being disrupted by autonomous electric trucks - something straight from the pages of a sci-fi novel. With everything changing so quickly, the onus is on infrastructure investors themselves to reassess traditional assumptions of what is and is not a "safe" asset. 2. Mind the (infrastructure) gap $1 trn. That's how much the difference between the amount needed to meet future global infrastructure demand and the amount actually available is expanding by each year. This global "infrastructure gap" clearly needs to be bridged urgently. But it also needs to be bridged sustainability, with an emphasis on ongoing economic, environmental, and social objectives. Source: Ark Invest Europe It's a difficult, multi-faceted tightrope to walk. And in recognition of this, governments worldwide are doing their bit to mobilise significant resources. Just recently, we've seen the introduction of legislation such as the Inflation Reduction Act in the US and the Green Deal Industrial Plan in Europe. But while such directives are, of course, vital, the limitations of public funding also mean their influence can only stretch so far. This is why, when it comes to eradicating the infrastructure gap in a sustainable way, it is also essential for investors to take the baton and run the distance. In fact, we've already seen the positive impact such strategies can have on national infrastructure when done in the right way. Just look at Vietnam, where strong legislation has paved the way for enormous international investments in large-scale wind and solar initiatives. Across the Pacific, meanwhile, widespread efforts to encourage infrastructure investment have helped wind and solar ventures to dominate Chile's power generation scene. It's hardly a surprise that the US has called for $500bn to be channelled into projects that align with its sustainable development goals every year. As this unfolds, investors can do their bit by anticipating future societal needs and allocating capital to the highest impact infrastructure projects possible. 3. Seeing the wood for the trees Following on from the previous point, another key consideration for investors is infrastructure's increasing breadth as an asset class. The sector's shift towards environmentalism has its roots in clean energy generation, and this continues to this day. This year alone, we've notably seen engineering group Acciona and renewable energy group EDP Renováveis and Brookfield double down on their solar and wind commitments. But by now, it's critical to understand that environmentalism in the infrastructure sector has also broadened to encompass an array of additional critical subsectors. This includes everything from innovative monitoring technologies and conservation initiatives to sophisticated pollution control systems and smart grid systems. The wider net is a testament to infrastructure's vital role in our sustainable future and signals a growing recognition of the necessity to invest in environmental resilience. With this in mind, investors must ensure they consider all of the options available to them during allocation. Infrastructure - an asset class in development As the infrastructure investment landscape evolves, it demands that investors adapt. Ultimately, a re-evaluation of infrastructure portfolios is not just about economic prudence; it is about investing in a resilient, equitable future. The new era of infrastructure investment calls for a blend of vision, adaptability and a commitment to the environment and society. Moving forward, it is this that will define the success of portfolios and the progress of communities worldwide. Rahul Bhushan is managing director at ARK Invest Europe Share