Investing in infrastructure has shifted focus. Once known for investing in the development of transport links such as roads, bridges and other basic services to aid economic growth, the asset class has evolved and now finances assets across a much wider set of sustainable opportunities.
At BNP Paribas Asset Management, we believe infrastructure has a critical role to play in enabling a sustainable and secure future for our planet. That’s why we are interested in investing in projects that help finance proven development in sectors such as healthcare, water, energy and battery storage technology. These will provide the building blocks of tomorrow’s sustainable world.
Funding a sustainable world
By directing capital towards infrastructure such as solar, wind, hydro and biomass energy we can help to mitigate climate change. And by financing energy storage, green hydrogen development and other forms of sustainable energy, investors can support the energy transition.
Securing a sustainable and secure future isn’t just about energy, however. It also involves ensuring people have access to clean mobility options such as railways, electric vehicles (EVs) and a charging network to support those EVs. Investing in the utilities that can distribute clean energy and deliver secure supplies of water by developing waste and water-treatment plants, will also make a vital contribution.
Access to green and social housing, education and healthcare is also critical to ensuring society is on a path to a socially inclusive and hence sustainable future. Finally, ensuring the benefits of digitisation are available to everyone means investing in digital towers, green data centres and fibre-optic networks.
Mobilising resources
The investment needed to build all these assets cannot be provided from the public purse alone. Private capital has a huge role to play. The International Energy Agency, for example, estimates that investment in clean energy alone must reach USD 4 trillion annually by 20301 if we are to achieve net zero by 2050 and prevent catastrophic changes to health, livelihoods, water supply, food security, human security and economies. The European infrastructure market totalled USD 306 billion in FY 20232.
Hence, there are clearly a huge range of investment opportunities available. The increasing maturity of the asset class means investors can build portfolios that are diversified across sectors, themes, geographies and currencies, and access opportunities within the sector depending on their risk appetite.
Aligned to requirements
The characteristics of the asset class also marry well with the requirements of institutional investors. Infrastructure debt is used to finance essential assets and services that benefit from high barriers to entry, regular cash flows, and supportive regulatory and contractual frameworks.
Consequently, the asset class can provide stable and predictable returns throughout the economic cycle. It also offers an attractive risk/return profile, with inflation-linked features, low correlation with public markets, and access to an illiquidity premium. Hence, infrastructure can offer a useful means of portfolio diversification to investors, with longer term investment horizons.
Critically, investing in infrastructure debt also aligns with the growing emphasis on environmental, social and governance (ESG) goals. Regulation and end-investor demand is driving a strong appetite for assets such as solar and wind plants. But there are also a huge range of opportunities in assets with less obvious “green” credentials. Ultimately, infrastructure assets from transport to utilities, need to be decarbonised.
Social infrastructure assets such as healthcare and education facilities have been a core element of the opportunity set for many years, providing essential services that directly benefit local communities and enhance social inclusion. Moreover, the social aspect of ESG is likely to grow in importance, particularly given regulatory developments. Institutional investors, for example, have urged the European Commission to adopt clear rules for social-impact investment in housing, healthcare and education.
Investment that can drive change
New technologies such as gigafactories for EV battery production and energy storage are creating significant infrastructure needs, while huge capital expenditure is required to harness the potential of emergent technologies such as green hydrogen and carbon capture and storage. Natural carbon sinks such as forests are another new and developing frontier for real asset investment.
Battery energy storage, for example, is vital for a clean energy future. It helps stabilise the inherent variability of renewable energy supply and underpins the EV market. However, huge advances in battery technology are required to secure a net-zero future.
And to date, investment opportunities in Europe have been limited, but the technology is an increasing focus in the region, with governments keen to secure local supply and production. This reflects growing competition for investment as countries across the world race to boost battery energy storage capacity and battery development by enacting policies and incentives. These include the US Inflation Reduction Act and China’s plans to install more than 30 gigawatts (GW) of energy storage by 20253.
Meanwhile, “green” hydrogen holds the potential to decarbonise heavy transport, such as in shipping and aviation, where EV technology may not suffice. “Green” hydrogen is produced by a process powered by renewable energy, as opposed to the traditional method of hydrogen generation using fossil fuels. The technology is in its infancy, yet some parts of Europe offer rich potential to produce green hydrogen using low-cost, abundant renewable energy. We also see infrastructure debt opportunities further along the value chain – for example, in green steel and transportation.
How to capture the opportunities
The challenge of building a more sustainable future is creating vast numbers of infrastructure debt opportunities. However, targeting those that best meet a particular investor’s goals and risk profile requires resources and the specialist expertise needed to analyse complex projects. Lenders such as BNP Paribas Group have the bandwidth to assess the full value chain, and to offer financing solutions that align with emerging business models.
The high capital costs associated with many of these projects means caution is required in assessing their likely profitability. For example, although it is now stabilising, the cost of producing a wind turbine or a solar photovoltaic (PV) panel has risen steeply. Consequently, lenders need to be highly selective and ensure projects can generate sufficient income and stable cash flows to mitigate these higher costs. But given the large number of projects in the pipeline, it is possible to be selective.
The rapid evolution of the opportunity set is accompanied by equally fast-paced regulatory developments. In-house sustainability expertise, legal capabilities and a robust ESG framework are vital when structuring long-term sustainable products, as is constant dialogue with regulators.
Finding an investment path to the future
Rapid advances in technology promise to overcome the challenges involved in building a sustainable and secure future for the planet. Institutional investors can play a vital role in achieving that goal by helping to finance the huge range of projects around the globe that can help address the impact of climate change and other societal issues. At the same time, they can benefit from stable and healthy income flows, potential capital appreciation and portfolio diversification. Expertise and track record are key in an asset class in which depth of research and access to a strong pipeline of deals are important differentiators.
At BNP Paribas Asset Management our Infrastructure Debt strategy forms part of our Private Assets platform. To learn more about our approach and capabilities, visit private assets.
Sources
[1] IEA (2021), Net Zero by 2050
[2] Inframation News, March 2024
[3] https://www.reuters.com/business/energy/china-aims-install-over-30-gw-new-energy-storage-by-2025-2021-07-23/
