How infrastructure can help build a recovery

With the pre-pandemic desire for uncorrelated returns intensifying amid the turbulence of 2020, there is an ever-sharper spotlight on infrastructure as it leverages trends across decentralisation, digitalisation, decarbonisation and democratisation.

At a roundtable hosted by ANZ and FinanceAsia, we sat down to discuss these themes with Marigold Look, Executive Director, Infrastructure, IFM Investors;  Ross Israel, Head of Global Infrastructure, QIC; Christopher Curtain, Managing Director, OMERS Infrastructure;  and Jonathan Evans, Director, Corporate Finance at ANZ.

Below are some of the key points touched on during the discussion.

Finding resilience despite uncertainty

Despite the economic and geopolitical shocks arising from the pandemic, infrastructure has proven robust and maintained its appeal as an asset class, the panel agreed.

Against the current investment backdrop, diversification and uncorrelated returns across sectors, geographies and lifecycles are increasingly important objectives – and ones infrastructure assets are broadly able to fulfil.

The disruption stemming from Covid-19 has also highlighted the importance of understanding the underlying drivers of risk within various infrastructure themes.

Potential deal flow and pipeline

The panel also discussed how shovel-worthy, nation-building projects – especially in line with fiscal stimulus measures – offer a natural multiplier to support the recovery.

This also creates a long-duration perspective to deliver sustainable resilience across sectors such as energy, logistics, automation and healthcare.

Opportunities also exist from government deleveraging, with infrastructure divestment a significant avenue to pursue.

Incorporating sustainability within real assets portfolios

There has been a more structured approach in recent years to sustainability when investing in and also managing infrastructure assets.

There is support in Australia for a sustainable agenda, helping the growing number of investors with specific ESG imperatives to meet their goals, the panel concluded.

Over the past couple of years, investors have moved from a compliance mindset in relation to sustainability to one of value creation – in turn shifting thinking in terms of how to transform assets and leverage them to create new opportunities going forward.

Evolving opportunities

The panel discussed four key themes which they believe underline emerging investment angles: decentralisation; digitalisation; decarbonisation; and democratisation.

Within these areas, specific opportunities within infrastructure include: national resilience and self-sufficiency, with a particular focus on ensuring energy storage and security; nation-building infrastructure, to provide and drive the economic recovery via jobs and long-term, productive infrastructure; and digitalisation, including telecoms and data centres.

There is also an emerging pivot from listed to unlisted infrastructure.

KEY INSIGHTS

On lessons from the pandemic in managing infrastructure assets

“Diversification has been a key lesson to emerge from Covid-19. Some infrastructure assets have been more resilient than others, but we will see multiple knock-on effects as we move through the recovery phase.”

“This underscores the benefits for an infrastructure portfolio of a diverse allocation of assets by sector, geography and operational status versus construction.”

- Christopher Curtain, OMERS Infrastructure

“We have dissected our infrastructure portfolio into various buckets of key underlying drivers to further understand the various risk profiles. We are also using this to stress-test our portfolios for future scenarios.”

- Marigold Look, IFM Investors

“Diversification is being tested and has broadened for two reasons: firstly, infrastructure and real assets have always performed positively during a low interest rate environment; and secondly, some sectors are disrupting in an accelerated way, in turn creating different levels of risk compared with what has historically been seen.”

- Ross Israel, QIC

On sustainability priorities

“To achieve sustainability objectives, we have reviewed our portfolio, established baselines and set targets for assets.”

“For example, our top seven Australian assets have emissions reduction targets that range from 40 per cent to 100 per cent by 2030, depending on the asset itself.”

- Marigold Look, IFM Investors

“Our current focus is on net zero emissions for assets in our portfolio. To achieve this requires an understanding of the carbon emission profile of the asset, then setting a baseline for that asset to work from and identifying reduction initiatives – which can emanate from energy efficiency, embracing renewable and hybrid systems, fuel switching, or offsets that can make the business more sustainable. Although this will take some time to achieve, we are committed to it.”

- Ross Israel, QIC

“We see growth in the importance of the ‘S’ in ESG due to the pandemic and it is a priority for investors. We expect to see ongoing flow-through into green-field infrastructure projects such as social housing.”

- Jonathan Evans, ANZ

“We have developed a series of standardised tools and categories to help us assess the broad themes of sustainability.”

- Christopher Curtain, OMERS Infrastructure

On relying on a more focused ESG lens to drive allocation decisions

“We are increasingly looking to set our sustainable investing criteria within our investment process, which involves reviewing how we manage these assets, as well as how we originate and acquire them. Part of this filter is the criticality and vulnerability of the assets.”

- Ross Israel, QIC

“ESG is as important for us as it has ever been in terms of screening investment opportunities and facilitating sustainable projects for clients.”

- Jonathan Evans, ANZ

On the appeal of infrastructure assets going forward

“Going forward, we will look to infrastructure assets that provide value-add in a diversified way.This requires us to assess each asset on its merit. For example, data centres are getting attention as a popular thematic, but this was becoming the case before Covid-19, so we are cautious about whether they’ll present attractive risk-adjusted return propositions for us in the future despite them being robust during the pandemic.”

“In addition, many investors would like to see greenfield opportunities to help drive an infrastructure-led recovery, but getting projects built and delivered requires real social justification and support.”

- Christopher Curtain, OMERS Infrastructure

“We will continue to look at assets with a long-term perspective as we see good-quality infrastructure assets that can provide a cushion to impacts for investors."

- Jonathan Evans, ANZ

This story originally appeared on FinanceAsia