Over the past three years, macro events such as the Covid-19 pandemic and Russia’s invasion of Ukraine have taken the world on a transformative journey, to say the least.
The world of infrastructure and energy is no exception, where such events have sped up the transition to net-zero emissions and made renewable energy and digital infrastructure the most dominant subsectors in the market.
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Investment Monitor spoke with Jon Phillips, acting CEO of the Global Infrastructure Investor Association (GIIA), about the priorities of infrastructure investors and the trends that dominate the market.
How has the approach to infrastructure investing changed over the past decade?
The infrastructure and energy sector has continued to mature and become more popular. As a result, it has seen significant growth with more and larger funds coming to market. It has been a real success story. As often happens when a market expands, both opportunities and challenges arise. In the infrastructure sector’s case, the entrance of more fund managers in the market has caused a gradual expansion of the definition of infrastructure, both in terms of the asset class itself and in terms of geographies. We have seen an increasing number of infrastructure managers looking outside of the more mature infrastructure regions in search of new opportunities as competition has grown.
How do net-zero targets impact investors decision-making process?
Infrastructure investors like to have policy clarity and certainty as much as they can, especially as the transition to net zero is a complex one for those with carbon-intensive investments. While there certainly are challenges ahead for those assets, there are opportunities as well to repurpose some of them as new technologies are developed. Gas pipelines and hydrogen are an obvious standout area for this.
Investment in renewables has seen enormous growth in the past decade. Alongside digital, which saw accelerated growth as a result of the Covid-19 pandemic, renewables are by far the most dominant subsector in the infrastructure market.
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By GlobalDataIt is also important to highlight that some more traditional subsectors have proven to be very resilient in the face of the challenges that we have experienced over the past two years. Both in the wake of Covid-19 and the threats posed to energy security by the Russian invasion of Ukraine, investors have been quite agile in their response. For instance, in Europe and the UK, ports and airports, which were heavily hit by the pandemic, are now very close to getting back to pre-Covid levels in terms of passenger volumes. That demonstrates the long-term value of infrastructure and its resilience as a sector.
What do sustainability, resilience and adaptability mean?
Resilience is a top priority for infrastructure investors now. It is a great concept as it can be used on different levels. It can refer to physical resilience and apply to building infrastructure that is able to withstand the impact of unforeseen events such as rising sea levels, flooding and drought. It also applies to economic and geopolitical scenarios. For instance, it can refer to the ability of infrastructure investment to adapt to workforce changes and anticipate supply chain disruption.
Sustainability is a very similar concept and has been around for long enough now for us to see greater scrutiny of investments and investors alike.
While net-zero targets are well understood by investors, other areas such as supply chain management and biodiversity are now under close consideration too, with discussions around what is possible and reasonable in terms of tracking activity at the further reaches of supply chains.
What geographies have become more relevant as a result?
The picture is still evolving, but India is a good example. Investors who can navigate opportunities and build partnerships that are key to succeeding are poised to reap some good results from India.
More generally, political turmoil and political risk are not exclusively an emerging markets concern – our members have increasingly flagged political instability as a barrier to investment across developed markets over the past year.
What are the main macroeconomic and geopolitical events that are top of mind for infrastructure investors at present?
Investors are keeping a close eye on protectionism and the extent to which it is a response to events that have taken place recently or whether it is more an underlying trend that is here to stay. Governments face the challenge of attracting inward investment without inadvertently putting in place burdensome policies that make such investment difficult.
Part of our job as GIIA is to guide governments on the journey to striking the right balance between being investor friendly and protecting the resilience of domestic assets.
What are the GIIA’s main objectives for 2023?
It depends on the market. In the UK, we are trying to improve the dialogue between regulators and investors. There is a challenge in managing the short-term impact of the cost of living crisis and the long-term requirements to meet net-zero targets, for instance. Regulators are caught in the middle of that and need greater guidance from government policy to help them find the right balance. The US has rocketed to the top of the market in terms of investor sentiment after the passing of the Inflation Reduction Act. There, we are trying to focus our conversations at state level, which is where decisions about infrastructure projects are made. In Europe, we concentrate our efforts in Brussels in order to reach all 27 countries. The recent publication of the Green Deal Industrial Plan marks a positive step forward, encompassing many of the recommendations we have put to the European Commission around planning, funding and incentives over the past year.
