Peter Hofbauer, Head of Infrastructure at Hermes Investment Management, discusses infrastructure’s role as a sustainable asset class, highlighting how responsible investment considerations play an integral part of infrastructure investment decision making and asset management.
Defining sustainable investment
Sustainable investing has two principal definitions: first, selecting investments on the basis of their ESG (environmental, social and governance) attributes, and second, truly long-term investing, aligned with the dictionary definition: ‘able to be maintained or kept going; a system that maintains its own viability…for continual reuse.’
Apply either of these definitions to the infrastructure asset class and it’s a fairly logical conclusion that infrastructure - broadly defined as the assets or services required by a community to function - is an inherently sustainable asset class. It is also a very relevant investment choice for pension schemes looking to match their long-term liabilities in a responsible, purposeful fashion.
Infrastructure assets have a social purpose to provide public services, and are often intergenerational, with long useful lives which due to their essential nature, are not significantly exposed to stranded asset risk. This makes them attractive for pension schemes on two counts: the well understood lifetime-long investment horizons, but also the potential to influence the prospective quality of life for pensioners at the same time as providing appropriate financial returns, which is a relatively new, but growing, demand.
ESG considerations are increasingly prevalent in infrastructure investment decision making, as a holistic sustainable investment focus becomes the norm for institutional investors. For the Hermes Infrastructure team, ESG considerations, including the assessment of an investment’s sustainability status, are formally integrated and embedded into our business, investment and asset management processes.
Our ESG analysis considers such things as customer relations and health and safety; how the asset is managed and run; as well as gaining a thorough understanding of the environmental landscape including changing regulatory backdrops that could be key to an asset’s longevity and sustainable performance.
Responsible owners and operators
Infrastructure sits at the intersection between owners (such as institutional investors), regulators, policymakers, shareholders, long-term partners, local governments and communities, and as such requires a high level of ongoing engagement between the relevant stakeholders. For example, infrastructure owners must engage with policymakers, regulators and politicians in order to seek sensible policies which are predictable, transparent and certain. Businesses which own and operate infrastructure assets must constantly engage with their customers or end users to uphold responsibility obligations and ensure that they are fulfilling their role as providers of public services.
In 2015, we acquired a 40% stake in Associated British Ports (‘ABP’) in conjunction with the Canada Public Pension Investment Board (‘CPPIB’). ABP is the UK’s leading ports group that owns and operates 21 ports in Great Britain which account for 30% of the value of UK exports of goods through seaports1. As well as undertaking the direct delivery of port services, ABP also follows a ‘landlord ports’ model at some of its ports. This means it has over one thousand customers, each with their own businesses and their own obligations with regards to health & safety and the environment, and a key reliance on the critical port infrastructure provided by ABP.
This places ABP in an important stewardship role, given the importance of port facilities to the UK as an island nation, and from a business perspective provides significant diversity but also complexity. Good governance structures are therefore essential from an investor’s perspective, as the scale of the business and diverse revenue streams mean that ABP’s business model needs to constantly evolve and change to meet the requirements of both its direct customers and the nation.
The longevity factor
Recognising future trends is an important part of ensuring an asset’s long-term sustainability and profitability. For example, decarbonisation of the environment is a clear societal trend, with the longevity of an asset now inextricably linked to its environmental credentials. The ports industry offers both risks and opportunities in this area: ports have until recently imported huge quantities of coal to supply coal fired power stations, but as these are phased out, coal volumes are declining. New methods of power generation have therefore provided an opportunity to reconfigure port utilisation. This is well illustrated by ABP-owned Ports of Hull and Immingham, which now have state of the art handling facilities for biomass imports to supply the Drax power station in North Yorkshire. Drax now provides about 7% of the UK’s electricity supply from its generation facilities.
Decarbonisation has also resulted in the increasing role of renewable energy in supplying the nation with power. This is an area well understood by Hermes, with a number of onshore wind farms and solar energy assets in our current infrastructure portfolio. There is a tie-in too with the UK’s port industry, with a growing number of offshore wind farms requiring access via ABP ports.
The landmark Siemens facility, Green Port Hull, is located at the Port of Hull. ABP has partnered with Siemens, alongside Hull City and East Riding Councils to promote the investment and development of a dynamic renewable energy sector in the Humber region. ABP has a number of prime development sites in Queen Elizabeth Dock and at nearby Paull that are ideally placed to support the renewables industry, with the 230 hectare site at Paull capable of housing major manufacturing sites that can be linked by secure road or rail to the rest of the port estate.
While we are directly invested in numerous green energy projects, all these investments are underpinned by solid financial reasoning and the beneficial holistic outcomes we expect to achieve over the life of our investments. In the case of ABP, investing in future decarbonisation trends such as renewable energy will hedge against the changing usage its ports will experience as old carbon-intensive energy imports decline. We believe this is a truly long-term, value-conserving approach. Our recent investment in Energy Assets Group, which provides advanced metering services to monitor energy usage across the industrial and commercial sector in the UK, is a further example of our approach to investing in socially important activities that benefit our clients through long-term sustainable real returns, while simultaneously benefitting consumers and the environment.
While all infrastructure assets have different risk return profiles, the asset class demonstrates attractive investment characteristics due to the essential services provided by infrastructure being largely inelastic to demand, economic cycles and other influencing factors. Ensuring the sustainability of our assets, through our own responsible ownership and governance, and awareness of future trends, allows infrastructure investors like ourselves to generate stable returns for our clients while providing beneficial outcomes for a range of stakeholders and arguably society as a whole.