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Sustainable Infrastructure Soars as Managers Feast on Demand

Managers have already raised more than $33 billion, nearly half of last year’s total in the sector.

After big inflows to sustainable infrastructure funds in 2021, managers are off to an even hotter start this year, with more than $33 billion raised in just the first few months of 2022, according to Preqin data. And industry outlooks suggest even more capital will flow to such strategies across the rest of this year.

It’s happening even as investors and managers grapple with how exactly to define “sustainable infrastructure,” and how to report on its performance. If the industry can agree on definitions and standards, the floodgates could open to even more funds and investments, experts say.

“Investor interest in sustainable strategies continues to grow,” said Chris Leslie, global head of sustainability at Macquarie Asset Management.

And infrastructure managers “are sensing that changing tide,” said Meredith Jones, partner and global head of environmental, social and governance investing at Aon. “I think they were already moving in that direction [toward sustainability]. But the increasing investor interest has really accelerated the drive to create more products.”

Brookfield Asset Management has been one of the biggest beneficiaries of that interest. Last summer, it announced a first close of $7 billion for its Global Transition Fund and boosted its total target to $15 billion, up from an original $12.5 billion. Money kept pouring in, including $750 million from the New York State Common Retirement Fund in late December; a final close is expected soon.

Brookfield is far from alone. In January, North Sky Capital announced a final close of its third sustainable infrastructure fund at $200 million, with a focus on clean energy, waste and water projects in low-income communities across the country. That same month, Napier Park Global Capital formed a joint venture with the U.K.’s Ethical Power Group that will invest in largescale solar projects and battery storage across the U.K. and Europe.

Apollo Global Management in February also announced a new sustainable investing platform with a goal of investing $50 billion in “clean energy and climate capital” over the next five years. And in December, Ares Management said it had raised $2.2 billion in “dedicated climate infrastructure capital” through its Climate Infrastructure Partners fund. The money will go to renewable energy, energy storage, electric vehicles and similar projects.

The macro numbers confirm these examples. Preqin data shows that eight infrastructure funds that closed with a renewable energy focus have raised nearly $33 billion so far this year, an accelerating pace of inflows from last year, when 60 such funds raised a collective $67 billion. Last year’s count was more than double the $34 billion such managers raised in 2020; in 2019, 70 renewable-focused infrastructure funds raised $44 billion, according to Preqin.

Carbon reduction-focused funds are clearly a popular flavor for sustainable infrastructure funds.

“We have investors that are looking to decarbonize their portfolios,” said Jones. “Infrastructure is an obvious place to look because while it is often a relatively small portion of their portfolio, its carbon intensity can be quite high.”

Interest in the space has also received an unexpected jolt this year from Russia’s invasion of Ukraine and the subsequent shock to global energy markets.

“The events in Ukraine have turned attention to energy security and, in turn, food security,” Leslie said. With much of Western Europe looking for new sources of energy supply, green hydrogen projects will likely see more interest, he said. “Likewise, sustainable agriculture strategies around the world are also likely to receive a boost as the world compensates for disruption in food supplies from Ukraine and Russia,” he added.

Indeed, while renewable energy projects are often the first thing that comes to mind when “sustainable infrastructure” is mentioned, it can involve colors other than green.

“Besides green energy, sustainable infrastructure can include mobility, which also encompasses electric vehicle charging stations,” said Irene Mavroyannis, global head of private capital advisory for infrastructure, renewables and sustainable investing at Sera Global. “It can mean making agriculture more efficient in terms of more efficient use of energy and more efficient use of water.”

The sector also goes beyond carbon and climate issues. Rural broadband, for instance, could fall under the sustainable infrastructure umbrella, Jones noted.

And “diversity, equity and inclusion is also rising as an essential element, although we are yet to see DEI-driven strategies as such,” Leslie said.

Investor demand is also a major factor in the segment’s growth. Among pensions making recent sustainable infrastructure investments is the Ohio School Employees’ Retirement System, which in late February committed $50 million to Brookfield’s fund, according to MandateWire. The Connecticut Retirement Plans and Trust Funds put $125 million into the Climate Adaptive Infrastructure Fund to gain “exposure to low-carbon infrastructure investments in energy, water, and transportation,” the pension system said in a January statement. And the District of Columbia Retirement Board late last year also committed $75 million to Climate Adaptive Infrastructure.

A recent survey of institutional investors by Schroders underscores that demand, with the “vast majority” of respondents in the October poll saying they intend to boost their exposure to private assets over the course of 2022. More than half said they are most interested in strategies built around environmental, social and governance factors, which include sustainable infrastructure.

Still, challenges remain including how to define “sustainable” and related terms.

“I hear managers use the term ‘ESG,’ and it can mean everything from impact to sustainability to just avoiding certain types of projects,” Jones said. “I often refer to it as a ‘linguistic anarchy’ that we have around the terminology.” That can lead to conversations between managers and investors where neither side fully understands the other, causing confusion and missed investment opportunities. “I think we have yet to see how that’s really going to shake out,” she added.

Regulatory action is adding some clarity. European Union rules around sustainable infrastructure and sustainable investments in general have provided some consistency, Mavroyannis noted. The SEC is now looking to enact regulations around sustainability as well. “That could be helpful, but it could also create more confusion because then we will have competing frameworks,” she said.

If the industry can agree on definitions and rules around reporting performance and other standards, interest in sustainable infrastructure would likely rise even more. Such harmonization could mean “more funds, more flows and a greater differentiation between those [managers] that are actually investing in sustainable infrastructure versus those that are perhaps not as focused,” Mavroyannis said.

Even so, there’s little doubt that dollars will continue to flow to sustainable infrastructure funds, and away from those that are not sustainable. “Sustainable infrastructure investing is destined to become the predominant form of infrastructure investing,” said Leslie. “It’s hard to imagine that strategies which prove to be unsustainable will be supported by investors.”

And the sector may no longer even need a boost from government incentives or rules, Mavroyannis said. “At this point I don’t think even a political administration change will change that momentum,” she said.

Reproduced with permission from Fundfire.