Your next conference is 200 miles away and you must determine the best way to get there. Will you fly, drive or perhaps take a train? This simple scenario invokes many questions about fuel, electricity, highways, airports and more. Each of those is a matter of infrastructure, and each opens further to sustainability and investment angles.
Advisors must stay informed on both as clients, especially younger generations, increasingly search out investments with a positive impact. Like other alternative investments, the answer in sustainable infrastructure investing depends not only on the client’s desires and plans, but on the advisor gaining a solid understanding of the risks and possibilities inherent in each opportunity. And beware to the advisor who doesn’t examine the impact of a changing world on their clients’ current infrastructure investments.
To learn more about sustainability in infrastructure investing, we spoke with Robert Wall, Managing Director and Head of Sustainable Private Infrastructure at Lazard Asset Management, which managed almost $240 billion globally as of June 30 and operates in 19 countries. The firm’s strategies include both listed and sustainable private infrastructure.
We asked Wall about sustainability issues and risks and the impact of the energy transition on firms. He also walks us through an example of a sustainable infrastructure investment done under his leadership.
WSR: What sustainability issues and risks do investors need to be aware of?
Wall: The primary purpose of infrastructure assets is the sustainable and effective provision of essential services to society. Infrastructure investing is directly impacted and supported by energy transition, decarbonization of transportation and a circular economy, which is an economy that keeps materials and products in circulation to reduce waste. Significant amounts of capital are required to achieve corporate, national and international sustainability goals, and where capital is needed, it tends to earn superior financial returns.
While investing in major sustainability-based trends, it is important to avoid added risks which can come from a focus on all things “green.”
One such risk is “greenwashing” – fund managers exaggerating the positive ESG impact from their investments. The opposite side of the coin would be funds chasing “renewable” opportunities at all costs, forgetting that they also have a duty to generate market-level returns for investors.
Numerous agencies are working to develop standards for identifying, measuring and reporting sustainability characteristics. However, it will likely take years to achieve a set of “Globally Accepted Sustainability Principles” comparable to the accounting profession’s GAAP.
At Lazard, our sustainable private infrastructure strategy operates a proprietary assessment tool that helps the team develop a sustainability thesis for each private equity investment, which focuses on environmental and social metrics relevant to a particular sector or business. It allows us to track and report our progress without moving goal posts. We believe such an approach is more transparent than filling in long, generic and often backward-looking forms and reports.
One final aspect is technology risk. New technologies emerge regularly providing new potential solutions for electrification of industries, innovative ways to produce green hydrogen, or cutting-edge recycling methods. It is important to remember that many of these emerging technologies are still in the proof-of-commercialization phase.
WSR: How are infrastructure companies impacted by the energy transition?
Wall: Energy transition is a double-edged sword for many infrastructure companies. There is opportunity to participate in the massive investment requirement for decarbonization of energy and transport, making it possible to deploy substantial amounts of capital at attractive returns.
For some companies it is not an optional opportunity, it is an existential requirement – failure to adjust may lead to long-term decline. For example, service station operators have no choice but to adopt electric vehicle charging infrastructure, and electricity networks must invest to expand connectivity and capacity to accommodate more renewables and battery storage.
WSR: Provide an example of sustainable infrastructure private investment you have done recently.
Wall: In December 2022, the Lazard Sustainable Private Infrastructure Fund invested in a private anaerobic digestion business in the U.K. that converts food waste into biogas, a carbon-neutral equivalent of fossil gas. Biogas can be used to generate green electricity, injected into the gas grid, or compressed and used as a clean transport fuel. Its by-products are carbon dioxide, which can be used in the food and beverage industry, and organic fertilizer.
The business benefits not from one but two major sustainability trends – it recycles organic waste, addressing the U.K.’s circular economy vision, and creates bioenergy that contributes to the country’s net zero ambition.
We believe it will take years for this sector of infrastructure companies to consolidate and grow to the scale needed to have their shares listed on exchanges, since biogas assets currently are largely owned by farmers and families. The evergreen, open-ended structure of the Lazard Sustainable Private Infrastructure Fund allows us to gradually invest in consolidation and growth of the biogas business without the pressure of a fixed investment period or holding horizon.
Janeesa Hollingshead, Contributing Editor at Wealth Solutions Report, can be reached at editor@wealthsolutionsreport.com.
