Infrastructure’s irreplaceable role in the global ESG revolution

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By Jeremy Anagnos, portfolio manager of Nordea’s Global Listed Infrastructure strategy

Over the last several years, no other theme has seen such asset growth as ESG. We expect the market to continue to rise, with the overwhelming majority of investors interested in sustainability and integrating ESG into their portfolios. The coming shift in asset allocation should not be underestimated.

Infrastructure is uniquely positioned to lead and financially benefit from global sustainability initiatives. Electric utility companies are at the forefront of net-zero action – as these groups are installing solar modules, constructing wind turbines and upgrading transmission lines to charge electric vehicles (EVs) and convert our heating to electricity. Meanwhile, these same utilities are pushing aggressively to shutter high-carbon, fossil-based generating stations like coal-fired power plants.

Water utilities upgrade antiquated lead pipes and filter waste to provide clean drinking water. In telecommuting and edge computing, data centres and cell towers reduce Scope 3 emissions and optimise logistics, while rails and roads invest to lower the need for long-haul trucking – producing 75% less greenhouse gas in the process – and to reduce congestion.

Because of these investments, infrastructure companies should grow cash flows substantially and sustainably. Over the next two decades, we expect over $100trn in investments across the utility, water, digital infrastructure and transport sectors. Investors seeking sustainability and ESG, with a desire to make an impact with their capital, should consider the suite of infrastructure companies that will control the initiatives they care about, and which will grow sustainably into our future.

The under-represented asset class

Given infrastructure’s central role in achieving global sustainability goals, it is unfortunate that major ESG funds allocate so little to the asset class. All in, the top 20 global ESG funds have only 5% exposure to companies leading environmental stewardship and energy transition, while they have a 33% exposure to tech and communications services.

This is a clear shortcoming for investors who wish to prioritise climate change, as the companies in listed infrastructure are leading industries that are spending half of every dollar on decarbonization over the next several decades.

For example, one of the largest renewable developers in the world, NextEra Energy, commands a $137bn market cap, but still only appears in a minority of ESG funds, whereas Alphabet and Microsoft dominate the lists. While not commenting directly on Microsoft or Google, we would hazard that NextEra, which owns a >24GW renewable portfolio that should double in three years, will build more clean energy than the creators of Windows 95 and Gmail.

Heavy exposure to volatile segments

When we put aside broad ESG strategies, and examine ESG and clean tech ETFs, we find a larger exposure to energy transition, but also a concentration to businesses with uncertain financial futures. The more popular ETFs have roughly 50% exposure to solar installers, manufacturers, wind turbines and clean EVs – which have a history of booms and busts.

By contrast, listed infrastructure companies either have long-term contracts or regulated rates of return, which provide stability to its cash flow. Cyclical clean tech tends to make money on energy transition only once, with each sale of a car or solar panel, whereas listed infrastructure will earn on a renewable asset for years. Tesla and the module makers might be the hares in an energy transition race, but infrastructure is the tortoise – it is the steady and secure way to invest in energy transition while offering an attractive and growing income yield.

When we examine the sustainable investment market, and consider what investors care about most, we see global listed infrastructure as an essential, and under-represented, asset class for ESG portfolios. Listed infrastructure offers an unparalleled exposure to environmental stewardship and energy transition, with a chance for investors to make an impact while earning a compelling total return derived from secure cash flows that should grow for decades.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Investor Information Document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.

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