Investing in the future: Exploring green infrastructure

Investors are looking to green infrastructure for new and potentially attractive investment opportunities. Companies providing sustainable services therefore need to ramp up their offering to keep up with global demand, while governments are responding by introducing policies that create certainty for green fund managers and their investors, as Luxembourg’s Head of Infrastructure for the Aztec Group, Peter Blackburn, explains.

The urgent decarbonisation of the global economy is leading to a growing number of businesses developing and providing green infrastructure services. This growing sector offers investment opportunities for investors looking to diversify their portfolios away from traditional asset classes. However, the flow of capital into green infrastructure funds needs to flow even faster if, collectively, we are to deliver on the Paris Agreement's central aim to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius, while also keeping up with global energy demand. 

This is where private market investors can help – and many are.

To put the demand in context, the IEA’s World Energy Investment Report 2024 notes that, in the U.S. alone, investment in clean energy will reach more than $300bn this year, 1.6 times higher than 2020 levels and well ahead of the amount invested in fossil fuels. Meanwhile, the European Union currently spends $370bn on clean energy. By contrast, China is expected to spend almost $680bn this year, focusing on its ‘new three’ industries – solar cells, lithium battery production and EV manufacturing. 

Meanwhile, in July this year, the UK’s new Energy Secretary, Ed Miliband, announced a new budget for the Contracts for Difference (CfD) scheme, upping the allocation from £500m to £1.5bn for Round 6 where renewable energy producers bid for their share of funding. The increased budget is part of the new government’s desire to be seen ‘as a global leader for green technologies’ and ‘to become a clean energy superpower’.

These reports and announcements show the direction of travel for sustainable investing, especially in green infrastructure. 

Established in 2001, the Aztec Group is an award-winning independent provider of fund and corporate services, employing more than 2,000 people across the UK, U.S., Luxembourg, Ireland and the Channel Islands. The Group specialises in alternative investments, administering more than €600 billion in assets, 450 funds and 4,500 entities for a range of clients, spanning the major asset classes including private equity, venture capital, private credit, real estate and infrastructure. 

Aztec Group has recently joined GIIA, and among our clients are a number of fund managers specialising in areas of green infrastructure. From our understanding of their businesses, and our experience in the wider alternatives industry, we’ve pinpointed four factors contributing to the growth in green infrastructure funds to share with our fellow members: 

1. Sustainable finance

The latest round of COP28 pledges, including the COP28: Global Renewables And Energy Efficiency Pledge which acknowledges where investment is needed: ‘…To limit warming to 1.5°C, the world requires three times more renewable energy capacity by 2030, or at least 11,000 GW (gigawatt), and must double the global average annual rate of energy efficiency improvements from around 2% to over 4% every year until 2030. Recognizing that energy is inextricably linked to all the UN Sustainable Development Goals, and that transforming the world's energy systems will create new jobs, enhance lives and livelihoods, and empower people, communities, and societies.’ 

An example of the growth in sustainable finance is the establishment of the Luxembourg Green Exchange in 2007, the world’s first exchange dedicated specifically to green investments. It took 12 years for the Luxembourg Green Exchange to reach one trillion dollars of cumulative sustainable bond issuance, but the next trillion took just a year. Currently, the Exchange hosts more than 3,600 securities by 310 issuers representing 60 different countries.

During a recent podcast with the Aztec Group, Head of Sustainable Finance at the Luxembourg Stock Exchange, Laetitia Hamon, explained that the Exchange’s role is to be a platform between investors and corporates. ‘A lot of industries need to make the transition to cleaner and more sustainable technologies and offer more sustainable products and services. And that’s the role we play as an exchange.’ The Exchange issues debt to finance companies’ green assets and their transition, and to do so it provides transparent and reliable information to foster investments in those instruments. Listen to the full podcast here.

2. Policy certainty

The 2022 Inflation Reduction Act (IRA) was introduced in the U.S. to incentivise energy producers to build generation plants and manufacturing parts across the country. A year ago, the World Economic Forum completed an assessment of the IRA’s impact and credited the Act with creating more than 170,000 new green jobs across the country in just 12 months. Non-profit Climate Power found that by July 2023, over 270 new clean energy projects had been implemented nationwide in the U.S., amounting to $278 billion in new investments.

Backing up the expected continued growth in investment – not only in the U.S. but across other developed and developing economies – are the findings of the World Economic Forum’s The Future of Jobs Report 2023, which tracks macrotrends in the global job market over a five-year period to 2027. The Report’s scope includes ‘responses from 803 companies – collectively employing more than 11.3 million workers – across 27 industry clusters and 45 economies from all world regions.’

The report’s summary says that ‘businesses predict the strongest net job-creation effect to be driven by investments that facilitate the green transition of businesses, the broader application of ESG standards and supply chains becoming more localized, albeit with job growth offset by partial job displacement in each case.’  

Portfolio Manager for Energy Infrastructure Credit at Nuveen, Don Dimitrievich, shared the report’s expectations for the sector during a recent discussion, saying that more and more developed economies are recognising the need to develop the supply chains for renewable energy within their control, creating opportunities for investors to deploy capital to build out these supply chains. This in turn creates the environment for infrastructure debt to play out in a similar way to how private credit has over the last decade. Listen to the full podcast here: Investing in sustainable supply chains (aztec.group).

3. Innovation

Across the renewable energy value chain, innovation is solving renewable energy’s historical challenges of storage and consistency of supply. The technological advances in battery storage are significant as a study into patenting activity, supported by the European Patent Office and the IEA, shows. The annual rate of patenting worldwide in electricity storage technologies grew at an average of 14% between 2005 and 2018, four times faster than the average of all technology fields. Also, as Roy Bedlow, Founder and Chief Executive of Low Carbon, explained in a recent podcast episode, there are ever-evolving advances in the proven technologies his company leverage that are improving efficiencies and performance. 

Low Carbon is an Independent Power Producer (IPP) working to develop land from pastures into locations that produce power. 

For example, new materials are being developed to create even more efficient solar cells which have now reached beyond 30% efficiency. Advances in the panels means that Low Carbon now install 650-Watt panels compared to 2015 when they were installing 275-Watt panels. Added to this, solar panels are now bifacial, increasing their efficiency as radiance is not only captured above the panel. 

In wind energy generation, larger and more efficient turbine designs increase energy production and battery technology is matching that innovation with installations moving from two-hour batteries to eight-hour batteries. 

Listen to the full conversation here. 

4. Natural Capital

A niche but growing asset class, natural capital values our natural environment. For infrastructure investors, considerations around biodiversity protection and sustainable land use are increasingly front-of-mind. Private market investors are in a unique position to develop this asset class as it has a longer investment horizon than other investments and, if correctly deployed, can deliver long-term sustainable outcomes for the environment and the communities in which investment is made, improving ESG reporting and outcomes. 

Parit Shah, Senior Product Development Manager at Climate Asset Management, explains: ‘It’s almost like the Earth’s balance sheet and we’re looking at the asset side of that balance sheet. For a very long time the value of these assets has been ignored and the results are the climate and nature crises we face today. So, what we are trying to do is engage international investment capital to really unlock the value of this in financial terms.’ 

Climate Asset Management does this through implementing more sustainable and regenerative land management practices that conserve natural ecosystems, while also implementing a carbon credits strategy, by verifying and generating carbon credits on the voluntary carbon market. Listen to the podcast here.

The strategies of this asset class also tie-in with the need for all infrastructure investors to mitigate for the likelihood of stranded assets or reputational damage. You can read more about what some of those risks are in this summary of the GIIA’s roundtable discussions with the Principles of Sustainable Investment. 

The investing environment is changing along with our world and infrastructure investors can be at the forefront of this change. If you’d like to benefit from the Aztec Group’s experience in administering infrastructure funds or find out more about how the GIIA is smoothing the way for investment, please contact Aztec Group.