The sustainable infrastructure investment report

It was not too long ago that infrastructure investing was considered a sleepy backwater of low-risk, income-producing hedges against inflation. A 2015 InvestmentNews article described the landscape of largescale, often publicly funded, capital-intensive infrastructure projects as ‘steady, defensive, even boring, investments’, that should be considered for their ‘dependable returns’. Even more recently, in 2018, when Elon Musk founded an infrastructure and tunnel construction services company, he called it The Boring Company. Musk’s comment was an intentional double entendre meant to evoke the literal function of the company with a winking nod to the notion that tunnels are not as exciting as electric cars or rocket ships.

Along the way, a handful of emerging and frontier market projects were introduced that ratcheted up the level of investment risk and intrigue in infrastructure as an asset class. The most significant of these was China’s Belt and Road Initiative, a sweeping infrastructure lending programme introduced in 2013 to build railways, ports, roads, dams, pipelines and industrial centres across several dozen countries in Asia, Europe and Africa. The project quickly captivated investors’ imaginations around the world with its promise to pour trillions of dollars into these projects over a decade. However, concerns around lack of transparency and potential location-based risk has prevented large-scale involvement from Western firms.

From geek to chic

Fast forward to today and infrastructure has become the favoured asset class. The Economist has explored the prospects of burgeoning infrastructure boom and some of the largest institutional investors in the world are clamouring to get behind the latest windfarm or largescale solar power project.

What’s happened over the last couple of years to change things?

A lot. But two major factors have been the biggest catalysts. The first is the growing global focus on sustainability. With nearly every major economy committing to the UN’s Sustainable Development Goals and the Paris Agreement, it quickly became clear that meeting these goals would require a significant upgrade to existing means of power generation, global trade and industrial production. The second major driver has been global economies – including the US, EU, Canada, Japan and several others –introducing largescale projects. Now, projects with multi-billion-dollar scale, strong governance guardrails and the halo of sustainability are on the table for everyone from government sponsors to global investment banks to mainstream mutual funds.

Add the effects of the Covid-19 pandemic, which introduced billions of dollars in government stimulus aimed at sustainable infrastructure projects. Also, consider the rapid-fire growth of the electric vehicle (EV) market, explosive mainstream investor interest in environmental, social and governance (ESG) investing and a torrent of natural disasters and extreme weather events. The stage is set for sustainable infrastructure to become the most fertile area of investment speculation since the first Industrial Revolution (1760-1840).

As evidence of this trend, consider that a record US$272 billion in sustainable infrastructure projects across categories including wind, solar, waste and several others were announced in 2020, according to the projects tracked by Refinitiv in the Infrastructure 360 app. That total includes 1,477 individual projects globally, which is more than three times the total number of sustainable infrastructure projects announced a decade earlier and almost double the total dollar value. So far this year, that total is likely to be surpassed. In the first quarter of 2021, 267 new projects were announced with a combined total cost of US$80.6 billion.

Tilting at windmills

A large portion of those total project costs is being consumed by a global rush into wind power. In fact, competition for offshore wind power licences has become so intense that a recent Reuters story compared the quest to secure lease rights to the pitched battles the oil and gas industry used to wage over land access. In one recent auction to secure rights to an offshore seabed near the coast of England, Wales and Northern Ireland, the German Utility firm EnBW and British energy giant BP paid a record US$1.38 billion. That site will generate roughly 3.6 gigawatts of power, which will be enough to power roughly one million homes.

But that’s just one auction for two small parcels of ocean floor in the Irish Sea. Countries around the globe have introduced plans to boost wind power. The US, for example, which recently moved above the 100-gigawatt mark for total offshore and land-based wind energy capacity, plans to be generating over 404 gigawatts of wind energy by 2050. A new initiative launched by Biden’s administration would add another 30 gigawatts of production from offshore wind farms over the next 10 years. Europe currently has roughly 25 gigawatts of offshore wind capacity and intends to install 105 gigawatts of new off-shore and land-based wind energy capacity over the next five years. China’s construction of off-shore and on-shore wind farms nearly tripled in 2020, reaching a total of 281.5 gigawatts of wind power with plans to hit 400 gigawatts by 2030.

The scale and scope of these ambitious projects is fuelling a groundswell of interest in wind-related project finance. According to Refinitiv Infrastructure 360 data, a total of US$55.3 billion in new wind projects were announced in the first quarter of 2021, more than double the amount announced during the first quarter of 2020 ($21.9 billion). 

Beyond wind, solar is the subsector of the sustainable infrastructure landscape that is reporting the most activity. A total of US$18 billion in solar projects were announced in the first quarter of 2021.

The US$18 billion figure is noteworthy for a couple of reasons. It is down by about $3.9 billion from the same period last year, but it is also significant that wind projects have surpassed solar by a wide margin in the first quarter of 2021. The two have been locked in a horserace for supremacy in the renewable energy market for some time and – at least for now – wind projects appear to be edging out solar. To date, the US generates roughly 97.7 gigawatts of power from solar, the EU is at 136.2 gigawatts and China generates 250 gigawatts.

Sustainable projects take on larger share of project finance

To understand how significantly the sustainable infrastructure movement has altered the project finance market it helps to look at the total volume of projects with a sustainability focus versus the broad universe of infrastructure initiatives.

In 2020, for example, the total amount of all announced infrastructure projects was US$776.7 billion, with sustainable infrastructure projects accounting for roughly 35% of that total. In 2011 by contrast, there were $1.6 trillion in infrastructure projects, of which projects with a sustainability focus accounted for just 10%. 

Digging deeper into the evolution of infrastructure project focus, the top five subsectors launching the costliest projects in 2011 were mass transit systems (US$165 billion), roads (US $134 billion), liquefied natural gas (US$128 billion), coal (US$117 billion) and wind (US$84 billion). By 2020, the deck had shuffled to create a much more sustainable-looking top five, led by solar (US$103 billion), wind (US$ 97 billion), mass transit systems (US$80.4 billion), hydroelectric (US$43 billion) and gas (US$41 billion).

Sherry Madera, Chief Industry & Government Affairs Officer at LSEG (London Stock Exchange Group), described the phenomenon playing out in government-backed projects around the world: “Green infrastructure is now almost a de facto asset class. If you’re going to be building infrastructure now, it’s just going to have to be sustainable,” she explained. “There exist many different standards in terms of global frameworks for sustainability, such as the Equator Principles, the Green Investment Principles and Blue Dot Network Principles.  As projects move out beyond multilateral development bank funding, especially in emerging and frontier markets, and develops as a post-Covid government focus, sustainability is rapidly becoming a must-have component to any infrastructure deal.”

For evidence of the mainstreaming of sustainable infrastructure deals, look no further than BlackRock’s April 2021 announcement that as the world’s largest asset manager it had raised $4.8 billion for a new global fund to invest in renewable power assets. BlackRock’s move was not a surprise as the company had announced in early 2020 that it would put ESG goals at the centre of its investment strategy. On the day of the announcement, the firm experienced a record one-day inflow of $1.5 billion into one of its funds. BlackRock quickly followed the announcement by launching a sustainability-focused exchange-traded fund (ETF), which raised more than $600 million in investment in its first week.

BlackRock is not alone among large asset managers that recognise the value of sustainable investments in their long-term strategies. According to Refinitiv Lipper research, ESG-focused funds performed better than their conventional peers in 2020, recording an overall average outperformance of 3.31% compared to 1.19% for conventional funds. 

While asset managers clearly see a growth path in the sustainable infrastructure space, project financiers have a stronger appetite for financing and risk-taking in these initiatives. On that front, 2020 was not a banner year, but it did reveal some interesting trends that highlight the prospects for future of sustainable infrastructure investing.

Overall, the global project finance market dropped by 7.1% in 2020 to US$329 billion, according to the annual Project Finance International League Tables. Within that total, projects funded by loans were down 6.4% and those funded by bonds were down 10.9%, largely due to the slowdown in the deal-closing process caused by the Covid-19 pandemic. 

However, while these totals were down on a year-on-year basis, they were roughly in line with the historical trendline. More importantly though, the proportion of financing for renewable power projects increased in 2020, despite the pandemic. All told, the power sector accounted for US$132.7 billion of global loan volumes in 2020, with 72% of that volume focused on renewable energy projects.

Among the leading commercial banks, Japan’s Sumitomo Mitsui Banking Corporation and Mitsubishi UFG Financial Group took the top two slots for total deal-financing volume in 2020, followed by Societe Generale, Santander and Credit Agricole.

Europe accounted for the largest volume of projects in 2020 with US$61 billion worth of sustainable infrastructure projects announced, despite the headwinds of the pandemic. The Americas followed with US$58 billion in announced projects, and Asia-Pacific (minus Central Asia) ranked third with US$42 billion. The five countries leading sustainable infrastructure by project cost in 2020 were Australia, the United States, Portugal, China and Italy. 

SPACS take off

Largescale infrastructure projects have historically been funded by a combination of loans from commercial investment banks and multilateral development banks and through bond issuance. That’s still largely the case. For the last five years, roughly half (49%) of all sustainable infrastructure projects have been funded by syndicated loans. Another 9% have been backed by bilateral loans and 8% have been funded by public bond issuance.

As interest in these projects continues to grow among asset managers, new types of investment vehicles are being leveraged to broaden access to these types of deals to all types of investors. The most popular of these to emerge over the last several months is the special purpose acquisition company (SPAC) – a shell company created by a group of institutional investors with the sole purpose of raising money through an IPO, then using those proceeds to acquire a company or invest in a particular strategy.

SPACs emerged as one of the hottest investment trends of 2020 – 256 went public and raised approximately $78 billion in total funding for some well-known names including Virgin Galactic, DraftKings and several others. But the real hot spot for SPACs has been the ESG space.

According to IFR and Refinitiv data, about a quarter of all proceeds raised by SPACs in 2020 were for ESG or climate transition-related purposes. Among some of the more noteworthy deals, the luxury electric vehicle company Lucid Motors raised US$2.1 billion, lithium-ion battery recycler Li-Cycle Corp raised US$1.7 billion and the electric bus and battery manufacturer, Proterra, raised US$1.6 billion. More recently, in 2021, Indian renewable energy producer ReNew Power became the first major overseas listing of an Indian company through a SPAC.

SPACs have gained such strong popularity by providing faster access to capital and less exposure to market volatility than a traditional IPO, but they also introduce some new risks. The biggest risk is the fact that the investors buying into a SPAC IPO often do not know what the eventual acquisition target will be.

Rod Morrison, Editor of Project Finance International, has been following the growth of SPACs in the project finance space and says they could be a harbinger of a possible bubble forming in the sustainable infrastructure space.

“There is definitely some frothiness in the sustainable infrastructure marketplace at the moment,” he explained. “The fact that you have fund managers raising money without telling investors what they’re going to invest in, and then moving very quickly into big positions to chase the next big thing, shows us that there is a lot of blue-sky thinking going on at the moment.”

Morrison added: “The amount of funds being raised, the willingness of companies such as BP and EnBW to pay top dollar for seabed rights, and financing of projects at zero percent interest rates are all signals of a gold rush mentality that will certainly create its fair share of opportunities, but also a great deal of risk.”

Project Finance International’s Morrison is not alone in recognising some of the warning signs that accompany the global push into sustainable infrastructure. Patrick Pouyanné, CEO of Total, one of the world’s largest oil and gas companies, recently told the Financial Times that “there is a bubble” in the renewables sector, with several companies currently valued at up to 25 times earnings – a level he described as “just crazy”.

Beyond the sky-high valuations for all manner of infrastructure-related plays with a sustainability focus, project-related operational risk is also an issue. History is full of examples of big infrastructure bets that have gone horribly wrong.

Globally, cost overruns on infrastructure projects typically exceed 25% and two-thirds of foreign bribery cases involve infrastructure deals. In 2008, the Indian highway authority signed a deal with a private company to establish a six-lane, 173-kilometre toll road that was to be completed in three years at a cost of $65 billion. After seven years of cost overruns and difficulties acquiring land, the company defaulted and the road is still not completed. 

Sustainable infrastructure deals in established markets have not been immune from these types of challenges. Cape Wind is a sprawling US$2.6 billion offshore wind project that was set to become the standard bearer for America’s burgeoning offshore wind industry. It collapsed after a 16-year battle with the fishing industry and very wealthy homeowners who didn’t want windmills obstructing their ocean views. The project’s biggest weakness: a plan to build its windfarm within view of some of the most expensive real estate dotting the coast of Nantucket, Martha’s Vineyard and Cape Cod, Massachusetts.

In the end, the Cape Wind project, which had the backing of heavy hitters including the US Department of Energy, Mitsubishi UFJ Financial Group, Rabobank Group and Natixis, succumbed to a not-in-my-backyard impasse.

“There really isn’t any global criteria standardisation in the sustainable infrastructure investing space right now,” LSEG’s Madera explained. “It is a very fragmented landscape of individual deals, all of which are subject to their own unique set of challenges, ranging from geopolitical risk, foreign exchange risk, debt sustainability and completion risks. It’s really critical at this stage in the game that investors have as much concrete data and trusted intelligence as possible to guide their strategies.”

There is no question that sustainable infrastructure investing is going to be a high-profile fixture of the global financial landscape for the foreseeable future with over US$80 billion in projects already announced in the first quarter of 2021. As investors of every type are flocking to sustainable investment strategies and virtually every major corporation in the world is rewriting its mission statement to include a focus on sustainability, the die is cast for a once-in-a-generation surge in deal-making.

Some of these deals will create new millionaires and billionaires, while others will collapse spectacularly – taking investors down with them. In the middle, there will be countless opportunities to win and lose, all of them dependent on the ability to discern good risk from bad.

In a sprawling market that spans geographies, asset classes and myriad incremental deal-specific details, accurate information will be the key to navigating the pitfalls and spotting the opportunities. Information on who’s backing a deal, due diligence on what other holdings current investors have in their portfolios, previous track records of deal principals and counterparties, information on debt and loan levels and expert intelligence on regional and local issues are all going to be critical factors in valuing these deals as they continue to proliferate quickly.

Just as smart gambles on steel, railroads and oil secured places in the history books for Carnegie, Vanderbilt, Rockefeller and Morgan, a generational opportunity to lead the new infrastructure revolution is here. Unlike the days of the gilded age magnates who could make decisions based on gut feel, intuition and influence, today’s fortunes will be made and lost on data quality, deep industry insight and powerful analytics.

Refinitiv Infrastructure 360

Refinitiv has the most comprehensive set of news, data, insights and analytics available on global infrastructure developments from rumor to close, including deal structuring, financing, risk profiling, regulatory compliance and lender, investor and advisor profiles.

The Infrastructure 360 app (GINFR) in Refinitiv Workspace combines more than 45 years of leading content from Project Finance International (PFI), BRI Connect, Refinitiv® Lipper®, MENA Projects, Refinitiv® Deals Intelligence, Refinitiv® DataStream, Loans, Reuters News and ESG.