Comment: Transition finance, an infrastructure investor perspective

Losses from natural catastrophes set a global record in the first half of 2023, with a total cost of $120 billion – 46 percent above the 10-year average of the last decade. Extreme weather events are set to become more frequent and more severe as climate change worsens, carrying a wide range of financial implications for global infrastructure and the communities it serves.

Investment of around $1.8 trillion was poured into the clean energy and electricity sectors in 2022, 80 percent more than into fossil fuels, and this amount is projected to continue to rise. This capital has predominantly flowed into renewables and grids, which form the cornerstone of the net zero economy.

While huge investments need to flow into the creation of new low-carbon infrastructure, transitioning existing infrastructure is also pivotal for meeting global carbon-reduction targets. Repurposing traditional infrastructure presents attractive long-term investment opportunities by leveraging operational expertise to evolve hard-to-abate business models.

Infrastructure investors can be the driving force behind climate transition for those sectors in which their assets play a critical role.

They can directly influence invested assets’ Scope 1 and 2 emissions reduction through helping the assets develop robust decarbonisation plans. This includes adoption of carbon-neutral operations and the use of renewable energy sources, eg via fitting dedicated behind-the-meter clean energy plants or facilitating power purchase agreements from certified green providers.

Infrastructure investors can also help transform their assets with the installation of new technologies, services and features that enable further decarbonisation.

Transport sector

This is particularly evident in the transport sector, which is a major emitter, accounting for more than one-fifth of global carbon emissions. Decarbonising road, air and maritime transports requires an understanding of current and emerging technologies and their trade-offs and, most importantly, cross-sector collaboration.

Electric vehicles (EVs) are the key to decarbonising road transport, which comprised around 17 percent of global carbon emissions in 2021. Therefore, public and toll road operators must ensure their infrastructure can accommodate a critical mass of EVs soon.

This requires significant investment in extensive plug-in charging infrastructure and other innovative technologies such as wireless power transfer technologies that help charge EVs while they drive in dedicated lanes. While the development of new battery technology is expected to reduce the additional demand for charging stations, EVs uptake still depends on the broad accessibility to reliable charging networks.

This is also where the Just Transition is already playing out, given the growing need for toll roads’ skilled workers to pivot from traditional mechanical-based service providers to new skilled EV specialists and service suppliers offering to support the transition and new customers. This not only offers opportunities to investors but asset workforce and wider communities.

While the shipping and aviation sectors each accounted for around 2 percent of global energy-related emissions in 2022, they are both expected to exponentially increase their share of emissions on the back of worldwide demographic and commercial trends.

Aviation focus

For airports, emissions from aircraft constitute their Scope 3 emissions, and form the lion’s share of overall airport emissions, making it a critical area of focus for infrastructure investors.

According to the International Energy Agency, aviation is “one of the most challenging sectors to decarbonise”, with limits on what can be achieved through shifts to hydrogen fuel and electric planes. With stringent testing requirements and long fleet renewal cycles, it is also unlikely that significant engine and airframe innovation will appear in the near term.

While the decarbonisation of aviation is likely to require a combination of multiple technologies – including engine and aircraft advancements, electrification and hydrogen – the majority of emissions reduction is expected to be achieved through sustainable aviation fuels (SAF).

In part, this is due to the compatibility of SAF as a ‘drop-in’ fuel, allowing it to be blended 50:50 with traditional jet fuel used in service today without significant alterations to existing aircraft engines and refuelling infrastructure.

SAF is currently produced using costly and finite biogenic feedstocks, resulting in low availability and exposure to commodity markets, which make SAF prices typically several times costlier than traditional jet fuel.

Close collaboration between airport owners, airlines, government and energy companies is therefore required to sustainably increase the scale and price competitiveness of SAF if aviation sector emissions are to be reduced in a timely manner.

In this regard, it is encouraging to see the UK government’s Jet Zero strategy, which supports the aviation industry to reach net zero by 2050. This includes an interim target of net zero domestic flights by 2040 and ensuring that at least 10 percent of jet fuel is SAF by 2030.

Port practices

Similarly, ports have an important role in providing facilities and incentives to support the decarbonisation of fleet vessels.

Some ports are decarbonising their operations by providing renewable energy to vessels that dock. This practice, known as ‘cold ironing’, involves ports providing shoreside electrical power to ships while they are berthed, allowing them to turn off their main and auxiliary engines and avoid burning fossil fuel.

While it is often not feasible to provide 100 percent of the energy needs of vessels through cold ironing, the practice can significantly reduce Scope 3 emissions of ports.

Additionally, there is a significant decarbonisation opportunity for ports in facilitating the refuelling of vessels with alternative, low-emission fuels.

Fleet order books for major shipping lines are increasingly trending towards ships powered by alternative fuels, including hydrogen, LNG and green methanol. With these different fuels will come differing safety, environmental and technological requirements for portside refuelling infrastructure.

Economic rationale

It’s not all about mitigation and emission reductions though. There is a clear economic rationale for substantial investment in adaptation.

The Global Commission on Adaptation calculated that extending the lifetime of assets by investing in early-warning systems and securing existing infrastructure had benefit-cost ratios ranging from 2:1 to 10:1.

Investment in adaptation can be viewed as returning a triple dividend of avoided losses, increased productivity and resulting social and environmental benefits. The Commission estimates that if $1.8 trillion was to be committed to adaptation in the decade to 2030, it would yield net benefits in excess of $7 trillion – nearly a 4x return on investment.

Yet, despite the strength of the business case and benefits for investors, the financing gap for adaptation remains staggering. Climate mitigation investments, such as in renewable energy adaptation projects, are not directly linked to a cashflow-generating activity. Instead, they deliver value by reducing the losses from extreme weather events, which are uncertain and complex to quantify.

Despite this uncertainty, there is a strong business case for private adaptation investment in solutions that are low cost, proven to be effective and have immediate impact. The climate adaptation opportunity is already enormous, and the need for adaptation solutions is likely to grow as climate impacts become more prevalent.

Maria Nazarova-Doyle is global head of sustainable investment at IFM Investors, a $150 billion global private markets asset manager