Energy transition to drive infrastructure boom: IFM

While infrastructure investments face pressures from higher interest rates and global economic uncertainty, the transition to a low carbon economy will drive spending, IFM says.

Global infrastructure investment is set to rise amid concerns about energy security and the need to fund the transition to a low-carbon economy, according to industry super-backed fund manager, the $210bn IFM Investors.

An IFM report says investment in infrastructure by institutional investors, including global pension funds, more than doubled from around $US300bn ($453bn) in 2015 to $US700bn in 2021.

While infrastructure investments face pressures from higher interest rates and global economic uncertainty, the report says asset allocation to infrastructure by institutional investors will continue to benefit from the “tailwinds” of macroeconomic forces.

It says the Russian invasion of Ukraine has intensified the focus on energy security, particularly in Europe, with a trend of “friend-shoring” energy investments.

At the same time, it says the “enormity of the investment required to fund the energy transition of the global economy” will continue to drive new infrastructure investment.

Owned by 17 major Australian super funds, IFM is one of the world’s largest investors in infrastructure, with more than $100bn invested in more than 20 countries. This includes ownership stakes in roads, ports and airports globally as well as renewable energy infrastructure including an offshore wind farm in Britain, a battery storage company in California and renewable energy platforms – Britain’s Nala Renewables and Europe’s ERG.

The report notes that patronage on infrastructure projects such as roads and airports is “now meeting or exceeding or pre-pandemic levels”.

It says governments around the world have also stepped up their investments in infrastructure as part of stimulus measures in the wake of the pandemic.

IFM’s global head of infrastructure, Kyle Mangini, said infrastructure had proved to be a resilient asset class in the face of rising inflation, higher interest rates, slower growth and continued geopolitical and economic uncertainty.

“Infrastructure assets are showing significant resilience across different sectors, given their favourable links to inflation and steady underlying demand, which is generating a supportive environment for infrastructure equity and debt investment,” he said.

He said both the equity and the debt sides of infrastructure investments would benefit from “tailwinds from the energy transition as governments get on with the significant task of building out the infrastructure their communities need for 2030, 2050 and beyond”.

The report notes that IFM expects the “resilience of infrastructure assets” to be tested this year.

But it argues that continued investment in the sector by global institutional investors will be driven by its resilience to cyclical downturns and the significant new energy investments.

The report notes that the International Energy Authority has estimated that $US2.8 trillion a year in investment will be needed globally this decade to achieve net zero emissions by 2050.

It says opportunities for investment include those directly involved in the energy transition to renewables including wind, solar and hydro-electric.

They also include the electrification of transport, including public transport networks, energy-efficient projects including smart meters, and environmental management projects such as water utilities, waste to energy and recycling facilities.

The report says that global investors, particularly in North America and Europe, are underweight in infrastructure investments compared to their long term targets and over-allocated to private markets. “While the current discrepancy between public and private valuations has led many investors to be over-allocated to private markets, it is clearly a temporary phenomenon,” it says.

“Once valuations adjust closer to their fundamental values, we believe infrastructure has plenty of potential for additional allocations.”

“We believe that, over time, infrastructure will become as ubiquitous as commercial property in a truly well diversified asset allocator’s portfolio.”