When it comes to government-driven infrastructure initiatives, it’s tricky to rely on politicians’ manifesto promises. But this year is different. The Covid-19 crisis has pushed infrastructure to the forefront of policymakers’ minds, with the exigencies of climate change shifting the focus to a ‘green’ post-pandemic recovery.
Infrastructure sits at the heart of the transition to a net-zero carbon world. From the European Union’s extensive Green Deal, to the UK Prime Minister’s recent pledge to promote offshore wind projects, governments are focusing their stimulus efforts on public services and infrastructure, with a distinct emphasis on renewables.
The OECD estimates that more than 60% of global greenhouse gas emissions are related to physical infrastructure. Widespread public investment, alongside regulatory initiatives, could prompt the private sector investment needed to help countries reach their climate goals.
One key development to keep an eye on in this area will be the outcome of the 2020 US election. Higher spending on infrastructure has been a prominent feature of fiscal stimulus packages across China, Japan and Europe, but it has been notably lacking in the US. Importantly, the urgent need to expand and modernise America’s ailing infrastructure is one of the few things that the Republicans and Democrats agree on.
The US spent just 2.5% of GDP on infrastructure in 2019, down from 4.2% in the 1930s, according to the American Society of Civil Engineers. It estimates that the shortfall in infrastructure investment between 2016 and 2025 will reach US$2 trillion. Furthermore, infrastructure is a key source of jobs in the world’s largest economy, with 17.2 million people employed by the industry.
Regardless of whether the Democrats win, regional utilities and private enterprise are already investing in green opportunities – even under Trump’s presidency, during which the US controversially decided to withdraw from the Paris Agreement. A Biden victory would likely drive renewable energy deployment further, given the candidate’s plan “to build a modern, sustainable infrastructure and an equitable clean energy future”.
Utilities play a key role
In the US, the utilities sector (which includes gas, water and electricity) is actually predicted to grow its earnings this year, compared to some pessimistic outlooks on earnings for the balance of the market.
The sector is a crucial element of infrastructure across all countries, yet it has suffered something of an identity crisis as one of the worst offenders in relation to greenhouse gases. However, utilities are central to the requirements around the energy transition, and many utilities businesses have an exciting story to tell on their contribution and access to opportunities around the shift to renewables. Some good examples include US utility company NextEra Energy Partners, which has a focus on clean energy, and Italy’s Enel, which is deploying emission-free energy sources, while accelerating the process of decarbonisation.
Utilities businesses on the whole have been able to grow their dividends this year. The M&G Global Listed Infrastructure Fund recently bought six holdings in utilities with a bias towards energy transition-focused companies, at highly attractive valuations. That has taken the utilities sector weight to the highest it has ever been for this fund, largely at the expense of transportation infrastructure, such as airports.
Where are the opportunities?
Investors are well-positioned to support the energy transition. Governments cannot simply snap their fingers and switch to renewables overnight. Moreover, some aspects of the energy transition are politically sensitive, such as the shift away from burning coal and the impact this could have on jobs. This could prove problematic in the US, with both political parties focusing on supporting and creating jobs as a major part of the economic recovery.
The journey towards a greener future will require gradually phasing out coal and other carbon-intensive sources of energy, at the same time as phasing in renewables. Public policy changes will be a key driver in some areas. Electric vehicles, for example, are gaining traction but take-up could remain relatively low without government action to incentivise consumers and phase out the production and sale of internal combustion engines.
In terms of investment opportunities, infrastructure companies that are exposed to the transition towards a greener and more sustainable economy are well-placed to prosper over the next few decades. The increased focus on a green recovery should prove to be a powerful tailwind for businesses that own and develop sustainable infrastructure assets, such as solar parks, wind farms and vehicle charging networks. Companies that own digital infrastructure on which modern economies depend, particularly in a post-pandemic world, are also key.
It is easy to get caught up in the current crisis and related market volatility, but investors should look beyond this. Whether the focus is on renewable energy, transportation of the future, urbanisation, universal connectivity, water and waste management or demographic shifts, there are clearly some powerful long-term themes and structural trends driving this exciting asset class.