Climate change poses significant financial challenges for investors whose decisions over the next decade will likely play a critical role in determining how the global economy moves towards decarbonisation. One of the key issues for long-term
infrastructure investors is how to act on the climate risk and emission profiles associated with the assets held in their portfolios. Many investors grapple with the conundrum of whether they should divest emissions intensive assets or stay
invested and help manage the transition to a net zero future.
Divesting is not the only option
We are increasingly hearing from our pension fund clients that they are being challenged by some stakeholders to start divesting emissions intensive and/or fossil fuel dependent infrastructure assets to de-risk portfolios. There is no doubt that
understanding and managing transition risks are important to protecting and growing the long-term value of investments we manage. But sometimes, divesting can mean just passing the problem to somebody else. Infrastructure assets are critical
to meeting the needs of economies and communities. They are costly to build and require significant planning and licensing – most can’t just be turned off and replaced.
There are, and will continue to be, attractive investment opportunities for those willing to take on the challenge of helping infrastructure assets maintain value, generate returns and prosper in a net zero world. Divesting can mean walking away
from these opportunities and the potential returns they can contribute to the long-term retirement savings of working people.
Transition is challenging but makes sense for long-term investors
Decarbonisation will require major new investment. The Net Zero by 2050 scenario explored by the International Energy Agency notes that achieving the net zero goal will “involve a significant further acceleration in the deployment of clean
technologies”. It says that by 2030, close to US$1 trillion will be needed annually for clean energy infrastructure, including electricity networks, public electric vehicle charging stations, hydrogen refuelling stations and import and
export terminals, direct air capture and CO2 pipelines and storage facilities1.
It is not realistic, however, to think that reaching net zero can be achieved by only investing in new “green” infrastructure projects. In the International Energy Agency’s Net Zero by 2050 scenario, tackling emissions from existing
infrastructure accounts for just over a third of the emissions reductions we need to reach our goal2. Some existing infrastructure assets will remain in use for decades and require long term stewardship in order to decarbonise.
Transitioning infrastructure assets for a net zero world is a necessary task but not an easy one. It is complex and highly challenging, and in some instances, it will take decades. It requires ambition, but it also requires patience and detailed,
strategic long-term planning as infrastructure assets have bespoke characteristics and operating environments. No two airports or toll roads are the same. Decarbonisation pathways are likely to be different for each asset and will depend on
many factors, including the source of the emissions, the level of control the asset has over the emissions, the commercial viability of existing abatement options, technological advances and the prevailing policy and regulatory environment.
Despite these challenges, long-term investors like pension funds are well placed to take part in the climate challenge and help assets and sectors decarbonise, particularly given their alignment with members’ interests and long-term investment