Refocusing Australia's infrastructure pipeline
We recently surveyed infrastructure industry leaders and found that Australia's infrastructure pipeline is out of step with what's required for long-term social and economic prosperity.
In the times of COVID-19, there has also been much discussion about an infrastructure-led recovery. As the stewards of $2.9 trillion in the Australian superannuation system, funds and institutional investors are on the hunt for opportunities to deploy capital in the long-term interests of their underlying members. As such, funds and institutional investors are uniquely positioned to play a pivotal role in this recovery and to respond to the disruption and opportunities that have been presented in infrastructure.
Outlined below are some of the key themes that have emerged for funds and institutional investors.
- The resilience and breadth of the infrastructure sector has been demonstrated throughout the pandemic. Infrastructure investment remains a long game, and it is a dynamic and continually evolving one.
- Market dislocation has accelerated opportunities in digital infrastructure, and highlighted the need to prioritise investment in social infrastructure and renewables.
- Investment in social infrastructure provides funds and institutional investors with enhanced opportunities to collaborate with government and the community, and to play a greater role in 'nation-building' projects.
- With increasing social pressure to decarbonise the economy, and a number of funds and institutional investors pledging to reduce emissions to net-zero by 2050, investments in renewables carry a strong social licence.
- The application of ESG principles is increasingly regarded as a means to act in the best long-term interests of investors, and investors have increasingly demanded ESG commitments from their fund managers.
As the impacts of the pandemic have been felt across the world, the resilience and breadth of the infrastructure sector has been demonstrated.
Whereas investors were focused on asset management for their existing portfolios when the crisis first hit (as well as dealing with COVID-19-related regulatory changes such as the early release scheme impacting superannuation funds), we are now starting to see investors look through the cycle. Infrastructure investment remains a long game, and it is a dynamic and continually evolving one too.
Market dislocation has accelerated opportunities in certain subsectors. There's no doubt that digital infrastructure has emerged as a winner and, more than ever, has the essential services characteristics of more traditional infrastructure assets. Changes in consumer behaviour have had a discernible impact on infrastructure needs, with increased demand for technology and data services being driven by changes in our work and lifestyle patterns. On the flipside, other subsectors have obviously been challenged, though not uniformly. For example, airports and roads within transport infrastructure have been highly exposed and suffered severely as a result of changes in volume (although investors remain optimistic of a medium-term recovery as underlying demand is thought to remain strong), whereas ports have remained resilient in light of increased demand for logistics services.
We've also seen a shift towards a more nuanced assessment of core and core-plus infrastructure assets, with a greater focus on the risk/return profile of particular assets and how to price divergences in risk. The resilience of the sector as a whole has also highlighted the importance of diversification in infrastructure portfolios (both within traditional infrastructure portfolios, as well as into core-plus and emerging infrastructure), together with a renewed focus on assets with long-term contracted revenues.
A key finding in our survey was that social infrastructure, community infrastructure and social and affordable housing are considered to bring the greatest benefit to society and our economy, yet these areas are the most underrepresented in Australia's current infrastructure pipeline.
The discussion on social infrastructure has assumed heightened importance during the pandemic. As one respondent to our survey commented: 'We need to improve the social fabric and licence that we as investors operate in. We need to enrich people's lives, especially at [this] difficult economic time'. We've seen the resilience of healthcare and aged-care assets in the current market, with such assets being increasingly brought within the remit of infrastructure investment mandates.
Investment in social infrastructure also provides investors with enhanced opportunities to collaborate with government, and for superannuation funds in particular to play a greater role in 'nation-building' projects. Seeking to utilise Australia's superannuation fund pool in restoring jobs and growth also takes aim at the twin objectives of generating strong investment returns, while also achieving broader and sustainable social, economic and other policy goals for the benefit of underlying fund members.1
Renewable energy generation and storage is another asset class that we've seen demonstrate resilience in recent times, driven in large part by increasing social pressure to decarbonise the economy and accelerate the transition to a greener energy mix.
As for social infrastructure, our survey respondents identified renewables as being underrepresented in the pipeline and as a key area deserving of development priority. Successful transition will require network investment and also government and community engagement, given the nature of many renewables opportunities as greenfield assets.
With a number of funds and institutional investors (including Cbus, HESTA, UniSuper and IFM) pledging to reduce emissions to net-zero by 2050, and industry bodies like the Australian Council of Superannuation Investors (ASCI) pushing for more to be done by leading companies on achieving their net-zero commitments, investments in renewables carry a strong social licence. The increased interest in renewables has meant that it can be challenging to find value, and investors may need to look for more complex opportunities, such as where there may be more exposure to development, technology, market and/or operational risks.
The discussions around bolstering social infrastructure and greener energy investment form part of the broader dialogue of the role of environmental, social and governance (ESG) considerations in investment strategy.
Public interest and focus on ESG considerations has sharpened significantly in recent years (and this trend will only continue), with many funds and institutional investors now having dedicated ESG teams in place, working alongside their investment teams. The application of ESG principles is increasingly regarded as a means to act in the best long-term interests of investors, and investors have increasingly demanded ESG commitments from their fund managers.
ESG considerations now factor into decision making across the lifecycle of investments, from assessing the value of opportunities, to risk mitigation, and to seeking to enhance value in the longer-term through asset management (aligned with the long-term horizon of infrastructure investments). However, more broadly than this, and inherent with an ESG approach, investors are looking beyond purely financial analysis to a more holistic approach that takes into account the purpose and impact of an investment on society and the community.2
We certainly find ourselves in interesting times as Australia begins to emerge from the COVID-19 haze. Continuing engagement between funds and institutional investors on the one hand, and key government and community stakeholders on the other, should place Australia in good stead to navigate our way through an infrastructure-led recovery.
J Dunn, The Australian Financial l Review: Nation-building funded by super funds, https://www.afr.com/companies/financial-services/nation-building-funded-by-super-funds-20190626-p521ff (26 June 2019); S Loane, The Australian Financial l Review: How to supercharge the economic recovery, https://www.afr.com/companies/financial-services/how-to-supercharge-the-recovery-20200602-p54ymx (2 June 2020).
See report by Linklaters: ESG. Risks and opportunities in the infrastructure investment cycle (Asia edition).