Sounding Board: Why institutional investors should consider sustainable infrastructure

Our world is changing. Food, fresh water, other natural resources and clean energy are all under strain. Unfortunately, these challenges will only worsen as population, urbanization and industrialization, along with demand, continue to rise.

Traditional global infrastructures (oil and gas pipelines, industrial production, transportation such as roads, railway lines, air and seaports, water utilities, etc.) that have long been known as central to the global economy are also central to the transformation of our global landscape needs. More specifically, infrastructure in its broader sense remains a central component of our transition toward a cleaner, greener and inclusive economy.

Read: Sounding Board: How institutional investors can manage the physical risks of climate change

While the environmental crisis (among others) will render us increasingly dependent on a transformation in global infrastructure, we’re also experiencing low interest rates and emerging inflation. These themes, along with aging infrastructure, have governments around the globe prioritizing infrastructure to help stimulate the economy.

However, with the urgent need to address climate change and natural resource pressures, nations are shifting their focuses. They’re moving from traditional, often fossil fuel-based infrastructures, to green, sustainable ones. This includes electric vehicle charging capability, lower carbon energy sources and improved water treatment facilities, to name a few.

While this necessary transformation helps address key systemic issues like climate change and supply shortages of food, clean water and energy, it also presents opportunities for institutional investors seeking income and long-term capital growth.

Influencing forces

Most major economies have committed to reducing the carbon they produce. Even with these commitments, we aren’t on track to limit global warming to 1.5 or even two-degrees Celsius. Climate change is already increasing the frequency and severity of extreme weather and natural disasters, such as hurricanes, flooding, rising sea levels and forest fires. These events trigger subsequent impacts, affecting fresh water, air quality, farming lands and more, in addition to the cascading effects on health and livelihoods. These pressures and impacts continue to mount.

Read: 75% of investors factoring climate change into investment policies: survey

Among the greenhouse gases that lead to climate change, carbon emissions are the most concerning. However, it isn’t as easy as simply turning off the greenhouse gas or carbon switch. We need to transition the current economy toward a lower-carbon economy. This has led to a growing movement toward the adaptation of our traditional infrastructure to incorporate sustainable measures. This can look like — but isn’t limited to — creating infrastructure with low carbon and environmental footprints and protecting natural ecosystems. Sustainable assets can also trigger innovation or increase investments in education, research, engineering and development.

But what are the benefits of investing in sustainable infrastructure? It goes beyond the idea of ‘making the world a better place.’

• Helping meet the increasing demand to transition toward an ecosystem supporting sustainable food, clean water and clean energy production

When large corporations and other entities invest in sustainable infrastructure, it can help fund new technologies and green initiatives. Take, for instance, the Thames Tideway tunnel project. Funded by institutional investors, this project has a goal to keep the Thames River clean from spills and pollutants. The project will upgrade London’s 150-year-old sewer system to cope with the city’s growing population.

• Mitigating the effects of climate change and the associated monetary costs

Investing in sustainable infrastructure can help reduce carbon or greenhouse gas emissions over time. Adapting traditional infrastructures to become more resilient can help protect populations from hurricanes, flooding, rising seal levels and forest fires, not to mention the costs associated with large scale cleanup and repairs.

Read: What’s next for infrastructure assets after a rough Q1?

• Creating more jobs

With new technologies, construction and the manufacturing of new products in support of clean infrastructure, new jobs are created. Just consider the number of jobs sustainable infrastructure creates within the environmental sector alone. Policymakers, planners, procurement, regulation and governance are all needed. Environmental Careers Organization, Canada’s latest database for the environmental sector, shows four consecutive quarters of increased job postings and two consecutive quarters wherein job postings surpassed pre-pandemic levels.

• Helping supply chains stay more ‘local’

Consider how the coronavirus pandemic has affected global supply chains during lockdowns. Often, sustainable infrastructure projects occur close to home. In Canada, the stages in green infrastructure projects — from ideation to completion — generally happen within a province. This means these projects will harness the power of local resources. It also means it’s less likely that the projects will be easily disrupted and they can better adapt when negative world events occur.

• Portfolio return

It may surprise some that investing in sustainable infrastructure doesn’t mean sacrificing returns. There are structural tailwinds that can lead to compelling investment opportunities. We saw sustainable indices outperform the S&P global infrastructure index from 2019-2021. Also, investing in sustainable infrastructure can prove complementary to traditional portfolio holdings, offering the ability to deepen diversification.

Read: ESG integration gaining steam as institutional investors challenge myths

Investing in sustainable infrastructure offers appeal, not only from a responsibility standpoint but from an economical perspective. Not only are these investments in companies that are part of the action, helping address climate change and shortages of food, clean water and energy, but they’re also investments for potential income and long-term capital growth.

It’s exciting to consider where this will take us in the next decade as we become conscious about what our money is doing for our wallets, as well as the communities and ecosystems we live in.

Adelina Romanelli is director of responsible investing and manager research at Sun Life Global Investments Canada Inc.