Institutional investors and low carbon infrastructure as an asset class

Achieving net zero emissions will require an unprecedented transformation of our infrastructure system. Different economies will face varying challenges, but the transformation of the global economy to be environmentally sustainable and resilient includes decarbonising industry and transport, building smart energy systems, and increasing access to affordable, clean energy. Understanding the role of the private sector and financial markets will be crucial in achieving a decisive transition.
At the same time, institutional investors such as pension funds are facing increasingly complex and challenging macro-conditions and financial markets. Investors are searching for organizational innovation and reconfiguration of their investment models to meet their long-term objectives. Following the Covid crisis with an increasing interest in sustainability among investors, there is an opportunity to scale up institutional investment in low carbon infrastructure and to protect and grow the retirement savings of fund members. Reframing finance will help to respond to the urgent need to act on energy transition while at the same time supporting the economy.
Objective of this thesis is to examine the of role institutional investors and in particular pension funds in sustainable and low-carbon infrastructure, diversifying sources of finance and fostering the development of infrastructure as an asset class. To illustrate how long term investors can promote a more inclusive and sustainable financial system while contributing to the real economy I have adopted an economic geography and bottom up approach benefitting from the unique access to micro data for infrastructure analysis. Following this approach, this thesis builds on literature on financial intermediation and the theory of finance, design and governance of infrastructure, the geography of finance, pension fund research and emerging debates on “relational geometries.”
Beyond the lack of data, there is a lack of analysis in academia and policy institutions on the connection between policies affecting investors’ portfolios strategies and political decisions for low carbon infrastructure.The institutional investor’s investment strategies and the decision to invest in infrastructure are based on strategic asset allocation and asset-liability management considerations. This thesis has analyzed how the changing nature of long-term savings is shaping the current and future demand for long-term assets and the impact of demographic and financial pressure on infrastructure investment. Asset allocation analysis has shown the overall trend to diversify investment portfolios in private markets, impact of ESG investment integration and increasing interest in low carbon infrastructure investment.
At the same time government choices about different types of private funding models and forms of financing of infrastructure are based on short-term political priorities and national constraints. Renewable energy investment is growing, being part of infrastructure asset allocations. However the limited overall investment in low carbon infrastructure is showing major disconnections between investors and governments expectations. As seen in the thesis, partnership models are emerging as a way to leverage traditional bank and utility finance in primary markets and share risks as well as organizational capacity and expertise in support of the financing of infrastructure projects. Well-functioning and deep capital markets, supported by pooling assets, securitization, yieldcos and new listed vehicles could widen the access to and improve transparency of infrastructure investment while diversifying risk and lowering the cost of capital.

Keywords: infrastructure investment
energy transition
long term investment
asset allocation
Advisor: Clark, GL