infrastructure funds facing the european green … · 2021. 1. 14. · patrick jolivet, director of...

INFRASTRUCTURE FUNDS FACING THE EUROPEAN GREEN RECOVERY

JANUARY 2021Supported

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2 INFRASTRUCTURE FUNDS FACING THE EUROPEAN GREEN RECOVERYJanuary 2021 Copyright: Reproduction prohibited without explicit consent from Novethic

Table of ContentsInvestment in infrastructure is essential to the European green recovery ............................................. 3

Key Figures .......................................................................................................................................................................................4

Infrastructure and the transition to a sustainable model ................................................................................. 5

The dynamics of green infrastructure .......................................................................................................................... 8

Green infrastructure funds and the EU Taxonomy .............................................................................................10

Expert Opinion: EU Taxonomy will boost the green focus of European infrastructure ........................................................................................ 12

The green infrastructure fund market ........................................................................................................13

The Taxonomy does not worry green infrastructure specialists ..................................................17

Infrastructure projects in light of the EU Taxonomy ...........................................................................18

Conclusion: Current strategies are insufficientto meet environmental objectives ................................................................................................................................... 22

Appendix : Green infrastructure fund analysis methodology ........................................................................ 23

AcknowledgmentsThe Novethic research team would once again like to thank all those who assisted in conducting this study: •AquilaCapital-Casilda Perez-Medina, Roman Schilin, Taoufik Saoudi & Lars Meisinger •Foresight-Henry Morgan & Jai Mallick •GRESB–Rick Walters •RGreen–Cédric Lacaze & Julien Commarieu


Investment in infrastructure is essential to the European green recoveryAcrosstheglobe,theneedforinfrastructureinvestmentgearedtowardssustainablecitiesisestimatedat$90trillionby20301. Meanwhile,largeinstitutionalinvestors-facedwiththeCOVIDcrisisandverylowbondrates-areturningtothisassetclasswheretheneedforinvestmentinnewinfrastructureisenormous(suchastransportanddigitalnetworks,energy,hospitals,retirementhomes).Itisalsoequallyimportanttorehabilitatetheinfrastructurethatalreadyexists(water,heating,airconditioning,etc.).Still,averagefundraisingforinfrastructureintheprivatefinancesphereisthusfarafewtensofbillionsofdollarsayear.

InitsJanuary2018finalreport,theEuropeanHigh-LevelExpertGrouponSustainableFinance(HLEG)includedarecommen-dation to create a “specific entity on sustainable infrastructure from existing institutions to accelerate the development of high-quality projects that will enable the European Union to achieve its environmental objectives, including compliance with the Paris Agreement”. ThisrecommendationhasbeenintegratedintotheActionPlanforFinancingSustainableGrowthdevelopedbytheEuropeanCommission.

However,didinvestorsestablishalinkbetweenthisveryspecificassetclassandtheEuropeanUnion’senvironmentalobjectives?Tofindout,Novethic-withthesupportofADEME,TheFrenchAgencyforEcologicalTransition–conductedacomprehensivestudyontheEuropeaninfrastructurefundsmarketwithconsiderationforenvironmentalimplicationsandtheimpactsoftheEUTaxonomyonthesefunds.Fundsarecurrentlyveryfocusedonrenewableenergy,wheretheconceptofsustainableinfrastructurecoversamuchbroaderfield.Itappliesto‘green’and‘smart’urbanprojectsandincludesawiderangeoffacilitiesforenergy,water,andlandmanagementthatincorporatetheuseofintelligenttechnologiesandsustainablebuildingmaterials.Investinginsustainableinfrastructurealsoconcernstheessentialrehabilitationofexistinginfrastructure.Toincreasesustainableinfrastructurefinancing,itisnecessarytointegrateEnvironmental,Social,andGovernance(ESG)criteriaintothemanagementofthisassetclass.Thisstrategyexistsbutstillneedsaboosttobefullyefficient.WemayhopethattheEUTaxonomy,cornerstoneofthenewEuropeanframeworkforsustainablefinance,willbeafactorinitsacceleration.

Links between finance and the environment : ADEME speaks out and mobilizes forces

Patrick Jolivet, Director of Socio-Economic Studies, ADEME

TheParisAgreement-liketheFrenchandEuropeancarbonneutralitytargets-requiresamassiveincreaseandreorientationoffinancingtowardssustainableandresilientassets.ADEMEhasshownthatagreenrecoveryisbenefi-cialinmacroeconomicterms,asitspurspositiveeffectsonactivity,employment,andpublicaccounts1.TheFrenchAgencyforEcologicalTransitionalsointervenesattheactorandprojectlevel,seekingtostrengthentheprofitabilityofsustainableandresilientassetsandtechnologiesandincreaseconsiderationoftherisksandopportunitiesrelatedtotheenergyandecologicaltransitionforvariouseconomicactors,includingthoseinthefinancesector.Theyalsoseektoalignpublicfinanceswiththesetransitionobjectivesbystrengtheningtheirleverageeffect.ADEMEhasstructuredmostofitsactionsaroundtheEuropeanFinanceClimActproject,whichaimstoconsiderclimatechangeinfinancialsectormanagementandsupervision.

ThisfocusoninfrastructurethatwascarriedoutinpartnershipwithNovethicintheextensionofthe“EuropeanGreenFundsandtheEUTaxonomy:TheGreatChallenge”studyprovidesausefulperspectiveonthepossibilitiesofmobilizinginvestorsaroundtheEuropeanGreenDeal.However,thisoverviewshowsthemagnitudeofefforttobemade.TheimplementationoftheEuropeanframeworkonsustainablefinance-whichgoesintoeffectin2021-shouldcontributetothis.

1 TheNewClimateEconomy,TheSustainableInfrastructureImperative,20162 https://www.hautconseilclimat.fr/wp-content/uploads/2020/07/effets-macroeconmiques-plan-relance-ademe.pdf

http://newclimateeconomy.report/2016/the-sustainable-infrastructure-opportunity/

https://www.hautconseilclimat.fr/wp-content/uploads/2020/07/effets-macroeconmiques-plan-relance-ademe.pdf

https://www.hautconseilclimat.fr/wp-content/uploads/2020/07/effets-macroeconmiques-plan-relance-ademe.pdf


KEY FIGURES Context

Toachievetheseenvironmentalobjectivesby2030,theEuropeanUnionhasanimportantneedforgreeninvestmentsspecifi-cally.Thisneedisestimatedatnearly€500billionperyear.

Additional green investment needed under the European Recovery Plan (€bn per year)

InaworkingdocumentdedicatedtotheEuropeanrecoveryplan,theEuropeanCommissionstates:“The total green investment needs cover not only the current 2030 climate and energy targets (€240bn additional annual investment) but also investment needs to deliver on Europe’s wider transport infrastructure (€100bn per year) and environmental objectives (€130bn per year).”3

Heavyweight Institutional Investors but a limited ESG analysis€388 billioninvestedinallkindsofinfrastructurebymajorglobalinstitutional investors4. ThreeEuropeansareintheTop10:twoinsurers–Allianz(€35bn)andAXA(€13bn)–andtheDutchpensionfundAPG(€17bn).

ESGanalysisdedicatedtoinfrastructuresremainsquiteelementary.TheOECDlistsaroundtenserviceproviders,butindica-torssuchasCO2emissionsfrominfrastructuresorreportingontheimpactofESGriskssuchasclimatechangehaveyettobefurtherdeveloped.GRESB–aspecializedESGratingorganizationforreal-estateandinfrastructurefunds-waslaunchedin2015.Itcurrentlycoversnearly200fundsworldwide-61ofwhichareinEurope–foratotalofapproximately€2.5trillion.

Green fund offer focus on renewable energyNovethichasdevelopedamethodologytoidentifyandanalyzeinvestmentfundsinvestingspecificallyingreeninfrastructure.Thelargestcategoryisgreenfunds:theirinvestmentstrategyincludesanenvironmentalfocusandhalfoftheirinven-toryatleastiscomposedofgreenprojects.Novethicalsofocusedondiversifiedfunds,fewerinnumberbutlargerinsize.Althoughthesefunds’strategydoesnotputforwardenvironmentaldimensions,theyareinvestinginatleastoneinfrastruc-tureprojectcompatiblewiththeEuropeanTaxonomy.

Sectors

Total Green Transformation

Environmental Objectives*Energy and ClimateGoals for 2030

470

Renewable Energy 30

185

5

120

77

38

15

Construction

Industrial/other energy efficiency

Transport

Environmental Protection

Resource Management (excluding energy)

Circular Economy (beyond needs already included above)

Source:EuropeanCommission*beyondclimate

Green Funds

310 funds

108 €bnraised

Diversified Funds

51 funds

55 €bnraised

Source:Novethic3EuropeanCommission,“CommissionStaffWorkingDocument,IdentifyingEurope’sRecoveryNeeds”,27May2020.4IPE,«Top100InfrastructureInvestors2020»,Sept.-Oct.2020.


5EuropeanCommission,CommissionCommunicationontheSustainableEuropeInvestmentPlan,14January2020.6SeethecasestudyonFrenchinstitutionalinvestorsinthe2020editionofNovethic’sArticle173report.7Source:BEI

Infrastructureinvestmentsareeithermadedirectly-inassetssuchasroads,wind/solarfarms,anddigitalnetworks-orthroughfundsdedicatedtoinfrastructure,recentlydevelopedinEurope.Thepossibilityoffindingtheserealassets,withapredefineduse,givesinvestorshopeforstablefinancialbenefitsbasedonthepriceandvolumeprojectionscalculatedonlong-termcommit-ments(partnership,publicservicedelegation,etc.).LargeEuropeanpublicinvestorshavebecomeinterestedinaligningthistypeofinvestmentwiththeirclimatecommitments,suchastheEIB(EuropeanInvestmentBank),which“will align all its financing activities with the principles and goals of the Paris agreement by the end of 2020. A first step in that direction was the adoption of the new Energy Lending Policy on 14 November 2019, which prioritises lending to energy efficiency, renewable energy […]and new types of energy infrastructure required for the future low carbon energy system”.5

In2018,theEuropeanCommissiondecidedtodevelopataxonomyofenvironmentalactivitiescompatiblewith itsobjectives, foragreenereconomy.TheTaxonomyisplannedtogointoeffectin2021.Thisclassi-ficationsystemcovers6areas(seerigttable).Thefirsttwoareasinclude70activitiesthatcontributetotheEU’senvironmentalobjectives.Thedrafts for the first two technicalframeworkswerepublishedin2020,andtheotherswillfollowbetween2021 and 2022.

Infrastructure: key assets starting to integrate ESG criteria and resilience factorsAnincreasingnumberofinstitutionalinvestorsreportongreeninfrastructureinvestmentsintheirresponsibleinvestmentreport6.Reportsoninfrastructurecontributingtotheproductionofelectricityfromrenewableenergysourcesaremostcommon.Yet,sustainableinfrastructureisabroaderfield,bringingtogetheralldevicesthatcontributetothetransitiontosustainableeconomicmodels.

Forthetransportation sectornotably,transitioninvolvesfollowingthe“avoid,shift,improve”principle.Ifavoiding unneces-sarytravelcan,inpart,bereplacedbydigitization(suchasvideoconferencing)itremainsnecessarytoshiftfromexistingcarbon-intensivemeansoftransportation-inparticular,roadtransportation-tolow-carbonsolutions,suchasrailorinlandwaterwaytransportation,andimprovevehicleswiththedevelopmentofelectricorhydrogencars,forinstance7.

Infrastructure and the transition to a sustainable model

Climate change mitigation

Sustainable use and protection of water and marine resources

Pollution prevention and control

Protection of healthy ecosystems

Transition to a circular economy

Climate change adaptation


Investors’currentfocusleadsthemtotargettheenergysectorfortheirinfrastructureinvestmentstoreducetheircontributiontogreenhousegasemissions,however,thetopicismuchbroader.Thisisillustratedbytheenvironmentalratingforinfrastruc-turecarriedoutbyGRESB(GlobalBenchmarkonRealAssets),themainESGratingtoolforinfrastructure.Ithighlightstheimpactindicatorsthatmatterandgivesanideaofthemostcommittedactors’capacitytopublishdataonenergyissues,CO2emissions,airpollution,water,waste,biodiversity,health,andsafety.

TheanalysisofinfrastructureassetsgraduallyextendstootherESGdimensions:assessmentofcontributiontotheSustai-nableDevelopmentGoals(SDGs),orresiliencefactorsarejusttwoexamples.TheaimistobringthevariousESGratingmodestogethertocreatemomentumtowardssustainableinfrastructure.

Inits2020SustainableFinanceReport,theOECDstates,“the growth of institutional investment in infrastructure in recent years has been accompanied by an increased effort to apply ESG considerations from other portfolio investments (e.g., investments in publicly traded companies) to infrastructure assets, for those investors with ESG investment decision-making processes in place” 8.AstudycommissionedbyLinklaterssurveyed302Europeaninfrastructuremanagersandrevealedthatamongthefactorstakenintoaccountbymanagers,“ESG performance and transparency are in second place (32%), after growth potential (36%)” 9. This dynamic is onlypartiallydrivenbytheEU“Disclosure”regulation(orSFDR)sinceonly53%ofmanagerswereawareoftheirnewobligations,accordingtoLinklaters.

Thereareseveralsustainabilityassessmentandcertificationreferencesfortheinfrastructuresector.TheOECDlists10ofthem,includingGRESB,whoseinfrastructurebranchproducesasystematicassessmentofcorporateESGperformanceandinfrastructurefundsthatcovers,accordingtoits2020results,“32% of the top 100 infrastructure investment managers of IPE Real Assets […] - participating with at least one fund.” 10

8OECD(2020),OECDBusinessandFinanceOutlook2020:SustainableandResilientFinance9 SaraFeijao,“Greenrecoveryinsightasoneinfourinfrastructurefundsexpecttogrowgreenassetsmorethanafifthby2022”,Linklaters,28July.202010 GRESB,“GRESB2020Results:InfrastructuresectormaturingitsapproachtoESGreportingandbenchmarking”,12November2020.

Performance - Performance Reporting

Source:GRESB

ENERGY

PART

ICIPA

NTS

100%

0%

GHGEMISSIONS

AIRPOLLUTION

WATERINFLOWS/

WITHDRAWALSOUTFLOWS/DISCHARGES

EMPLOYEES:TRIFR

EMPLOYEES:LTIFR

WASTE BIODIVERSITY& HABITAT

HEALTH & SAFETY

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

2019

2020

https://www.linklaters.com/en-us/insights/blogs/linkingesg/2020/july/green-recovery-in-sight-as-1-in-4-infra-funds-expect-to-grow-green-assets-more-than-a-fifth-by-2022


Producing an ESG rating prepares for the implementation of new regulations, including those concerning the EU Taxonomy

Rick Walters, Director GRESB Infrastructure

What is the current availability of ESG data for infrastructure?

Thesituationisquitedifferentbetweenprivate(unlisted)andpublic(listed)companies.Theretendstobemoreinformationonlistedinfrastructurecompaniesastheymustmeettheexpectationsofavarietyofstakeholders.Fornon-listedcompanies,investorshaveadirectstakeandoftensitontheboardofdirectors,whichallowsthemtohaveamoreeffectiveengagementstrategy.InEurope,theytrytoarticulatethiswiththeirresponsibleinvestmentpolicies.WhilewehavemanyinfrastructureinvestorswithgoodESGperformance,wehavealargespreadofplayerslaggingbehindonthesedimensions.

What are the impact reporting trends on various themes, such as greenhouse gas emissions and waste management, that will gain momentum this year?

Interactionsbetweenimpactinvestorsandinfrastructurespecialistsarestillrare,butthereisagrowinginterestonthepartofthelatterinmeasuringimpact.Eveniftheydonotyetnecessarilyseeitasafinancialperformanceissue,theywanttounderstanditsmechanismsanduseitintheirreporting.Manyinterestinginitiativesarebeingdeveloped,particularlyaroundthecontributiontoSustainableDevelopmentGoals(SDGs).Thisiswhywearedevelo-pinganewreportingproducttoofferourmemberstheopportunitytoevaluatetheircontributionbasedonthedatatheyprovideuswith.

Will the new European regulations on sustainable finance, and more particularly those on reporting (SFDR), have a positive influence since awareness is still low?

Weareworkingtobuildanofferingtohelpinfrastructureinvestorsmeetthesenewobligationsandwehavealreadydonepartofthework,since70%oftheindicatorsreportedbyourmembersarecompatiblewiththesenewrequi-rements.Theyarethereforelargelyprepared.Theirdegreeofimplementationismorevaried,however,withmanyofthem at the legal consultation stage.Asforcommunicationonthegreenshareoftheirinvestmentsalignedwiththetaxonomy,theyareworkingonit.Weareabletodisaggregatetheirenvironmentaldatatoindicatewhichpartoftheirinvestmentsistaxonomy-compatible,whichpartlacksinformationontechnicalthresholdsandfinallythepartsnotcoveredbytheTaxonomy.

Are there any developments from investors on new topics such as the protection of biodiversity or social dimensions?

Investorsarestillbecominginterestedinbiodiversity,withFrenchinvestorssuchasMirovaorVauban,showingrealleadershipinthisarea.Asfarasthesocialdimensionsareconcerned,theirinterestisgrowingthroughtheCOVID19crisisortheBlackLivesMattersmovement,withmanysocialthemessuchasdiversity,equality,healthandsafetyrisinginpriority.


The dynamics of green infrastructure

Current situationAccording to the EIB, investment in infrastruc-ture has declined over the last ten years except in WesternandNorthernEurope.Furthermore,theinvestmentsactuallymadefocusmoreonthemaintenanceofexistinginfrastructurethanontheirmodernizationortheconstructionofnewinfrastruc-ture. “Weak government infrastructure investment and investment activities by public-private partnerships are the main drag on overall infrastructure investment in the European Union. The transport and (to a lesser extent) utilities sectors were the hardest hit by the crisis, with no recovery in sight in either case.”

Inthiscontext,theEIBstressestherolethatlargeinvestorsmustplayintheenergytransition: “Attrac-ting private finance is a critical enabler of the energy transition. The renewable energy sector is entering a new phase, as governments move away from a regulated to a more competitive environment, partly in response to the increasing costs of support schemes and the falling capital cost of renewable energy technolo-gies”.11

The weight of European institutional investorsTheIPERealAssetsrankingoftheworld’s100largestinfrastructureinvestorsestimatesinfrastructureassetsheldbypensionfunds,sovereignfunds,insurers,andotherinstitutionalownersat€388billion.Amongthetop10investors,3areEuropean(Allianz,APG,andAXA),totallingfor$65bnininfrastructureassets.Atthisstage,itisdifficulttoquantifythegreenshareoftheseassets.Novethicillustratedthiswiththe34largestFrenchinstitutionalinvestorssubjecttoArticle173ofthe2015TransitionLaw;apaneltowhichthetwoinsurersmentionedabovebelong(throughitsFrenchentityforAllianz).Initsrecurringstudy“173shadesofreporting”,Novethicstatedthatattheendof2019,greeninvestmentsininfrastructurereached€9.9billion-€3billionmorethanin2018.Theseinvestmentswereeithermadedirectlyorthroughspecialisedfunds.Upto€700millionoftheseAuMareundertheGreenfinlabel.

PENSIONDANMARK, A PIONEER INVESTOR IN GREEN INFRASTRUCTURES

Awarded several times by the IPE for its exemplary infrastructure management, the Danish pension fund is also one of the 50 global climate leaders nominated by Bloomberg in the summer of 2020. Its director, Torben Möger Pedersen, calls for sustainable management based on green energy and with solid returns on investment. The pension fund made its first investment in renewable energy infrastructure in 2010 and stated in 2019 that it financed the production of nearly 3.7 TWh of green energy per year. About 10% of its total assets (€36 billion at the end of 2019) are invested in wind farms, solar power plants, and power generation units. Denmark has an objective of 70% reduction in its emissions by 2030 to be carbon neutral by 2050.

11 EIBInvestmentReport2018/2019:AcceleratingEurope’sTransformation

Source:EIB

Investment in infrastructure (by European region, 2008 = 100)

https://www.eib.org/en/publications/investment-report-2019


EU Taxonomy contribution to an environmental approach to infrastructure investmentThemajorityofgreeninfrastructurefundsidentifiedbyNovethicpresentanenvironmentalstrategybasedonexclusiveormajorityinvestmentinrenewableenergy(particularlyinsolarandwindenergy),whichmayappeartobealignedwiththeTaxonomy.However,thelatterdoesprovidemeanstobetterstructuretheprocess.

Strict criteria to qualify an activity as ‘green’TheEUTaxonomymakesitpossibletostandardizethedefinitionofgreeninfrastructurewiththresholdsandmetricsappli-cablebyallwithintheEuropeanUnion.Inthecurrentstateofthemarket,notallactivitiesconsidered‘green’actuallymeettheTaxonomy’srequirementstobeconsideredassuch.Evenrenewableenergyprojectsmustmeettheso-calledDNSH (Do No Significant Harm)principle.

DNSH principle on other environmental objectivesTheEUTaxonomymeetsaholisticdefinitionfortheenvironmentalcontributionofagivenactivity.Tobeeligible,eachactivitymustmakeasignificantcontributiontotheclimatechangemitigationobjective,forinstance,butwillonlybeconsideredgreenif-andonlyif-ithasbeenverifiedasnotnegativelycontributingtothefiveotherenvironmentalobjectivesoftheTaxonomy.

Broadening the scope of green activitiesTheEUTaxonomyexpandsthescopeofgreenassetstosectorsotherthanenergyproductionwithspecificthresholdsandmetrics.Therearethreewaystoexpand:

Taking into account sectors with a significant environmental contribution of their own, which are still seldom considered by investors,forexample,urbanheating/coolingnetworksorsomeactivitiesrelatedtowaterand waste treatment.

Consideration of enabling activities,forexample,energytransmission,distributionandstorage,andlow-carbontransportationinfrastructure(land,inlandwatertransport,andmaritime).

Consideration of transition activities,particularlyconcerningelectricitysupply,severalactivitiesareincludedwithprogressivethresholds:electricityproductionfromhydropower,gas,andbioenergy.

Minimum social safeguardsCompliancewiththeEUTaxonomyconsistsofverifyingthattheassetoractivitydoesnotviolatethefundamentalprinciplesconcerninghumanrights(ILOConventions,OECDGuidelines,DeclarationofHumanRights,UNGuidingPrinciplesonBusinessandHumanRights,etc.).

WiththeexceptionofNorthernEurope,aclearlinkbetweenthefinancingofgreeninfrastructurebymajorinstitutionalinvestorsandtheenvironmentalobjectivesoftheirrespectivecountriesisstillveryrare.UsingtheEUTaxonomyasagreenframeworkshouldstimulatetheapproach,butmuchremainstobedone.


Green infrastructure funds and the EU TaxonomyThepotentialforprojectswithintheEuropeanUnionissignificant.However,today,onlyafewgreeninfrastructurefundmanagersmentiontheEUTaxonomy.ThePrinciplesforResponsibleInvestment(PRI)havegatheredaboutthirtycasestudiesbutonlytwomanagementcompanies(Foresight,andStepStone)haveassessedthedegreetowhichtheirinvestmentsininfrastructurealignwiththeTaxonomy.TheuseoftheEUTaxonomy-ifitexpands-shouldallowEuropeaninstitutionalinves-torstomaketheircontributiontotheEUGreenDealmorevisibleandunderstandablethroughinfrastructurefinancingthatenablestheEuropeanUniontoachieveitsclimateandenvironmentalobjectives.

AstudyconductedbyEY(Ernst&Young)in2020evaluatedaclusterofEuropeanprojectsagainsttheEUTaxonomy.Itrevealedthatprojectleadershavelittleawarenessofthenewframework:“a majority of project developers neither refer to [the EU Taxonomy] to demonstrate their projects’ climate benefits, nor disclose information that can prove compliance.” 12

Thisstudycovered2,000so-called“ready-to-go”projects,locatedinthe27EuropeanUnioncountries,selectedusingtheEUTaxonomythresholdsrecommendedbytheTEGtoidentifythosethathavethebestpotentialforcreatingsustainablevalue.

Morethan1,000projectswereidentifiedasgreenandtaxo-compatible.SpreadthroughouttheEuropeanUnion,theywillrequirearound€200billioninpublicandprivateinvestmentsandwillsupport2.8millionjobs.

InvestorsarealsowaitingtoseetherolethattheEUTaxonomywilltakeonthemarket,withthenotableexceptionofForesightwhichhasdevelopedaprocesstoobtainthird-partyvalidationofinvestments'alignmentwiththeEUTaxonomy.

Top 10 represent 76% of the 1,000+ green projects selected

4%5%

7%

9%

11%

5%12% 4%

7%

36% Renewableenergygeneration(electricityorheat)

Transmissionanddistribution

EnergyStorageandsystemservices

Publictransport

Lowcarbonmobility(other)

Buildingrenovation/energyefficiencyimprovement

Circulareconomy

Industrialprocessefficiency

Greenhydrogenforindustry

ManufacturingofLowcarbontechnologies

12 EY,AGreenCovid-19RecoveryandResiliencePlanforEurope-SummaryReport,Sep.2020.

Source:EY

https://assets.ey.com/content/dam/ey-sites/ey-com/it_it/news/2020/ey-summary-report-green-recovery-v2.pdf


What is Foresight’s strategy regarding the validation of EU Taxonomy compliance?

ThefirsttwoacquisitionsmadebytheForesightEnergyInfrastructurePartners(FEIP)fundhavebeenassessedinlinewiththeperformancethresholdssetoutintheTechnicalAnnextotheEUTEGFinalReportandweredeemedtomeetallnecessarycriteria,validatingthemassustainableinvestmentsinlinewiththeEUTaxonomy.ThisprocesswillberepeatedforallfutureinvestmentstheFundmakes,withFEIPaimingtobeoneofthefirst(ifnotthefirst)fullyvalidatedEUTaxonomy-compliantsustainableinvestmentfunds.AtForesight,weseegreatvalueinusingtheUNSDGsasaframeworkwithinwhichtopresentsustainabilityimpact.However,withrespecttoindividualassets’sustainabilitycredentials,theEUTaxonomyhasclearadvantagesintermsofprovidingastandardizedandobjectiveassessmentonwhetheranassetshouldbeconsidered“sustainable”ornot.Wecouldsettleforself-reporting,butinanenvironmentwheregreenwashingrepresentsasignificantandoftenirreparablereputationalrisk,Foresightseesgreatvalueinthetransparencyandassurancethatcomesfromanexperiencedthird-partyprovidinganindependentassessmentofaproject’ssustainabilitycredentials,evenconside-ringthecostsassociated.WeareintheprocessofevaluatingtheapproachwewilltakeforretrospectivevalidationacrosssomeofForesight’sexistingfunds.

What is your opinion on the thresholds and metrics set by the EU Taxonomy?

TheEIBisoneofthecornerstoneinvestorsintoFEIPandhaveveryspecificreportingrequirementsaroundsustaina-bilityandimpactmetrics.Foresighthasalonghistoryofworkingwithinvestorstoagreethecontent,structureandlayoutofbespokefundandasset-levelreportingagainstminimumconditionssetbyinvestors.Asasustainability-ledlong-terminvestorincleanenergyandsustainableinfrastructure,meetingsuchthresholdsisneverlikelytobeanissuebutwealwaysaimtobetransparentabouttheimpactofourinvestmentsandtoworkwithourpartnerstoincreasethesustainabilityimpactsachievedbyourportfolio.

Taxonomy validation helps to ward off greenwashing suspicions

Henry Morgan & Jai Mallick – Foresight Group


EU Taxonomy will boost the green focus of European infrastructure

Atfirstglance,managersofinfrastructurefundsspecia-lized intheenergyandecological transitionneednotworryaboutthearrivaloftheEUTaxonomy.ThetechnologiestheyfinanceareessentiallyatthecoreoftheEuropeanactionplan,andESGdimensionshavegradually integrated their due diligence as well as the financialconditionsofthetransactionstheycarryout.Articulation in the EU Taxonomy of the eligibility of an investment with a Do No Significant (environ-mental) Harm (DNSH) criteria and minimum social safeguards should further democratize the ESG questionnaires that many investors send to their stakeholdersforeachtransaction.

However,amongtheTop10sectorspresentinthepaneloftransactionsanalyzedinthecontextofthisstudy,notalltechnologieswillreceivethesametreat-ment.Onlyphotovoltaicandwindpowergenerationarenotcoveredbyso-called technical screeningcriteria,whiletheothereightactivitiesintheTop10arelikelytobesubjecttosuchcriteria.Mainlytwotypesofactivities here:

either in relation to the infrastructure’s purpose,forexamplenotintendedforthetransportationoffossilfuelsorthedistributionofhigh-carbonelectricity,or-inthecontextofroadsandairportinfrastructure-bereservedforexistingorfuturelow-carbonmodesoftransportation.

or concerning the environmental performance of the financed technology,particularlyinthecaseofbiomasspowerplantsandhydropowerproductionassets.

Theseenvironmentalperformancecriteria (whichrelatetothetypeofbiomassused,wastemanagementhierarchyorthepowerandenergydensityofhydroe-

lectricfacilities)arestillthesubjectofheateddebatebetweenindustriallobbiesandNGOspendingthefinalversionoftheTaxonomy.Therefore,theycouldnotbetaken into account in this study.

Fortherest,asStepStoneGroupwrote in itscasestudyontaxonomywithinthePRI“practitionergroup”,cleardefinitionsandconsistencyinimplementationframeworksshould«facilitatepricediscriminationbetweenassetsthatcomplywiththeEUtaxonomyandthosethatdonot.»SomeinvestorsmayalsofindtheTaxonomytobeaframeworkforidentifyingthemostattractive investments fromtheperspectiveofoptimizingthecostofupgradingto“taxonomic”environmentalperformance..

Oncethesixenvironmentalobjectiveshavebeenfinalized,willtheTaxonomybeabletofunnelcapitaltotheleastinvestedsectors?Thisisoneofthemostdifficult issues.Tomakecertain investmentsmoreattractive-particularlyforclimatechangeadaptation-it is necessary to invent remuneration models that are closetotherisk/rewardprofilescurrentlyofferedbytheTop10technologies.

Note:ThetreatmentofinfrastructurefundswithintheframeworkofthefutureEuropeanecolabelforfinan-cialproductsremainsuncertain.TheymaybeeligiblethroughfundsoffundsandAIFopentoretailinvestors.Thefinalreportontheecolabelisexpectedinspring2021.

Nicolas RedonGreenFinanceExpertatNovethic

Expert Opinion


The green infrastructure fund marketInfrastructurefundsaccountedforthree-quartersofunlistedgreenfundsinNovethic’s2019study.Inthe2020edition,Novethicdecidedtoperformataxo-compatibilityanalysisdedicatedtothisassetclass.

TheGreenInfrastructureFundsselectedarethosethatpresentconsi-derationofanenvironmentaldimensionintheirinvestmentstrategy.Novethicreliedontheanalysisofpublicinformationandtheportfoliooffundsavailable.

144ofthe180infrastructurefundsstudiedin2018areincludedinthe2020panel,and166otherfundshavebeenadded.Thischangeismainlyduetothechangeindataprovider,whichallowedforabroaderanalysisscope.

Moreover,tobetterrepresentthegreeninfrastructuremarket,anewfundcategorywasstudiedin2020:diversifiedfunds.Eveniftheirstrategydoesnotreallyhaveanenvironmentalfocus,atleastoneoftheirinvestmentsareconcernedwithgreeninfrastructure.

(See more details on the identification of green funds in the Methodological Appendix)

ANALYTICAL METHODOLOGY FOR PROJECT "TAXO-COMPATIBILITY"

Novethic analyzed 274 infrastructure funds exposed to eligible activities (e.g., renewable energy, transportation, etc.), for which portfolio was available via the transaction monitoring carried out.

Novethic took into account the low degree of market transparency to develop a bottom-up taxocompatibility analysis methodology, based on the specific sectors corresponding to each transaction in the database established by Preqin (e.g. wind energy, water distribution, etc.). For sectors eligible for the EU Taxonomy but whose compatibility could not be directly determined (e.g. transport, utilities, etc.), direct analysis of the transaction was carried out via document search and press releases.

Novethic then deducted the taxo-compatible part of each fund, which is defined here as the share of projects (in number) eligible for the EU Taxonomy. This green substitution share was chosen given the lack of data available for the amounts invested per project concerning more than two thirds of the funds’ portfolio on average.

Green Funds

Diversified Funds

2018

2020

2020

180 funds

310 funds

51 funds

50 €bn

108 €bn

55 €bn

Source:Novethic


Taxo-compatibility of funds invested in green infrastructureNovethicclassifiedtheanalyzedfundsaccordingtoasystemofcategorieslinkedtotheirshareoftaxo-compatibletransactions.

The Green Infrastructure Fundsareclassifiedasfollows:

1–Full Green Funds: Pure players,100%oftransactionsaretaxo-compatible.Thesearethemostnumerous(153funds)butalsothesmallest(withanaverageweightof€383millionforatotalof€50.2billionraised).

2–Green Focus Funds:Between50%and99%oftaxo-compatibletransactions.Thesearetheleastnumerousonthepanel(41funds)butwithanaverageweight2.5timeslargerthanFullGreenFunds(€965millionforatotalof€37.6billionraised).

3–Funds with unavailable portfolio:Theseare116fundsrepresenting€25.9billionwhereitwasnotpossibletodeter-mineFullGreenorGreenFocusclassification.Theyareneverthelessconsideredtobegreenfundsbecauseoftheenvironmentalcontributionstrategyputforwardbytheirpromoters.

Diversified Funds:Novethicwasalsointerestedintheprofileoffundsthatinvestingreeninfrastructurewithoutthisbeingparticularlyemphasizedintheircommunicationorwithoutgreentransactionsrepresentingthemajorityoftransactions.

Diversifiedfundsaccountforbetween1%and49%oftaxo-compatibletransactions.Thesefundsarelargerthangreenfunds,withatotalaverageof€1.3billionforatotalof€55.3billionraised.Thetransactionsundertakenarealsolargerthanthoseofgreenfunds:onaverage€416millionfordiversifiedfundsand€252millionforgreenfunds.

The“diversified”shareofDiversifiedfundsismainlycomposedofsocialinfrastructureassets(hospitals,schools,etc.)orinfrastructurenoteligiblefortheEUTaxonomy(roads,telecommunicationinfrastructure,etc.).

IDENTIFYING THE BROWN SHARE OF PORTFOLIOS

For infrastructure funds that have some sort of environmental orientation, it is useful to identify the brown share of assets that exposes investors to reputational risk.

Four transaction sectors listed by the Preqin database can qualify fossil fuel infrastructure projects as “Natural Resources”, “Natural Resources Pipelines”, “Natural Resources Storage Facility” and “Power Plant”. By definition, Full Green funds are not exposed. On the other hand, 11 Green focus funds totaling €15bn and 21 Diversified funds totaling €34bn are exposed.

The treatment of these sectors as sustainable activities under the EU Taxonomy has been the subject of contentious debate - especially gas - as illustrated by the delegated acts draft placing conditions on their application. The first version of the climate change mitigation and adaptation targets was published at the end of November 2020 and includes liquid fossil fuels in some sustainable activities as long as they meet strict emission thresholds (100 gCO2/kWh).

Breakdown of amounts raised by fundtaxo-compatibility

22%

15%

30%

33%

DiversifiedFullGreenGreenFocusGreenfunds (whereportfolio isunavailable)

Source:Novethic


A majority of funds specialize in renewable energyAmongthe361sector-focusedfundsofthepanel,theRenewable Energy sector isbyfarthemostrepresentedwith214funds(including211greenfunds)and€54bnraised.ThesearealmostexclusivelyFullGreenfunds,andtheirtotalaverageisamongthelowest(€291million)onthepanel.

On theotherhand,Multi-sector funds -whicharehalf asnumerous-arenearlythreetimeslargeronaverage(€907million)andraisedmorethan€75bnintotal.Apartfromrenewables-whichremainthemajority-portfolioassetsaregenerallygaspipelines(withoutanyapparentrehabilitationoftheplannedassets)hospitals.

Telecommunicationsinfrastructure,andtransportationinfrastruc-ture,suchasseaportsandairports.Theaveragegreenshareofthesefundsisaround53%andtheyhavethemostdiversifiedfunds(36funds).

Energy funds(24fundsweighingonaverage€632mandwith€12bnraised)alsoinvestmainlyinrenewableenergybutdiversifytheirassetswithtaxo-compatibletransactions,suchascleantechnologies(e.g.lightingwithbetterenergyefficiency,energystoragetechnologies,etc.),andotherswhosetaxocompatibilityisnotalwaysprovable,suchasthermalpowerplants.

Fund Strategy and Target ReturnsTheclassificationofinfrastructurefundstrategies,hereprovidedbythePreqindatabase,isbasedonthelevelofriskassociatedwiththeselectionofassetsaccordingtothesectorandgeographicallocation.

1. Thecategorymostrepresentedingreenfundsistheso-called“Core Plus”strategy,whichisexpectedtohavehigherrevenuesbecauseiftheinfrastructureislocatedinEurope,returnsarelinkedtothefluctuationsoftheeconomywheretheinfrastructureislocated.“CorePlus”fundsarethemostcommononthepanel(189funds).Ofthefundsstudied,nearlythree-quarters(71%)areFullGreenfundsandthemajorityoftheassetsintheportfolioarewindandsolarenergyinfrastructure,followedbybuildingsintheeducationsectorandhospitals.Justover40%oftheprojectsareintheUnitedKingdom,followedbyFranceandGermany.

2. Thesecondpreferredstrategyis“Core”(70funds).Thesearegenerallyessentialassets,alreadyoperationalandgenera-tingreturns,locatedindevelopedcountrieswithastableregulatoryandpoliticalenvironment.Theyarelessriskythan“CorePlus”assetsbecausetheseareofteninamonopolyposition.Coreassetsalsohavepredictabledemandwithstablelong-termcashflows.

Thebreakdownisasfollows:43%FullGreen,31%Diversified,and26%GreenFocus.Themostcommonassetsarebuildingslinkedtotheeducationorhealthsector,aswellassolarandwindenergyinfrastructure.Two-thirdsoftheprojectsarelocatedintheUnitedKingdom.

3. Thethirdstrategy(55funds)called“Value-Added”isthemostpromisingfinancially.IttargetsGreenfield(newprojects)orBrownfield(existingprojects)assetswhereuseordemandisincreasing,includingnewtechnologies.

HalfoftheseareFullGreenfunds(53%),withtheremainderfairlyevenlysplitbetweenDiversifiedfunds(27%)andGreenFocus(20%).Assetstendtoberenewableenergy,windandsolarinfrastructure,followedbytelecommunicationsinfrastruc-tureandairports.Theirgeographicallocationisvaried,withapodiumdominatedbyFrance(23%),followedbytheUnitedKingdom(20%)andBrazil(7%).

Primary Sector of Green Funds

Breakdown of AUM by Strategy

RenewableenergyMulti-sectorEnergyOther(Utilities, Transportation, WasteManagement)

CorePlusCoreValueAddedOther

96

214

2724

15%32%

45%

9%

Number of funds

Share of total amount raised

24%

26%

43%

7%

Source:Novethic

Source:Novethic


A market where Public-Private Partnerships have particular importance95fundsarethesubjectofPublic-PrivatePartnerships.Thesefundscomefrom55differentmanagementcompanies,whichareprimarilyBritish(21companiesrepresentedby41PPPfunds)andFrench(10companiesrepresentedby19funds).

Althoughtherearefewerfunds,Public-PrivatePartnershipfundsare,onaverage,twiceaslargeasfundsthatdonotusethistypeofcontractwithpublicauthorities.Ontheotherhand,theirtaxocompatibilityshareislowerthantheaverage(52%),sincetheyaremainlydiversifiedfunds(39funds).

Theassetswiththemostfrequentinvestmentarebuildingsintheeducationsector(15%),hospitals(12%),windenergyinfrastructure(10%),roads(7%),andsolarenergyinfrastructure(7%).

Green Infrastructure Fund Market Leaders

A predominance of British and Danish management companies

Managementcompaniesofferinggreeninfrastructurefundshavevariedprofiles,bothintermsofassetclasses(companiesspecializingininfrastructure,ormoregeneralcompaniesalsomanagingfundsforretail investors), intermsofgeographicdistribution,andtypeoffund.Butthelargevolumesofassetsundermanagementareheldbythreespecialists:twoBritishandoneDanish.MIRA-whosefundsaremoresoGreenFocus-isthelargestinfrastructuremanagerintheworldandhad€239billioninassetsin2019.Itholds€2.5billionmoreingreeninfrastructurethanInfracapital(associatedwithM&GInvest-ments,itsparentcompany).TheDanishcompanyCopenhagen Infrastructure PartnersistheonlyoneofthethreewhosetotalfundsareFullGreen.

Companies specialized in environmental issues

Thecompaniesthatofferthegreatestnumberofgreenfundsarealsoenvironmentally focused.TwoAMsspecialized inenergytransitioninfrastructureoccupythefirstplace:Aquila Capital and Foresight Group.TheyarecloselyfollowedbyMirova,aFrenchassetmanagementcompanyspecializedinsustainableinvestment(seeNovethic’sstudyEuropean Green Funds and the EU Taxonomy: The Great Challenge).

Public-private partnership

PPP Non-PPPorunavailableinformation

Total weight (€bn)

NumberofFunds

0% 20% 40% 60% 80% 100%

Source:Novethic

CopenhagenInfrastructure

Partners

Macquarie Infrastructure and Real Assets (MIRA)

Infracapital

21

3

8.1 €bn

6 Funds

8.7€bn

4 Funds

6.2 €bn

4 Funds

Top 3 by Total Green Funds Size

Source:Novethic

Source:Novethic

Aquila Capital Foresight Group

Mirova

1 13

2.1 €bn

9 Funds

1.2 €bn

9 Funds 2 €bn

8 Funds

Top 3 by Number of Green Funds

96,4

266

72,6

95


The Taxonomy does not worry green infrastructure specialistsGreeninfrastructurefundsaremanagedbyspecialistswhoneedtocombinefinancialandenvironmentalexpertiseinthisassetclass.BelowaretestimonialsfromtwoofthemonhowtheywillleveragetheEUTaxonomy.

What are the opportunities for green infrastructure funds under the EU promise for a green recovery and the Green Deal?

Oneofthemainopportunitiesisinenergyefficiency:thisareaislaggingsignificantlybehindtheobjectivesregardingtheenergytransition.ThecurrentEuropeanPlanforeseeslargeinvestmentsinenergyefficiencyandthereductionofprimaryenergydemand.Energygenerationalsoremainsabigtopic.It’sonewhereprojectsizemakesiteasierforinstitutionalinvestorstoparticipate.FortheEU,thegoalisheretocrowdoutfossilfuelsincountrieswheretheenergymixstillhasanimpor-tantshareofcoalforexample.

In your opinion, what are the obstacles to more sustained growth in the green infrastructure market?

Alotofwhatislyingahead,forinstanceregardingenergystorageandgreenhydrogen,isstillsignificantlydependent

ontechnology.So,youareontheperipheryofbeingatechnologyinvestorandprojectinvestor.Thesetechno-logiesbecomingincreasinglyestablishedisanimportantprerequisitesothattheyarebothunderstandableforLPsandbankable.

Will EU Taxonomy requirements force you to change your investment process?

Concerningthetechnicalcriteria,ourcurrentduediligenceprocessshouldnotrequiremuchadjustmentforourmainassetclasses.Wealreadylookatprojectsonaverydetailedlevelandmuchoftheinformationrequiredinthetaxonomyisalreadyrequestedfromourlocaldevelopersorservicesproviders.FortheDNSHassessment,ontheotherhand,theremaybesomeadditionaldataweneed.Thenecessarydatacouldbecollectedbyourexternalserviceprovidersandtheprocessingofitneedstobesetupefficiently.

How has the infrastructure market in Europe evolved in recent years?

Firstly,when itcomestothetechnologiesRGreen isexposedto,withtheriskprofileofourinvestmentsbeingwhatitis–notablyan8%to10%return-wecannottakeastrongtechnologicalrisk.Ourmandatesrelatetotradi-tionalinfrastructures,suchassolar,wind,biomass,andbiogas-allofwhichhavewelldefinedrisks.However,weareseeingnewthemesonhydrogen,energyefficiency,offshorewind,agriculturewithabitmorecomplexarran-gements.Theygiveanindicationonthefuturedirectionofthe market.

Thresholds on the applicability of the EU Taxonomy - particularly on CO2 emissions - have been set for certain activities. Do you plan to integrate them into your project analyses?

We have already included such thresholds in theframeworkoftheinvestmentswemanagefortheEIB,whichhasverystringentenvironmentalcriteria.Asaresult,wearenotveryconcernedabouttheTaxonomy’simplementation.Themaindifferencewillconcernrepor-ting.Thiswillbeaddressedlater,themostimportantthingtodayisinvestingintrulygreenprojects.

The new EU framework should help develop the energy efficiency market

Taoufik Saoudi and Lars Meisinger – Aquila Capital

We are not concerned about the application of the Taxonomy thresholds

Cédric Lacaze and Julien Commarieu – RGreen


Infrastructure projects in light of the TaxonomyThisanalysisfocusesonprojectsfundedbytheGreenfundsandDiversifiedfundspanelwhichareoverwhelminglyinfrastruc-tureprojects,althoughrealestateassetscanbefoundfordiversificationpurposesand,morerarely,investmentsinunlistedcompanies.

Novethic analyzed the projects and identified 1,890 transactions that were taxo-compatible and 504 that were not because due to a lack of environmental information.

Lack of environmental information hinders taxo-compatibilityNovethicidentifiedtwocasesofnon-compatibilitywiththeTaxonomy:

The sectoral classification of certain transactions does not indicate any environmental contribution. Thisisespeciallythecaseforrealestatetransactionsthatrelatetosocialthemesbasedontheuseofthebuildingsconcerned(education,health,etc.).Thus,theenvironmentalcontributionoftheseprojectsisnothighlighted,revealingtheneedformorecompre-hensiveapproachescombiningsocialpurposeandenvironmentalobjectives,suchasthethermalrehabili-tationofbuildings.AccordingtothereportconductedbyPreqin,ofalltransactionscarriedoutbetween2013and2016byBritishinfrastructurefunds,30%wererelatedtothesocialsector–secondonlytorenewableenergy(47%)13.

Some transactions are linked to activities that are still barely covered by the EU Taxonomy. Thisisparti-cularlythecaseforprojectsrelatedtoliquidfossilfuels,roads,andairports.

13 Preqin,TheUKInfrastructureMarket,2016

Amount(€bn)

Number oftransactions

Nature of thetransactions

3.5

7.2

15.8

217

177

110

Schoolbuildings

Hospitals

Roads

Source:Novethic


Renewable energy in the lead

Projectsdedicatedtorenewableenergyarepopularwithinfrastructurefunds,withapreferenceforsolarandwindenergy(>75%oftransactionscombined).Moreover,thematurityofthesetechnologiesisdemonstratedbythemajorityofprojecttransactionsinthe“secondarystage”(See p. 20):abouttwothirdsforsolarandwind.Inthirdplaceareprojectsdedicatedtobioenergy–orthosewiththemostGreenfieldprojecttransactions(>50%)-meaningtheyareatthedevelopmentstage(see p. 20).Almostallofthesetransactionscomefromgreenfunds(>90%ofthetransactionsand>80%oftheamountsinvested).

Theimportanceofrenewableenergyprojectsinthepanelisalsoreflectedintheimportanceofso-called“green”electricitydistributioninfrastructureprojects.

Concerningenergyefficiency,itismainlyfoundinprojectscategorizedas“CleanTechnology”,whicharetypicallylightingefficiencyprojects.Therearealsoadozenenergystorageprojectsinthiscategory.

Rail transportation

Priorityisalsogiventorailtransportationwiththeconstructionofrailwaysandrailwayrollingstock.Thisputsthesectorinsecondplaceafterrenewableenergyinmanydeals.Inaddition,almosthalfofthetransactionsinvolvenewprojectsinthedevelopmentstage.Regardingthefundprofile,thevastmajorityareDiversifiedfundswith61transactionstotaling€22bn.

Renewable energy production at the top of the listThenatureofinfrastructureprojectsmakesitpossibletoanalyzethemthroughtheprismoftheEUTaxonomy’ssustainableactivities.Nonetheless,theinformationavailableoneachtransactionremainslimited.

*Thepresenceofthissectorisduetothefactthatitgroupstransactionsrelatingtoinvestmentsincompanieswithenergyproductionactivitiescombiningdifferentrenewableenergysources,withelectricitycogenerationandheating/coolingactivitiesviarenewableenergy,orrelatedprojectssuchasenergystorageorenergyengineeringrelatedtorenewableenergy.

Source:Novethic

Top 10 sectors covered by the EU Taxonomy in the transaction panel

Transactions Amount (€bn) Country Leaders Objective (and type of contribution)Sectors

Wind Energy

Solar Energy

Biomass Plant

Combination of renewable energy*

Railways

Green Electricity Distribution

Clean Technology

Waste to Energy Conversion

Hydropower

Rolling Stock

737 10.7 183121

Mitigation(Ownperformance)

680

74

58

52

44

39

32

25

23

36.7

1.7

5.3

14.8

11.8

0.1

3.3

1.0

9.1

313156

48

2212

1414

179

235

23

66

9


Mitigation (Ownperformance and transition activities)

Mitigation(Ownperformance, enablingandtransitionactivities)

Mitigation(Enablingactivities)

Mitigation(Ownperformance, enablingandtransitionactivities)

Mitigation(Enablingactivities)


Mitigation (Ownperformance and transition activities)

Mitigation (Enablingactivities)


A majority of transactions involve existing infrastructureInvestmentsingreeninfrastructurearealignedwiththeEuropeaninfrastructurefundsmarketandthereforefocusverylittleonnewequipmentortechnologies.

Themajorityof taxo-compatibleGreen Infrastruc-tureFundprojectsarecategorizedbyPreqinas in“Secondary Stage”,meaningtheyarefullyoperationalandrequirenoinvestmentfortheirdevelopment.

AboutathirdoftheassetsareGreenfield. These are projectsthatdonotyetexistandforwhichinvestorsfinancethedesign,construction,maintenance,andoperation.

Finally,asmallminorityofassetsareBrownfield. These areexistingassetsthatrequireimprovements,repairs,orexpansion.Theinfrastructureisgenerallypartiallyoperationalandcanalreadygeneraterevenue.

AccordingtofigurescollectedbyPreqinontheglobalEuropeanfundsmarket,theshareofGreenfieldtransactionsinvolvinginstitutionalinvestorswentfrom43%in2010to30%in2019.Innumber,Greenfieldtransactionsincreasedonlymarginally(from252to291)whileSecondaryStagetransactionsmorethandoubledfrom287to66814.

FOCUS ON WATER-RELATED SECTORS

The infrastructure sectors related to water treatment and distribution do not appear in this ranking because of the small number of financed projects (28 transactions in total for 3 different sectors). On the other hand, they are very significant in terms of weight and volume of invest-ments (about €5 billion on average for water distribution and €1.4 billion for water treatment). The water distribution sector is second in terms of the amount invested (€36.9 billion in total), just ahead of wind power.

However, as specified in the case of water distribution and treatment activities for listed companies (see Novethic study “European Green Funds and the EU Taxonomy: The Great Challenge”) this sector’s ranking could be downgraded if the eligibility thresholds are applied allowing this type of infrastructure to be compatible with the carbon neutrality commitment.

14 https://realassets.ipe.com/infrastructure/greenfield-infrastructure-investor-appetite-goes-from-red-to-amber/10045388.article

Breakdown of transactions by project developmental stage

BrownfieldGreenfieldSecondarystage

62%

7%

31%

Source:Novethic

https://www.novethic.com/sustainable-finance-trends/detail/european-green-funds-taxonomy-challenge-october-2020.html

https://www.novethic.com/sustainable-finance-trends/detail/european-green-funds-taxonomy-challenge-october-2020.html

https://realassets.ipe.com/infrastructure/greenfield-infrastructure-investor-appetite-goes-from-red-to-amber/10045388.article


Geographical DistributionInfrastructureinvestmentviafundsisaspecialtyofUKassetmanagers,butprojectsmaybelocatedinothercountries.ThegreatfragmentationoftheEnglishpensionfundlands-capeisoneexplanationforthisphenomenonsincetheydonot necessarily have the weight necessary to directly invest ininfrastructure.IntheUK,theprojectsaremainlysolar-oriented.Ontheotherhand,despitethelargeshareofbioenergyprojects(67%inGreenfield),almostthree-quartersofthetransac-tions are for Brownfield projects or projects in theSecondaryStage.

Incomparison,France-whichrankssecond-hasasmallershareofbioenergyprojectsandremainspositionedonmorematuretechnologies(windandsolar)butwithalargershareofGreenfieldprojects(40%).

Italyisinthirdplacebynumberoftransactionsandaccountsfornearly80%ofsolarenergyprojectswithalmostthree-quar-ters in the secondary stage.

Infourthplace,Germanyaccountsfortwo-thirdsofwindprojects,whicharemostlyinthesecondarystage.Ontheotherhand,solarprojects(20%ofprojects)aremorefrequentlyGreenfield.

LikeItaly,Spainhasalmostallsolarenergyprojects,followedbywindandrailwayprojects.However,likeFrance,nearly40%oftheprojectsareGreenfield.

Ifwerankedprojectlocationsby total amount of investment,theUnitedStatesthenentersin4thpositionontheTop5with€23.4billion;aheadofSpainandprecededbytheUnitedKingdom(whichmaintainsfirstplace),followedbyFranceandGermany.

However,ifwelookatthetotalamountinvestedpercountryinnewprojects(Greenfield),theresultisquitedifferent.

Almost90%oftheamountsallocatedtoFrancecomefromsixrailwaytransactions.

ForTaiwan,98%ofthesearewindprojects(4transactions).

AsfarasGermanyisconcerned,almosttwothirdsoftheamountscomefromwindprojects,andthelastthirdmainlycomesfromelectricitydistributionprojects.

The United Kingdomhasmainlywindprojects (35%),railways(18%),andbiomass/biofuelplants(15%).

Lastly,theamountsforSpainmainlycomefromrailwayrollingstock(62%)andsolarenergyinfrastructure(24%).

*ShareofprojectsforwhichtheamountisavailableinPreqin

Top 5 des pays de localisation des transactions Greenfield par montant total des transactions

Number oftransactions Amount (€bn) Availability of

amount*

13.2

10.5

8.2

7.4

3.6

102

5

37

181

44

25%

60%

41%

46%

30%

*ShareofprojectsforwhichtheamountisavailableinPreqin

Top 5 countries tracking transactions by number of transactions

Number oftransactions Amount (€bn) Availability of

amount*

699

258

200

181

116

63.1

15.6

6.4

24.9

12.4

32%

21%

20%

23%

30%

Source:Novethic

Source:Novethic


Investment strategies for green infrastructure are insufficient to meet EU environmental objectives

Forinfrastructurefunds,whatisatstakewhendeployingtheEUTaxonomyisnotreallymakinganofferthatisalreadygreenbynature(givenitsstrongfocusonrenewableenergy,particularlysolarandwindenergy)evenmore‘green’.However,thiswouldmakeitpossibletobetterarticulatethisenvironmentalapproachwithEUenvironmentaltargets,particularlyclimateobjectives.

Thefocusonrenewableenergyleavesblindspots,likeenergyefficiency,andshowsthatinvestorshaveaverylow-riskapproachtogreeninfrastructuresincetheytendtofocusonmaturetechnologiesanddevelopedprojects.

Tobetterunderstandanoverallanalysisofinfrastructureprojects,itwouldbeusefultogeneralizetheintegrationofESGcriteriainthemanagementofthisassetclass.Currently,thisisinitsearlystages.Additionally,positiveandnegativeimpactindicatorsshouldbemeasured.Forthemoment,themostadvancedapproachesareusingtheSDGswithouttherereallybeingaframeworktodoso.

ThecontributionoftheEUTaxonomywillbedecisivewiththeimplementationofprocessestoensurethattheinfrastructuredoesnotviolatetheDoNoSignificantHarm(DNSH)principle.Thiswillinitiatethenecessaryimpactmeasurementanalysisneededtoimprovethismarket’scontributiontoenvironmentalobjectives.

TheuseoftheTaxonomyand,moregenerally,compliancewiththeEuropeanUnion’ssustainablefinancestrategy,couldhavebeenseriouslyquestionedbyBrexit.Butontheonehand,assetmanagementcompanieswillhavetofollowthesestandardstocontinuethedistributionoftheirfundsinEurope,andontheotherhand,therecentlaunchofanambitiousgreenfinancepolicybythelargestassetmanagerinthesector,Macquarie,suggestsastrongmobilizationongreeninfrastructure.

TheEUTaxonomycoupledwithaclearandambitiouspublicenvironmentalpolicycanallowfortherapiddevelopmentofvirtuouscircles,asdemonstratedbytheDanishexample.

ThechallengesfacingtheGreenInfrastructureFundmarketmostlystemfromalackofunderstandingofthetransitionneedsrequiredtoassessoftennewtechnologicalchoices.

Conclusion


GREEN INFRASTRUCTURE FUND ANALYSIS METHODOLOGY

ThisMethodologicalAppendixaimstopresentthemethodologyforidentifyingandselectinggreeninfrastructurefundsaswellasthemethodologyforanalyzingtheircompatibilitywiththeEUTaxonomy,whichthefirstmethodo-logyispartlybasedon.

Preselection of infrastructure funds to be analyzed: 527fundstotaling€247.6billion.

After the analysis :

I. PRESELECTION OF THE INFRASTRUCTURE FUND PANELOurinitialpanelismadeupofinfrastructurefundspreselectedbasedontwotypesofcriteria:

Strategy criteria: ThePreqindatabaselistsfundswhoseethics(«Fundethos»)isbeingenvironmentallyresponsible.Therefore,thesefundswerepreselected.

Sectoral criteria by asset class: AllfundsinvestinginsectorsthatcouldpotentiallyconcernactivitiescoveredbytheEUTaxonomyhavebeenpreselected(eveniftheir«FundEthos»didnotincludeenviron-mentalresponsibility).

ScreeningwasthencarriedouttokeeponlythefundsmanagedbycompaniesbasedinEurope1,andwhosegeographicfocusisEuropeor«multi-regional».

Greenfin-labeledinfrastructurefunds(theonlysustainablefinancelabelforunlistedfunds)thatwerenotpresentinthePreqinselectionhavebeenaddedhere.

Thisinitialpanelismadeupof527 funds.

II. IDENTIFICATION AND SELECTION OF GREEN FUNDSTheobjectiveofthissecondstepwastoonlyselectfundswitharealenvironmentalstrategy(greenfunds).Itwas,thus,aquestionofdifferentiatingthemfromfundsthatcouldinvestinenvironmentallyhigh-stakesectors,withoutthisbeinganimportantpartofthestrategy.

Thisanalysiswasadaptedaccordingtotheavailabilityorunavailabilityofthefundportfolio.

1EuropeanEconomicArea,SwitzerlandandtheUnitedKingdom

Diversified FundsGreen Funds

Total number of funds(totalamountraised)

Number of funds analyzed in light of the EU Taxonomy(totalamountraised)

310 (€108.4bn)

194 (€83.3bn)

51 (€55.3bn)

51 (€55.3bn)


A. Funds with unavailable portfolio – Multi-step selection process(116 GREEN FUNDS CHOSEN FROM 252 ANALYZED FUNDS)

Multi-stepanalysis:

1. Greenfin-labeled funds:AllGreenfin-labeledfundshavebeenselected.TheGreenfinlabelistheonlygreenfinancelabelontheunlistedmarketthatvalidatesthefunds'environmentalstrategybyverifyingaminimumshareofthefundportfolioalignedwithagreenactivitybenchmark.

2. Semantic analysis of the label: Novethicselectedfundswhosenamecontainedoneofthekeywordspresentinapre-establishedlistof60termsfrequentlyencounteredinthewordingofEuropeanfundswithagreenfinancelabel.ThelistofkeywordsismadeupoftermsinseveralEuropeanlanguages(French,English,German,Spanish,Italian,Portu-guese,Swedish,Dutch,etc.).Certainkeywordscoveringthemestoobroadforagreenfundpanel(‘sustainable’,forexample)werenotretained.

3. Fund Ethos :«EnvironmentallyResponsible».

4. Primary Sector :«RenewableEnergy»,theonlyPrimarySectoravailableonPreqinthatdidnotrequireadditionalanalysis(vs.simply«Energy»or«Diversified»).

5. Analysis of fund communicationincaseofdoubt,especiallywhenwordingcontainedthekeyword“energy”withoutbeingaccompaniedbytheterms“clean”,“green”,“efficiency”,etc.

Inall,116 funds(€25.9billionraised)wereselectedbasedonputtingforwardagreenstrategy.

B. Funds with available portfolio – Taxo-compatibility analysis(194 GREEN FUNDS CHOSEN AND 51 DIVERSIFIED FUNDS FROM 275 ANALYSIS FUNDS)

Outofthe275fundsavailabletoNovethic,ananalysiswascarriedouttoassesstheshareoftaxocompa-tibletransactions.

Thedatabaseused(Preqin)associatesasectorwitheachtransactionthatcomprisesthefundportfolio.Eachtransactionusuallycorrespondstoaninfrastructureproject,relatingtoaspecificeconomicactivity.Giventhedifficultyinobtainingmoreinformationonthesetransactionsthatfallundertheunlistedcategory,thetaxo-compatibilityanalysiswasdefinedbasedontwolevelsofverification:

-thepresenceoftheactivityinthelistofsustainableactivitiescoveredbytheMarch2020EUTaxonomydraft,and

-compliancewiththetechnicalcriteria“principle”,whichexplainstheframeworkwithinwhichtheactivitycanmakeasignificantcontributiontooneoftheenvironmentalobjectives.

15 funds

68 funds

16 funds

7 funds

10 funds


Thegenerallevelofpaneltransparencydidnotmakeitpossibletoverifythethresholdsandmetrics(forexampleCO2emissionthresholds)definedbytheEUTaxonomy,thereforethesehavenotbeentakenintoaccount.VerificationofDNSHcriteriaandminimumsocialguaranteesisalsooutsidethescopeofthisstudy.

Somesectorsareveryprecisesothatcorrespondencewithasustainableactivitybecomesautomatic(e.g.«Windenergy»,correspondingtothesustainableactivity:ProductionofElectricityfromWindEnergy),whileothersarelessdirect(e.g.“Renewableenergy”).

ForthesectorswhichcouldnotbedirectlyassociatedwithoneoftheTaxonomy’ssustainableactivities,anindividualtransactionanalysiswasconducted.Thisconsistedofconsultingallpubliccommunicationandspecializedpressbasedonthenameoftheproject.

Wethendeductedthetaxo-compatibleshareofeachfund,definedhereastheshareofprojects(innumber)eligiblefortheEUTaxonomy.Thismethodology,intermsofthenumberofprojectsratherthantheamount-likethegreensharedefinedinthepreviousGreenUnlistedAssetsStudy(2018)-waschosengiventhelackofavailabledataconcerningthe70%oftransactionsinthedatabase.

GREEN FUNDS AND DIVERSIFIED FUNDS

The analysis showed that 243 funds carried out at least one taxo-compatible transaction. The taxocompatibility analysis made it possible to differentiate the funds analyzed:

• 194 funds have at least 50% taxo-compatible transactions and are therefore quali-fied as Green funds.

• 51 funds have at least one taxo-compatible transaction but have a taxo-compati-bility rate of <50%. After analyzing the documentation and public communications of the funds for which there was doubt about the promotion of an environmental strategy (Fund Ethos: Environmentally Responsible or Primary Sector: Renewable Energy), none of these funds were selected as Green funds. These funds are there-fore qualified as Diversified funds and are subject to a differentiated analysis from Green funds.

• The 30 funds with no taxo-compatible transactions were analyzed using the same process as the funds with an unavailable portfolio. They have all been ruled out and are not subject to further analysis.

A study by the Novethic sustainable finance research teamHeaded by Julie Nicolas

with support from Fabrice Ishimwe.Supervised by Anne-Catherine Husson-Traore

With the support of

INFRASTRUCTURE FUNDS FACING THE

EUROPEAN GREEN RECOVERY

Asanexpertinsustainablefinance,areferencemediafortheresponsibleeconomy,and now an expertise accelerator, Novethic combines approaches to providefinancial actors, companies, and their employees with the keys to a sustainabletransformation.With Market Data, Novethic's analysis offers insights into the dynamics andcharacteristicsofsustainablefundsincorporatingESGcriteriaandtheorientationsofplayersintheresponsibleinvestment(SRI)marketinEurope.

© Novethic 2020 - Reproduction in whole or in part must be authorised byNovethic. Any citation or use of data must clearly indicate the source.

infrastructure funds facing the european green … · 2021. 1. 14. · patrick jolivet, director of...

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