Monday, December 23, 2024

The Infrastructure Revolution: A Climate Risk – Reclaim Finance

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“We are in the early part of this infrastructure revolution” BlackRock CEO Larry Fink told Bloomberg Television in January this year, when BlackRock announced the acquisition of Global Infrastructure Partners (1). This enthusiasm for private (non listed) infrastructure investment was later reiterated in Fink’s annual letter to investors, where he explained how he sees it as a key pillar of the “energy transition” (2). With globally-managed private infrastructure assets hitting US$1 trillion in 2023, this investment category has come increasingly under the spotlight (3). But how does the growth of this type of investment fit into a credible trajectory to limit global warming to 1.5°C? Our analysis of the fossil fuel policies of five of the world’s largest private infrastructure firms shows that they all lack even the most basic climate safeguards.

Private infrastructure is a type of private investment in assets not available in public markets, including facilities, services, and equipment in a wide range of sectors, such as energy, utilities, telecommunications, transportation, and water and waste management (4). Historically, it has been a niche area of investment. But in 2023, according to data provider Preqin, global infrastructure assets under management surpassed US$1 trillion, a six-fold increase since 2008 (5).

Private infrastructure funds have US$296 billion in unspent cash reserves waiting to be invested (known as “dry power”) (6). In addition, institutional investors such as pension funds plan to increase their commitments to private infrastructure funds by more than US$600 billion by 2027, according to the Boston Consulting Group (6). A significant proportion of this money is expected to go to the energy sector. In fact, the “energy and environment” sector is already attracting the most private infrastructure deals (45% of total deal value from 2018 to 2023), more than “transportation and logistics” and “digital infrastructure” (20% each) (6).

Leading private infrastructure firms lack fossil fuel policies

As the energy sector is a major destination for private infrastructure investment, there is a significant stake in ensuring that these resources are not used to support activities that are inconsistent with a credible 1.5°C scenario. We analyzed the fossil fuel policies of five of the largest private infrastructure investment firms-Macquarie Asset Management, Global Infrastructure Partners, Stonepeak, IFM Investors, and I Squared Capital-against the IPCC’s analysis that any new fossil fuel projects will jeopardize our chances of limiting warming to 1.5°C, echoed in the International Energy Agency’s Net Zero Emissions by 2050 scenario.

We found that none of these private infrastructure firms, which have collectively raised over US$250 billion in infrastructure capital over the past three years (7), have any sectoral policies in place to ensure that investments are not made in the expansion of the fossil fuel sector (see Table 1 and 2). In other words, they have no restrictions on companies developing new coal or upstream or midstream oil or gas infrastructure. This is in sharp contrast to public market investors, who have increasingly adopted such policies (8).

We also found that all five private infrastructure companies mention, to varying degrees, their efforts to engage with polluting portfolio companies. But none of them has a credible strategy that suggests they have any intention of encouraging the fossil fuel companies in their portfolios to transition to other activities. In summary, these firms remain able to invest in fossil fuel developers, often becoming their sole or majority owners. And when they do, it is not to support a reorientation toward climate solutions.

A latent risk of exceeding the global carbon budget: fossil gas

The track record of private infrastructure firms makes this lack of fossil fuel policy even more serious. The five private infrastructure firms in our assessment own or co-own at least 45 companies operating in the fossil fuel sector, according to data from the Private Equity Energy Tracker (9). They are particularly active in midstream infrastructure, often associated with fracked gas and criticized for environmental and human rights impacts. And some firms have publicly expressed an interest in further developing fossil gas infrastructure (10).

These private infrastructure firms appear to be betting particularly heavily on liquefied natural gas (LNG), even though it is a major source of greenhouse gases due to methane leakage (11). Global Infrastructure Partners is a main investor in the Rio Grande LNG terminal under construction in Texas, United States (US) (12), and has backed other controversial LNG projects, such as the Gladstone LNG project in Australia (13). IFM Investors backed the Freeport LNG terminal, one of the largest LNG facilities in the US (14), and is involved in its expansion, as well as the proposed Zeeland Energy LNG terminal in the Netherlands. I Squared Capital supported the construction of the Calcasieu Pass LNG terminal (14) and is supporting the ongoing development of the Plaquemines LNG and CP2 LNG terminals in the US (15). Finally, Stonepeak’s portfolio company, Seapeak, controls the transportation of approximately 10% of the world’s seaborne natural gas (16).

Without policies that set clear limits on fossil fuels, there is a high risk that private infrastructure firms will continue to invest in infrastructure that exceeds the remaining global carbon budget, making it impossible to avoid the worst impacts of climate change. All stakeholders interested in reorienting finance towards a 1.5°C trajectory should take action to encourage private infrastructure firms to adopt sectoral policies that, at a minimum, limit investments in fossil fuel expansion, including gas, for all their investments. Institutional investors who allocate money to private infrastructure funds have a critical role to play here. Similarly, regulators can immediately require more ambitious disclosure requirements for investments made by private infrastructure firms and ensure that private market investments are covered by relevant sustainable finance regulations in each country.

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