The investment path to net zero may not always be clear for asset owners. With the lack of a dedicated asset class and shifting risk profiles for energy transition-critical assets, the Fiduciary Investors Symposium in Toronto heard that investors need to be flexible and ready to creatively make room in their portfolios when the right opportunities arise.
For example, even infrastructure can be perceived as a riskier asset class when it is tied to new energy technologies, said Rossitsa Stoyanova, investment chief of Canada’s Investment Management Corporation of Ontario (IMCO). The fund invests C$77.5 billion on behalf of its public sector clients.
“We’re used to looking at infrastructure as clipping the coupon – there’s assets, they have a contract, and they just throw cash,” she told the symposium in Toronto.
“And the infrastructure of the future is not that, because it doesn’t exist yet – like renewables, batteries or green data centres, you have to build them.
“It might be perceived as taking higher risk, because we’re developing new infrastructure that eventually will become the infrastructure that is clipping coupons – for now, it’s not. But I think that’s the only way to do it.”
IMCO doesn’t have a specific allocation to sustainable investments, but Stoyanova said it has the expectation that “every asset class in the portfolio will be sustainable at some point”.
In cases where a sustainable asset doesn’t fit neatly into traditional asset classes, Stoyanova said IMCO is usually able to leverage its broad mandate and do things like splitting the investment into two sub portfolios.
For example, the fund’s investment in electric vehicle battery company Northvolt draws from the EV expertise of the infrastructure team, as well as on structuring and pre-IPO knowledge from the public equities team, Stoyanova said. It can take some explaining to the board, but the result is worth it.
“Sustainability brings the teams together. They work together, they find opportunities, and then we’ve committed to find a place for those opportunities,” she said.
“They’re not easy to approve, especially sometimes [these investments] are a challenge for boards to understand. I mean we’ve gotten there, but it’s not a cakewalk.”
Chief strategy officer of global infrastructure asset manager IFM Investors, Luba Nikulina, told investors not to lose sight of the fact that “net zero is not really an investment target, it’s an emission target”.
“The reality is, if you own assets that are critical for the functioning of the society, and these assets are really difficult to decarbonise, then net zero target becomes, in some instances, impossible,” she said.
“So what do you do in this context? I think actually, in the whole industry, my observation is that we are on a learning curve.
“Instead of just being the slaves to this target on carbon emissions, and say ‘I will do anything possible to reduce carbon intensity’, they [our team] start thinking about transition planning.
“This is where you really step into it as an investor, rather than an ecologist and ask ‘do I have the technology to decarbonise?’.”
Answering that question can require some creative thinking. For example, IFM Investors has partnered with several research universities in Italy to study a wireless technology that will allow EVs to be charged on the road as they drive, hence addressing EVs’ range problem and toll road assets’ decarbonisation.
Peter Martin Larsen, senior managing director and head of private markets in Canada’s University Pension Plan also spoke of the inclination and need to transform existing assets into more sustainable operations over time.
“Touching on the long-term view here, if I buy a data centre today, I would rather sell a green data centre in 15 years than a data centre that is not green,” he said.
“Coming from Denmark, we invested directly in offshore wind 15 years ago. ESG was not even a term [then], but it was a good commercial investment.
“For us, it’s really fundamentally believing that sustainability is commercially the right thing to do, so it’s 100% about risk return.”
