Global infrastructure investment driven by energy transition and growth of AI

Recently held in Berlin, the annual Infrastructure Investor Network Global Summit brought together over 4,000 institutional investors, industry representatives, asset managers, government representatives, advisors, and commentators to discuss trends and drivers that will shape the infrastructure investment landscape over the coming months and years.

According to recent data published by the Financial Times, infrastructure as an asset class currently has $1.25 trillion in assets under management. However, separately, it has been estimated by the Organisation of Economic Co-operation and Development (OECD) (60 pages / 3.9 MB) that there is a cumulative infrastructure investment gap of $5.2 tr until 2030, or as high as $14.9 tr until 2040, when the achievement of the UN’s Sustainable Development Goals (SDGs) is taken into account. Driving this need for investments are markets across Asia, the Middle East and Africa.

Public capital investment, whether by way of debt or additional taxation, will be unable to reach that level, and bridging the very significant gap will need private capital alongside public investment.

Aligning investment strategies and geopolitical considerations

The event also highlighted the long-term, stable returns sought by investors with a focus on cash flow, larger funds to manage risk, and differentiated asset-focused approaches, for instance the use of varied investment strategies such as property or shares. It means that many are keen to see where their money has or will be invested, if investment has been differentiated to spread out the risk, and whether this investment will deliver long term, stable returns. Attendees also highlighted the possibilities of prospective platform expansion through the consolidation of smaller assets and portfolios.

Asset owners are now focussing on capital allocation to energy transition investments. Value is, of course, important in terms of investment, but transparency is also pivotal, as well as investors keen to see simplicity in investment structures. Increasingly energy transition investments require a greater degree of risk, with technology risk often being present. There are also risks related to ‘stranded’ assets, where such assets suffer premature and unforeseen devaluations.

However, asset managers are reacting to market demand with new and novel fund structures, which are more aligned with investors’ asset preferences. These structures now commonly include thresholds for risk adjustment for example. Overall, the changes allow for a focus on more positive and sustainable outcomes for investors, with sustainability continuing to be a particular topic of scrutiny from asset owners, public procurement agencies, regulators, and local communities.

Deglobalisation and concerns over supply chain security are creating opportunities for ‘near shoring’, transferring a business currently operational overseas and regional infrastructure development, with energy security driving renewed interest in nuclear power and alternative energy. Recent import tariffs already planned or discussed by the EU, US, and UK, for example, may also result in renewed regional or national investment refocus.

Political elections across half the world’s population in 2024 will result in some near-term political uncertainty and risk, albeit the drivers for new infrastructure are likely to remain.

Sustainability standards and ESG backlash for infrastructure

The importance of sustainability in infrastructure is a consistent narrative. A recent study carried out by Aviva Investors revealed that 95% of global institutions consider sustainability when making real asset investment decisions. For 17% of investors globally, sustainability is considered a critical deciding factor, driven by aims to decarbonise portfolios and make a positive sustainability impact.

Despite current and incoming sustainability regulations and disclosure standards – standards set to enable businesses to understand and report their impact on the economy as well as the environment and people – there is a lack of consistent interoperability between regimes. In fact, there is a growing sense of environment, social and governance (ESG) “backlash”.

This “backlash” was illustrated in March 2024 when a group of Wall Street banks left the Equator Principles Framework – a financial industry benchmark for determining, assessing, and managing environmental and social risk in projects – with reports citing concerns raised by US politicians over antitrust regulation limiting the market power of businesses by encouraging competition within the framework.

However, in the long term, the transition to low carbon, greater sustainability cannot be stopped. National net zero commitments are legally binding to a total of 195 countries under the Paris Agreement, meaning there will no doubt be a continued and growing demand for sustainability in infrastructure.

We see evidence of this in the emergence of global standards such as the ‘FAST Infra’ label, closing the gap at asset level. The label is specifically designed to enable market players including project sponsors, developers, operators, and investors to show the positive impact of infrastructure assets. It also aims to attract investors seeking assets which positively contribute to sustainable outcomes while working to introduce credibility, impartiality, and technical rigour to counter the risk of ‘greenwashing’.

Additionally, to support transparency, a global data repository is under development by Bloomberg where data will be provided by project sponsors, developers, and owners which other stakeholders, including prospective investors, will be able to access and review.