Sustainability Inspires: how infrastructure delivers for investors and the planet

Infrastructure is a compelling asset class for any investor prioritising sustainability. The transport, energy and utilities sectors play a critical role in enabling a low-carbon world. 

But how do major infrastructure investors ensure their portfolio meets both sustainability needs and their financial objectives?

In our latest Sustainability Inspires podcast, Ruairi Revell, Head of Sustainability, and Maciej Tarasiuk, Head of Investments for abrdn’s economic infrastructure business, discuss how they select, engage with, and manage infrastructure investments to achieve optimal outcomes for abrdn investors and society.

Transcript

Fionna Ross

Hello, I'm Fionna Ross. You're listening to the abrdn podcast Sustainability Inspires, discussing all things relating to sustainability and responsible investing. Today we're bringing you the third of abrdn podcasts focused on abrdn Investments approach to engagement. In the last episode, we spoke to Andy Mason and Joanna Sulc in the active ownership team, where we discussed abrdn Investments approach to stewardship policy.

Now, I'm delighted to have with me on the podcast today, Ruairi Revell, Head of ESG in the Core Infrastructure team. Hi, Ruairi. 

Ruairi Revell 

Thank you for having us. 

Fionna Ross

I'm also joined by your colleague Maciej Tarasiuk, Head of Investments for Core Infrastructure. 

Maciej Tarasiuk

Hi Fionna, thanks for having me on. 

Fionna Ross

Hi. It's great to have you both here. So today we'll be continuing the conversation on how sustainability is integrated into the investment decision making process with a lens on stakeholder engagement.

Now, I'm fairly familiar when it comes to engaging with asset classes like equities and fixed income, but I believe there's quite a unique angle to engagement when it comes to economic infrastructure. Can we maybe start by you setting the scene with what your strategy is and how you approach sustainability? 

Maciej Tarasiuk

So, you know, to take a step back just in terms of exactly what we do.

So over the last ten years, we've been abrdn and we've been investing in what we call core and core plus infrastructure. And this is very much investing directly in small to mid-cap infrastructure companies, across Europe in order to create a diversified portfolio for our investors. And that's across what we call four key verticals which is regulated utilities, such as electricity distribution, heat distribution, its energy production in various renewable asset classes. It's transportation, such as rolling stock and then also digital, such as fibre investments. 

Across all of these characteristics, we look to create that kind of diversified, portfolio of assets which do generate stable cash flows to the investors over the long term. Now, in terms of the approach, which is linked around ESG, it's around how the governance works of these assets.

Fionna Ross

So (sorry to interrupt), that governance aspect is certainly something I’m interested in learning a bit more on, so if you could maybe expand on that.

Maciej Tarasiuk

Absolutely. So here we do normally invest into assets with we either have a control or dual control of the assets. But in terms of how they are governed within each, each entity is somewhat different. So it's not one size fits all. So, we do back certain assets with proper management teams within those assets. We also work with developers or local operators to provide day to day running of, of the assets and therefore we've got different approaches in terms governance on each of those.

Fionna Ross

That’s really useful, thanks.

 Maciej Tarasiuk

We also, because we look at smaller assets, a lot of the times when we make the investments the companies haven't developed yet, you know, significant ESG policies. And this is a challenge but also opportunity for us where we can come in and actually bring the knowhow, from across the wider portfolio, the wider business, in order to help the companies look to put in place appropriate ESG policies, but also drive value, through an active ESG approach.

I’ll let Ruairi tell you a bit more about how we actually approach that from day-to-day basis. 

Ruairi Revell 

Thanks for that Maciej, I’ll zoom in a little bit on how sustainability applies. First, just a little bit on, I guess, the sector for me, I’m clearly, very biased here.  But sustainability really comes to life and infrastructure is tangible. We're investing new capital directly into the sorts of assets Maciej just taken you through, and they’re providing these vital services to society that keep the economy going. So, we think about heat, power, mobility, digital connectivity and energy security. And in practice, what that means for us is it's, you know, solar arrays, it’s heat plants, it’s cables, its pipes, it's storage tanks, it's trains that we've got a number of in the portfolio and the people that sit around those to, to run them and maintain them. 

So, it's this web of interconnected parts of the built environment that enable that economic activity to support quality of life. Importantly alongside that, they also enable change. And often that change is required to support a societal imperative.

Fionna Ross

Can you expand on that a bit?  What do you mean by that exactly?

Ruairi Revell 

So, we're not, for example, going to resolve big challenges like climate change, like resource scarcity and dealing with the effects of aging populations without more and, and better infrastructure. So, when we think just in very basic terms about how sustainability applies to the sort of investment strategy, we thought we’re also pretty good start, right? The relevance is clear for us to see, but to get a little bit more specific there, as Maciej as described, our overall objective is to deliver long term value for our clients. And sustainability is, it will be no surprise to anyone, a big part of that. 

Fionna Ross

So how in practice does sustainability fit into the approach you take within infrastructure?

Ruairi Revell 

We underpin our approach with two clear principles. The first one, it might seem really obvious, but it's worth articulating. The first one's around financial materiality. So, sustainability factors as I've just described, are really just a subset of things that can affect long term value for our strategy.

And I really like academic Alex Edmond, he’s got a good quote on this where he says, “It's both extremely important and nothing special”, and really gets to the heart of our approach with this topic. So, we think about these factors, whether it's decarbonization, water use, health and safety, employee satisfaction. 

We think about these alongside everything else that we do, and we promote these outcomes in the context of and to the extent that they support our investment objectives. But we're not currently managing impact funds. So, these aren't objectives in their own right. 

The second principle, and one will spend most of today discussing, is our approach to active asset management. And this is the fact that we’re long-term owners. We can directly drive the changes working collaboratively with our management teams throughout ownership. You fundamentally, I guess, going back to Fionna's point at the start about being more familiar with how this works in equities and fixed income. Fundamentally, the reasons we're interested in sustainability factors are exactly the same. 

And it's that point around financial materiality, but the levers we've got with our strategy are a little bit different. And that's down to this point around the fact that we often have direct control versus influence only.

Maciej Tarasiuk

Some of the assets that we own are assets which, you know, have asset life of 50 plus years. So as much as Ruairi kind of explain, you know, how we manage some of the ESG issues during our ownership period. I think also one of the key parts of what we're doing in terms of generating value for investors is making sure that those assets, when they come for divest in a divestment period are well positioned so the next the next investor can benefit from the work that we've done as well. But also creating as best possible platform for a sale and allowing the next owner to benefit from that as well.

Fionna Ross

It really does seem to be a no “one size fits all”, as you mentioned, and also quite a bespoke approach, so very much hands on. 

Picking up on that second principle that that you mentioned Rurari, you know, approach to asset management. Can you expand a bit more on how you actually work with management teams throughout ownership to drive long term value especially if there are important sustainability factors at play?

Ruairi Revell 

The key point here is that it's about collaboration. And we work with management and partners, and we speak to them, you know, pretty much on a day-to-day basis. So, there's this constant dialogue and feedback that goes on. Really, they are the experts in their companies, but we can bring wider expertise, whether it's on sustainability or other topics.

Fionna Ross

And that people aspect I think is a really important consideration that you highlight. Can you illustrate that for us; maybe run through the investment cycle and talk about the “levers” that you have and can use?

Ruairi Revell 

So, I'll start right at the start. An engagement with our stakeholders can actually start years before we consider making an investment. And a good example of this is, is what we've done in Poland and indeed more recently in Italy in the biomethane sector.

And this is around identifying sector opportunities that we like, building the right relationships on the ground with advisors, with partners to to lay the foundation, to really get to understand that sector. So, engagement can start years in advance, of us actually deciding to progress with an opportunity. And if we do see potential to progress with an opportunity, that's when we get in our investment process to screening stage.

And from a sustainability point of view here we start with a long list of topics that we consider are appropriate. At this stage is always an element of basic policies, procedures, health and safety, regulatory, compliance, governance, these sorts of things.

But other material topics can vary by sector and can be very specific. So, for example, could be greenhouse gas emissions, fuel mix, decarbonization potential, energy intensity, water usage, physical climate risk. 

All these things come into play depending on what we're considering. For some investments there's a long list of these district heating assets in Finland, for example, for others it’s a much smaller list, so for operation renewables or train rolling stock assets, for example.

Assuming we get through a screening stage and we want to get a detailed due diligence, and undertake real work to, to capitalize on an opportunity, we engage very closely with, a technical and commercial specialists to drill into these issues much more detail, understand them properly. What are the risks? What are the opportunities? How should we consider these, how material are they? And ultimately with a view to, informing our offer and those sustainability factors – back to those two key principles earlier, particularly the one on financial materiality – they become, a fundamental part of our business plan at this early stage. 

And this is where we get to the point where active asset management and the discussion and engagement that we've been having really becomes relevant. 

So right at the outset will establish a clear business plan with management and clear strategy. And that will include sustainability topics, as relevant based on our findings from the due diligence phase and really importantly, and this is a key point, they might not always be ESG or sustainability because we consider them to be financial material, they're ultimately just part of the business plan.

So, at the outset we review, you know, governance, governance structures, management structures, remuneration to to really ensure there's strong alignment with management with our partners around the delivery of our business plan.

And we appoint an external sector specialist to our board as a non-executive. We assign responsibility at this point for any material sustainability factors to management and to the board, and often can link these to, to long term incentives if we consider that appropriate. And, you know, we'll set these KPIs clearly and monitor them with management on the board and on their track, depending on the KPI, monthly, quarterly or annually, depending on the topic.

Fionna Ross

Ruairi, this is really useful context. Are there any examples you can share of where you have worked with management to advise on some sustainability factor?

Maciej Tarasiuk

If I may just just jump in here because I think, you know, having seen this threat firsthand with one of our investee companies recently, in Finland, so one of the investee companies that we own in Finland is in the gas distribution space, clearly an asset which has added transition to the forefront of thinking at this point in time, as we think about long term value.

And I think what we have seen was, you know, Ruairi really kind of coming in and working with the management team to establish a whole process around green greenhouse gas KPI tracking, putting all the processes around decarbonization targets and by working hand-in-hand with the management, he was able to really provide that in-depth knowledge that comes from abrdn side of things and his own experience, together with management’s local knowledge to create a process which not only works for the company itself but also for our investors.

And when we look how we report and how we continue to create value through active ESG management, and also we're able to then use that framework and actually replicate it to some of our investee companies. So really taking advantage of the work done and putting it across the wider, wider portfolio of our companies as so I think that's really where some of that kind of value comes in from being an investor across more than one asset.

Fionna Ross

Thanks, Maciej – it’s really interesting to hear how you are able to share knowledge and lessons learned to benefit other players in the wider portfolio – even across different sectors and geographies as you say.

So, let’s get back to the levers – what additional tools do you have in the toolbox when as part of your active ownership approach?

Ruairi Revell 

Continuing on the theme of the levers we've got during ownership the key thing is we're able to invest in management over the long term so we can set long term incentive plans, development plans, regular reviews, check ins. 

And these are formal, obviously, and also informal. It's not just about the regular board meetings. We will undertake regular site visits. So, go to our assets regularly, see what's happening on the ground. And these informal check ins can be hugely valuable in creating alignment and the right culture. 

We regularly work with management to review, strategy based on a range of factors. So clearly in the sector we operate in there's lots of dynamics going on, there's regulatory changes, political shifts, technology is changing every day, and environmental factors and regulations come in that mean we have to we have to review, check and consider that whether our strategies are still appropriate and whether there's any tweaks we need to make. 

Fionna Ross

What about larger strategic opportunities – mergers and acquisitions for example – are you ever involved in these types of decisions?

Ruairi Revell 

We also, through ownership, throughout ownership, take opportunities to add bolt ons that we consider accretive to value. So, to date across the portfolio, I think there’s, you know, north of 20 of these we've done, that represent more than €250 million in value.

So, we can undertake these projects where we think they're beneficial to value, might be CapEx projects as well. And we can work with our companies on things like issuing green bonds for specific projects. And many of these are you can imagine, given the nature of our portfolio, many of these bolt-ons, the CapEx initiatives are designed to position companies to benefit from a long-term structural trends like the energy transition. So, for example, and it's the same company that Maciej referred to earlier as some really good bolt on acquisitions in the geothermal space and the bio space, as well as helping sort of support and diversify revenues by building energy services business, as well. 

So, so ultimately, it's back to the point that that Maciej made earlier, we're aiming to deliver our business plan, over our ownership period, to position our assets on the best sustainable long-term pathway to realize value at point of exit.

Fionna Ross 

Okay, great. You’ve covered a lot, and lots of great points – it sounds like it’s very hands on and bespoke for each asset, and very bespoke given your focus on materiality. And that collaborative aspect with management that you mentioned earlier, that really seems to stick out for me. As you say, it really seems to be key. 

Okay. So, we've heard a lot about the theory, but can you bring this to life with some more examples? So how do these levers support long term value creation in reality and are there really some win wins to be had?

Maciej Tarasiuk

In summary, yes, there are wins to be had. And you know, it's not that we just believe it, but actually we see it already within our portfolio, and I think that's the most important. So you know, proof is in the pudding, as you may say. I think, you know, you've heard some of the kind of key themes of how we look to engage to really kind of create value for ESG but just to summarize, you know, we see that across the investment lifecycle. 

So, it's one, through the kind of initial investment stage and how we interact with people as we make investments.

Two, its their operational improvements. So really kind of working, you know, actively with the assets and finding efficiency solutions, for example, or different approach to providing those essential service to our customers, but also generating positive ESG impact.

And the third one is through some follow-on investments. And I'm happy to kind of give you a bit more details on each one of those and bring this to life with some examples. 

So, for example, Ruairi kind of mentioned earlier on about our early engagement in the Polish solar market. So, to give you a background, we've actually made investments in the Polish solar market around 2019 and 2021.

These investments were off the back of early door engagements with developers when the market in Poland for solar PV was just starting. So, there was only around 400MW of capacity in the total market. And during this time, we were one of the first large, international investors to come into market to support those developers, to develop a set of 400MW. So really doubling the capacity of the entire Polish market in terms of solar production. 

Our portfolio itself does create quite significant, positive impacts on environments. So, the savings from CO2 production that, addition of the solar have produced is equivalent of probably taking about 200,000 cars off the roads per annum. So, you know, quite significant positive impacts from our initial investment.

More importantly for the wider energy market in Poland, we've actually created that kind of starting point for the early engagements for the market to develop significantly. So, over the last five years, you know, relatively small incremental investment has led to generation about 20GW of new assets in this class. So really almost having a 45 to 50 times more capacity than when we first started.  And I think that has had a significant positive impact from the ESG perspective on Poland. 

But actually, it also had a very significant positive impact for us and our investors, because being in early doors meant that the terms on which we were able to invest do generate superior returns vis a vis some of the later investors that came in where the market has become more commoditized, and the returns have been squeezed as well. So, I think the win win here is very much, you know, that kind of true positive environmental impact by CO2 abatement. And for our investors, it's about actually through early door investment, being able to benefit from superior returns versus some of the later entries to the market. 

Fionna Ross 

That’s a great example Maciej, really brings the value of the work your team is doing to life – any more examples you can give?

Maciej Tarasiuk

One of the kind of great example is some of our investments in Finland. So, you know, we are quite a large investor in district heating space in Finland. And those assets over our stewardship period have benefited from a number of efficiency improvements, whether it's by ensuring greater insulation of our pipes, whether it's by finding solutions to recapture some of the heat from the wastewater, for example.

And a lot of those projects have dual benefits. So, on one hand we are able from through various kind of CapEx projects be able to optimize our operating expenses because we are reusing heat or losing less, less heat. But also, that that leads to direct lower usage of energy and therefore lower CO2 footprint.

And to put this in context, one of the projects that we're looking at the moment is in the wastewater, heat recovery where you through a CapEx programme you're able to reduce the cost of heat generation by about 30%. So, it's a really kind of a true cost saving initiative, but also one which obviously reduces the energy you use to provide exactly the same service to the end customer. 

We're also looking at ways of finding new technologies, whether it's electric boilers, or more efficient boilers to reduce the CO2 generation and ultimately moving into an emission free production of energy. One of the investments that we've done over, you know, over five years ago. So we had it in we've been up for five years, has actually seen a significant reduction of carbon emissions, and that's around 60% reduction of carbon emissions. 

At the same time, we are able to drive efficiency through as well. So, again, you know, that kind of win win situation where, it does benefit, the climate, but it also benefits our investors by being able to generate additional value through more efficient operations.

And the last one is around really leveraging our existing assets, base and finding other opportunities to invest, invest the capital to provide a value accretive opportunities for investors. So, so one of the good examples here is our gas distribution business where we are able to leverage the existing asset base to be able to add new investments in the transition theme. 

So, for example, within our gas DSO business we are making investments in biogas production. And we're also looking to make investments for some of our customers by installing specific electric boilers alongside the boilers which are using gas at the moment. 

So, within both of these, where the efficiencies is one, we are able to use the existing footprint and therefore reducing the CapEx for the new investments, which on a standalone basis would be higher. 

At the same time, we also able to use the existing footprint of boilers or power plants where putting the electric, electric boilers inside it, again, reduce the overall cost of production of that heat for, for that customer. So again, win win for both the kind of CO2 abatement but also reduction of cost which makes us more competitive and allows us to deploy capital in a more value accretive way.

Fionna Ross 

Some fantastic examples, and as you say, creating win win situations from both a purely financial perspective, and also from a sustainability stance.

Ruairi Revell 

I think that this example really stands out to me particularly. You can have a sustainability practitioner and, you know, this is the transition in action in real life where we're moving from from the businesses that are involved in to conventional, conventional energy system, but gradually leveraging that that experience, that asset base and taking it to something new that's this fit for the future and fit for the long term to deliver value.

And that that to me is, is is where this all comes to life. And we can get this these big sustainability challenges and sort of cold, hard commercial reality to come together to work. And that's, that's really where we find value and what we, what we enjoy doing every day.

We've covered a lot of examples here. Hopefully we've really managed to bring to life, your what engagement and active asset management really means for us and the practical levers that we've got to manage sustainability risks and opportunities in our portfolio. 

Given the sector we're in, the time horizons, we're working with our funds, sustainability factors are an absolutely vital part of this. We can generate some, some tangible sustainability outcomes along the way.
 

Fionna Ross

Okay. Thanks. Some really useful examples, and it's great to hear how ESG benefits really do seem to go hand in hand with more efficient operations. And ultimately, as you both talk about returns for investors.  Well, we've covered a lot of ground today and I have so many more questions. But I think that's all we do have time for today.

So, thank you Ruairi and Maciej for joining us today. And of course, thanks to all our listeners who have taken the time to tune in. 

If you like this episode, hit the like and Subscribe buttons. You can find us on Spotify, Apple and the abrdn website. Goodbye for now.