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Ripe for Disruption

Andreas Köttering, Head of Private Infrastructure Europe, CBRE Investment Management, outlines private capital’s role on the long road to transport decarbonisation.

The decarbonisation of the transport sector – from automobiles, to trucks, ferries, trains, and planes – is pressing and highly complex. Globally, the transport sector accounts for around one-fifth of carbon dioxide emissions. According to the International Energy Agency (IEA), transport emissions grew at an annual average rate of 1.7% from 1990 to 2022, faster than almost any other industry. The complexity comes from the fact that the transport sector is poised for growth due to population growth, rising wealth and the need for connectivity; yet many of the low-carbon solutions in aviation and maritime shipping are not yet proven or commercially viable.

We can draw parallels between the transport sector today and the power generation from renewable sources such as wind and solar more than a decade ago. The emerging technologies – from biofuels to sustainable aviation fuel to hydrogen-fueled ships – require policy support to be attractive for private capital. But just as they did with renewables, investors in unlisted infrastructure have a vested interest in the success of the decarbonisation story for transport.

Slightly exceeding renewables, transport infrastructure (road companies, airports, and seaports) accounts for a quarter of the unlisted infrastructure universe estimated at US$3.0 trillion of market enterprise value, according to Boston Consulting Group/ EDHEC. In this article, we will explore how private capital can support and benefit from the decarbonisation of the transport sector and examine some of the many obstacles along the way.

Aligning incentives

Let’s illustrate our case by using the electrification of road vehicles. Motorised transport remains dependent on oil, and more generally, on combustion engines that run on liquids or natural gas. The electrification of road vehicles is the most promising pathway to change this trajectory. Yet, in 2022 only 4.5% of all new buses and 1.2% of truck sales worldwide were electric, according to the IEA.

Infrastructure investors in transport assets such as bus companies and ferries can promote the accelerated transition to an electric fleet. Many of these companies operate under long-term concessions with regional public authorities, generating availability-based inflation-linked cash flows which are highly sought-after by infrastructure investors. In exchange, investors can provide the significant upfront capital required for new electric buses and ferries and agree a return framework that is equitable to service users.

To commit more capital, investors need supportive and stable government policies. In the US, the 2022 Inflation Reduction Act provides funding, incentives, and subsidies to manufacturers and purchasers of electric vehicles (EVs) and equipment, batteries, and charging infrastructure. Similar industrial policies, such as the European Union’s Green Industrial Plan, will lead to more diverse and resilient supply chains as evidenced by recent announcements of EU-based domestic heavy-duty battery plants. However, investors must be alert to potential shifts in government policy. For example, the UK government has rowed back on some net zero policies, including pushing back the ban on sales of cars with combustion engines to 2035.

A dynamic environment

The IEA forecasts EVs will comprise 60% of vehicles sold globally by 2030, which underscores the enormous investment required across charging stations and related infrastructure. The EU estimates that 42 million EV charging points will need to be available across the continent to meet a targeted 55% reduction in transport emissions by 2030.

In the long term, the rollout of EV charging infrastructure will predominantly be funded by private capital. At present, business model immaturity reduces the pool of equity and debt capital willing to commit to the EV charging infrastructure sector. To de-risk the EV charging business, infrastructure owners and asset managers can put in place reliable stakeholder relationships with landowners, energy suppliers, regulators, and commercial partners.

In the case of logistic trucks, which are often old and diesel-powered and emit harmful pollutants, governments are creating incentives for truck operators to electrify, creating a huge investment opportunity for innovation and transformation.

By consolidating land with power along key routes, and offering customers access to chargers and EV trucks in exchange for medium to long-term contracted lease payments, infrastructure businesses can offer a full-service solution to electrify truckers’ operations creating a zero-emission logistics solution.

Cross-fertilisation of opportunities

Infrastructure is a diverse asset class, spanning network utilities, renewables, transport and more recently, data infrastructure. By owning assets across the spectrum, private infrastructure investors are well-positioned to share knowledge and implement complementary solutions from adjacent sectors. For example, onsite EV charging infrastructure at airports, long-term fuel supply contracts that offer greener fuel alternatives to airlines, and software that manages how planes approach airports help to minimise the time spent in the sky.

Smart mobility, digitalisation and automation are indispensable not only to make transport systems more efficient and mobility seamless, but also to reduce their carbon footprint. Using digital tools, users can select the most optimal choice of transport and lower transport congestion. Different hubs for mobility are formed, often with the objective to promote environmentally sustainable modes such as passenger and freight rail.

By investing in data centres, wireless towers and fibre optic networks, infrastructure investors make possible the transmission and processing of ever-rising data behind these smart applications. They also help bridge the digital divide in schools and rural communities so that the benefit of smart cities and smart mobility in general are available to all.

The search for ‘winners’

Infrastructure investors have a unique opportunity to drive the decarbonisation of the transport industry – a sector ripe for disruption and with investment potential. But infrastructure investments will require careful due diligence to compensate for the sector’s embryonic track record, underscoring the benefit of deploying capital via a global investment management platform with scaled resources.

They will also require revenue models that generate long-term predictable cash flows for capital providers. In the search for the ‘winners’ of the transport decarbonisation story, those infrastructure businesses that align incentives between stakeholders (by capitalising on supportive regional policies), embrace innovation (that offsets business model immaturity), leverage cross-sector experience and innovation, and that prioritise digitalisation, will rise to the top.

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