The world is going electric. Industry is increasingly embracing digitization and robotics. Cloud-based services dominate in our business and personal lives. Electric vehicles are becoming mainstream. At the same time, our efforts to slow down climate change require greener electricity.
All of this is accelerating growth in clean electricity infrastructure. To give investors access to this sector, NEI Investments recently expanded its suite of global impact investment funds with the launch of NEI Clean Infrastructure Fund, sub advised by Europe-based Ecofin Advisors Limited.
“There’s a very clear tailwind when it comes to infrastructure, and Ecofin has a long-standing history in this space, a fundamental understanding of the key drivers of clean infrastructure and strong ESG principles,” says John Bai, NEI’s senior vice-president and chief investment officer.
Bai adds that NEI chose Ecofin’s strategy to provide investors with more than simply growth potential.
“What I love about this strategy is the attractive dividend yield,” he says. “This should appeal to more risk-averse investors who want to participate in the clean infrastructure megatrend but prefer to focus on the dividend part of the curve.”
Delivering measurable impact
Selected as an ImpactAssets 50 top-tier manager for 2021 and a member of Race to Zero’s Net-Zero Asset Manager Alliance, Ecofin describes itself as “the bridge connecting ecology and finance.” Matthew Breidert, senior portfolio manager, with Ecofin Advisors Limited, sub-advisor to the NEI Clean Infrastructure Fund, claims investing in clean infrastructure can be a powerful way to invest for impact.
“The vast majority of ESG-related investment opportunities, or companies that say they’re focused on sustainability, what they’re doing is investing in companies that are themselves decarbonizing,” Breidert says. “We actually invest in those companies and assets that allow businesses like Google and Microsoft to decarbonize by supplying them with clean electricity. And, because we’re investing in the enabler technologies, you can actually measure the positive impact these companies have directly on the consumers of energy and electricity.”
Typical holdings include renewable energy developers, owners and operators of renewable energy assets, and ancillary parts of businesses involved in the transmission and distribution of electricity. Breidert points out that electricity produces about 20% of all energy today, but that number will likely rise to 40% within the next 20 to 25 years. That represents a “massive secular shift” from fossil fuel molecules to electricity-propelling electrons, and he maintains that green electricity will lead the way.
“There’s a very clear tailwind when it comes to infrastructure, and Ecofin has a long-standing history in this space.”
Fundamental analysis incorporates ESG criteria
Ecofin’s investment process places significant emphasis on deeply analyzing the regulatory environment, because stability is critical for long-duration assets. Breidert and his team also conduct a fundamental analysis of each company, incorporating a strict ESG framework. They look for the best opportunities globally, aiming to generate an attractive return with a lower level of risk than the market.
An example of a long-term holding is NextEra Energy Resources, a market leader in the renewable developer-operator space and the largest utility in Florida.
“It almost single-handedly created the renewables market in the U.S. and North America starting about 20 years ago and has easily built the most impressive portfolio possibly on the planet,” Breidert says. “Their locations, the contracts, the types of assets they have…are going to bear fruit for investors for decades. NextEra has had enormous outperformance compared to the market for the last 10 years. We think the future is quite bright.”
Breidert also likes the prospects for China Longyuan Power Group Ltd., which he describes as “the world’s largest owner-operator of wind farms, that nobody’s ever heard of.” Operating exclusively in China, this firm is benefiting from the country’s rapid move towards renewables as it works to decarbonize and satisfy electricity demand growth.
“Regulations are becoming more accommodative in China to satisfy market demand, and much of that demand is actually coming from multinationals, which are decarbonizing as part of their multinational requirements and basically telling the government, ‘You have to give us access to green electricity,’” says Breidert.
Focus on hard assets makes this a defensive play
While other sustainability-focused managers often invest in disruptors or technology innovation, Breidert’s team prefers hard assets.
“We think an awful lot of value, and certainly a lot of the capital investment that will be required to achieve wide-scale decarbonization will be in the hard-assets side of the business,” he says. “And that side of the business is quite different…than investing in cyclical or highly disruptive growth companies. We end up with valuations that tend to be much more reasonable or look a lot more like the market, but that actually have risk profiles and volatility profiles that are better than the market.”
As a result, this strategy can be seen as defensive, particularly since it’s positioned to benefit from the declining cost of producing renewable electricity—down 85% over the past 15 years and now below the cost of producing electricity powered by either fossil fuels or nuclear power.
“In the last 12 months, as energy prices have exploded around the world, the distance between renewable electricity and those resources has only widened. And the cost curve on renewables is durable, associated with the productivity and efficiency gains of the technology that’s deployed,” Breidert says.
“That headroom then creates perpetuity value in those assets, which means they will yield more and more value over their lives and can generate excellent rates of return.”
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