Portfolio Adviser • Portfolio Adviser Magazine Responsible Investing • INVESTMENT NEEDED IN ASIA TO REACH NET-ZERO TARGETS

Q: What were ThomasLloyd’s key takeaways from the recent UN Intergovernmental Panel on Climate Change (IPCC) report on the state of global climate science?

Tony Coveney (TC): The report has made it clear that now is the time for action, not just talk. Within the next two decades, temperatures are likely to rise by more than 1.5C above pre-industrial levels, breaching the ambition of the 2015 Paris Climate Agreement. Only rapid and drastic actions in carbon emissions in this decade, the 2020s, can prevent a complete climate breakdown. The second key takeaway was less what was in the actual report, but how it was received and how it has helped to bring these issues to the global stage.

At the end of the day, we are fund managers, not scientists. It’s not really my skill set to analyse the full contents of the report, but what I would say is that there is a significant opportunity for outcomes to be different today than after the Paris Agreement, when there was a lot of talk but very little action. If this report provides the incentive for governments and corporations to fill the investment gap needed to address the climate issue, then it has to be a good thing.

TC: To get a to a ‘net-zero’ world by 2050 we need to be doing things to solve what the real problems are in 2021. As much as I want to laud and praise all of those in the UK that want to continue to mitigate climate change here, simply acting in a more conscious and sustainable way and changing personal behaviours is not going to shift the dial or help reduce carbon emissions globally.

The heavy lifting is needed in places like Asia, where you have the combination of economic and population growth and urbanisation, meaning there is a correlated demand for a new power generation. Most importantly, we can now meet these demands with solar power, which is cheaper than coal and more environmentally friendly.

So we have to see actions and deeds that build co-operation to address where the problem really is. It would also be helpful to have a slightly more nuanced debate as to how we get to ‘net zero’. This is because net zero may be a mathematical calculation that does not really address the fact you may have burning fires in one part of the planet and electric cars in another.

We believe the best outcome of COP is that more groups and funds do what we do, and we get more support from governments. We need to establish sustainable energy infrastructure as an asset class in its own right, similar to REITs and other real assets.

Nandita Sahgal Tully (NST): This really gets to the heart of the question: why choose to invest in Asia? When we launched our sustainable infrastructure strategy 10 years ago, we could see an important opportunity to move the dial and have a genuine positive impact through investment in new sustainable energy infrastructure projects, not just the replacement strategies we see getting rolled out in western Europe. Hopefully we will see this with many more Asian countries having a significant seat at the table in the COP discussions. The Philippines and India are both working hard to present programmes for investment at COP.

TC: What we do, and what we have only ever done at ThomasLloyd, is invest in sustainable energy infrastructure, such as solar power plants. We take these projects from development, to construction, to operations. Through our investments, we have been able to measure concrete environmental and social outcomes, including job creation, an improvement in tax returns and the of setting of carbon emissions.

TC: The stars have never been better aligned with the economic opportunity to deliver sustainable economic growth in a commercially viable fashion, to help rejuvenate economies. Add to this the opportunity to earn money today and preserve the planet for your children and grandchildren and you have a double win.

NST: The commercial case, namely we can build renewable energy cheaper than coal, is the one investors most understand and do all their risk analysis on. However, the question we often get asked is ‘How are you sure you are going to get paid?’ To answer this, in some of our markets we construct and produce electricity for half of the price of coal, while in other markets it is a fraction of the price. So we don’t need to rely on subsidies, the security is in the price. We are fortunate in what’s happened in renewable energy, in that the costs of construction have fallen to make new electricity cheaper than coal. That security makes the commercial case for the asset class, because it is embedded in the price.

Q: Many traditional ESG funds have struggled performance-wise this year. Does this highlight the need for uncorrelated asset classes such as sustainable infrastructure?

TC: We have seen the figures for the amount of money fl owing into ESG ETFs and funds that invest in publicly traded companies. However, there are very few of us focused on real assets – investing in building actual sustainable infrastructure that supports the global transition to clean energy.

The point is that, while investing in traditional equity ESG funds may make investors feel good, they are actually making no net change to the available assets out there. No outcome is being changed. Post-Covid, governments will need to reboot their economies. Infrastructure investment will be encouraged through fiscal stimulus and regulatory incentives. This, combined with historic low-interest rates, is driving investor demand for income-generating real assets.

NST: Investing with a focus on delivering a positive impact has been, and always will be, embedded in everything we do. So our story hasn’t changed. We have long talked about the benefits that investing in real assets can add. If you want to know where your money is being spent, invest in a strategy like ours. You can go to the power plants, touch and see them. Nothing is synthesised or affected by what is going on in the wider market, such as the swing from growth to value. We build a plant, we know what our income is and that the performance won’t be affected by other external factors.

Q: The fund has well-established holdings in India and the Philippines. Are you looking to expand to other emerging markets?

TC: We see strong investment opportunities across large parts of the Indian subcontinent and South-East Asia, so we have already done a lot of work. There are particularly compelling investment opportunities in Bangladesh. We also see opportunities for investment in Vietnam, Indonesia and Sri Lanka.

NST: In January, we achieved commercial operations of a 75 megawatt utility-scale solar plant in India – our largest to date. This is a 200-acre site that we constructed at the height of the Covid pandemic. What it demonstrates is the resilience of this asset class, with the Indian government designating electrical power generation and renewable energy power generation, a must-run service. Once lockdown in India finished, we had workers on the site, with all the Covid safety measures being followed, and constructed the site during seven-to-eight months in the global pandemic.

This is something we are really proud of. More recently, we won a 200-megawatt solar plant in India which, when constructed and operational, will be the largest site we have ever done. In total, we currently run seven sites in India and six in the Philippines.

TC: Our mantra is to invest in strong, fast-growing markets that can demonstrate independent legal processes in our core renewable technologies, where the investment can be seen to generate local jobs, local economic growth and local wealth.

Now more than ever the financial sector has a critical role to facilitate a transition to a low-carbon economy, with the allocation of capital as a powerful lever for change. ■

TONY COVENEY, managing director and head of infrastructure asset management, ThomasLloyd

NANDITA SAHGAL TULLY, managing director, infrastructure asset management, ThomasLloyd