What could net zero emissions mean for listed infrastructure valuations?

This article was co-authored by Georgia Hall and Amy Ubank.

In December 2021, we published our inaugural Maple-Brown Abbott Global Listed Infrastructure Task Force on Climate-related Financial Disclosures (TCFD) report as part of our firm-wide commitment to climate change risk reporting. Building on that report, this article summarises the findings of our latest climate change scenario analysis and provides an update on our targets and metrics.

Summary

Despite an ongoing energy crisis and geopolitical instability, the latest IEA World Energy Outlook 2022 shows how the pace and scale of the energy transition has sped up with the introduction of landmark policy such as the US Inflation Reduction Act, RePowerEU and the EU’s Fit for 55 package of reforms. A more accelerated net zero emissions pathway could, according to our latest analysis, spell a material valuation upside for around 50% of companies held in the Maple-Brown Abbott Global Listed Infrastructure (GLI) strategy (by position weight) relative to our base case. Equally, around 20% of companies (by position weight) could experience valuation risks owing to their exposure to oil, natural gas, air and road markets.*

What is climate change scenario analysis?

Key to the analysis of transition risks and opportunities is the question of whether the global energy transition will be gradual or rapid. Scenario analysis can assist investment managers analyse the breadth of potential transition trajectories and should be considered a stress testing exercise to explore the extreme ends of the energy transition and what this could look like for a portfolio of investments.

We refresh our energy transition assumptions using the IEA World Energy Outlook scenarios every year to ensure our valuation assumptions account for the current state of the transition. This helps us identify risks and opportunities in our company models and use these insights to inform our ESG company engagements and other stewardship activities.

IEA World Energy Outlook 2022 scenarios**

Breaking down our findings 

In our latest analysis, we used the IEA Stated Policies scenario as a proxy for our base case and flexed various company-specific assumptions to account for a faster transition (the Announced Pledges scenario) and the fastest transition (the Net Zero Emissions by 2050 scenario).

Relative to the IEA Stated Policies scenario, our analysis shows that a faster pace of the energy transition could create significant opportunities for the GLI strategy. The results vary substantially across industries:

• Potential opportunities are most pronounced in the case of electric and multi-utilities, contracted renewable energy companies and railroads. These companies comprise a total weighting of around 50%.***
• The impact of a faster energy transition on airport infrastructure is more ‘middle of the road’ in the sense that the industry does not look to be structurally challenged or exposed to stranded asset risk, but instead could face uncertainties that impact its long-term valuation outlook.
• The most challenged industries – when it comes to a faster-paced energy transition – are the midstream and energy storage companies owing to their exposures to oil and natural gas markets. 
• The pace and scale of the energy transition has a relatively immaterial impact on the valuations of the water utilities, communications infrastructure and toll roads we analysed.

What does this mean for the GLI strategy?

Our analysis indicates the GLI strategy may be well positioned to tap into the opportunities associated with the valuation upside of a faster energy transition. For instance, according to our analysis, 18% of GLI strategy holdings (by position weight) see moderate to high valuation opportunities under the IEA Announced Policies scenario, which increases to 46% under the Net Zero Emissions scenario. 

Equally, the faster the pace of the energy transition, the greater the potential valuation downside for midstream infrastructure energy and storage infrastructure companies. Under the IEA Announced Policies scenario, around 15% of GLI strategy holdings see moderate to high valuation risks. This number increases to 20% of companies under the IEA Net Zero Emissions scenario. 

Targets and metrics 

Emissions versus "rate of change"

We believe emissions are not a good metric for forward-looking assessments of companies as they relate to a point in time as opposed to the potential rate of change. We use emissions data for specific purposes in the investment process, but consider companies’ business activities, capital expenditure plans and energy transition strategies to be better forward-looking measures.

The energy transition will not be possible without the right infrastructure investment, especially in the electric and multi-utilities sector which accounted for over one third of global energy related emissions in 2021.^ According to modelling undertaken by the IEA, the electricity sector is set to lead emissions reductions over the next decade as it carries the most potential to retire emissions-intensive assets and invest in renewable energy, battery storage and the requisite electricity grid infrastructure. 

CO2 emissions by sector in the Net Zero Emissions scenario

Source: IEA (2022), World Energy Outlook 2022, Paris, IEA. To achieve net zero emissions, the electricity sector will need to undergo the steepest and deepest cuts in emissions over the coming decade.

Walking the talk on emissions

In 2021, the GLI strategy became a signatory to the Net Zero Asset Managers initiative (NZAMi). We have committed to aligning the GLI strategy with a pathway towards net zero emissions by 2050 and have set an interim emissions target to assist with this trajectory. 

Making this commitment has been a key driving force behind our stepped-up climate risk and decarbonisation research, engagements and proxy voting decisions in recent years. We have seen some excellent outcomes from our engagement and proxy voting efforts, especially in relation to emissions targets and the incorporation of ESG objectives into executive remuneration frameworks. We also use global best practice standards and frameworks – such as the Paris Aligned Investment Initiative – to assess the quality of companies’ emissions targets.

After all, our ability to execute on our own emissions targets depends on the execution of the companies we invest in. This is the crux of our philosophy: we believe long-term decarbonisation will not be possible through a binary approach to divestment but instead through active stewardship.

* Based on equity weights of a representative fund of the Maple-Brown Abbott Global Listed Infrastructure (GLI) strategy as at 31 March 2023.

** Source: IEA (2022), World Energy Outlook 2022, IEA, Paris.

*** Based on equity weights of a representative fund of the Maple-Brown Abbott Global Listed Infrastructure (GLI) strategy as at 31 March 2023.

^ Source: IEA (2022), World Energy Outlook 2022, IEA, Paris.

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