Sustainable infrastructure in Asia Pacific faces setbacks despite investor interest
Governments around the world have put environmental, social and governance (ESG) issues at the top of their agendas. Most have put a clear focus on climate and carbon emissions, resulting in an institutional investment trend towards sustainability.
In 2021, a record $627 billion in sustainable infrastructure projects in the renewable energy and nuclear sectors were announced globally, an increase of $352 billion year-over-year, according to data from Refinitiv’s Sustainable Infrastructure Investment Report.
These projects include 1,521 individual projects throughout the Americas, Asia Pacific region, Europe and Japan, almost four times the total number of sustainable infrastructure projects launched in the previous decade.
India and China lead sustainable infrastructure development in Asia, which is no surprise given the size of their economies, according to Darrenth Hawken, head of capital markets, sales and strategy at the London Stock Exchange Group (LSEG).
“The pace of solar farm construction in India is enormous, both at the small and large scale. China’s Belt and Road initiative has been refocused into a more sustainable basis and while slower, continues to be a major plank in the regional market,” Hawken told AsianInvestor.
ASIA INFRA
At the same time, hundreds of projects have not gone ahead in Asia because of pandemic-related worker shortages and construction delays, supply chain slowdowns and growing macroeconomic uncertainty.
Two particular factors are at play in the Asian market according to Hawken.
“The timely delivery of the specific manufactured parts like turbines and solar panels that are needed for this market and the increases in price of raw materials needed for these parts thus impacting the overall financial return or viability of the projects,” he said.
“The market has been used to delays due to Covid recently. But these delays on top of supply chains are compounding the issues,” said Hawken.
Only 3.8% (47) of the 1,232 solar and wind projects that were announced in 2020, have been completed. Similarly, among the 1,069 solar and wind projects announced in 2019, just 89 (8.3%) have been completed to date, said the report.
POWER SECTOR
"Very recently the development of a $30 billion sub-sea cable to transfer sustainable energy from Australia to Singapore was announced. This is could be an interesting next trend in the distribution and storage of power," said Hawken.
Hawken pointed to Europe which already has an integrated power distribution network, making it possible to transfer power from Norway to Portugal.
"This means overproduction in one area can be used profitably in another that has increased demand. Asia currently lacks that kind of network so a project's financial viability are more locally focused," he said.
ASSET OWNERS DRIVING
Asset owners are predominantly driving the growth of the sustainable infrastructure market in Asia Pacific, according to Grace Szeto, associate director, manager research, investments Australia at Willis Towers Watson (WTW).
“A lot of the activity in Asia Pacific is driven by asset owners who have made a commitment to net zero or have identified the strong tailwind in sustainable infrastructure solutions and their focus has generally been on renewable energy assets,” Szeto told AsianInvestor.
Allocation to sustainable infrastructure also adds strong diversification benefits that complement a traditional core infrastructure portfolio, she added.
“There are, however, some constraints, including the pricing of renewable energy and forestry assets. There is a lot of capital in the region chasing what’s available,” she said.
While Apac investors have typically concentrated on renewable energy in the sustainable sector, the lack of availability of such assets for investment in the region is creating a fierce level of competition in the market, which is causing yields to decline, according to Szeto.
“There are also region-specific constraints, particularly in the energy grid and grid connections for renewable assets which needs to be addressed to clear the pathway for more private capital flows,” she said.
When looking at sustainable infrastructure more broadly, a range of other sectors within this asset class offer less competition “such as energy, water efficiency and waste management” can yield compelling risk-adjusted returns.
Another area that investors have explored less is sustainable infrastructure strategies which achieve a positive social impact, said Szeto.
“An example we have seen in Australia is a digital infrastructure opportunity which tackles the issue of inequality of access and seeks to alleviate digital exclusion in vulnerable communities by offering affordable, high-speed internet. This is expected to reduce social inequalities, and improve their access to education, healthcare and employment,” she said.