Infrastructure to play a key role in the move to net-zero emissions

Nick Langley

Infrastructure sector has the opportunity to lead global industry in decarbonisation and the transition to net-zero emissions, an extensive sector review by leading investment manager ClearBridge Investments has found.

ClearBridge Investments has published a white paper that explores changes in a number of infrastructure sectors, including electric utilities, energy infrastructure, airports and rail transport. The paper focuses on what is likely to happen over the next few years and beyond.

Nick Langley, ClearBridge Investments Managing Director and Portfolio Manager, says: “While moving toward net-zero is difficult, several pathways exist for infrastructure to lead. Each of these will require significant investment.

“Infrastructure companies and asset owners have historically been reducing carbon emissions from their assets, and this trend is set to accelerate as global policy support and social pressures grow.”

The white paper, Infrastructure and the Move Toward Net-Zero, says railroads are one of the likely ESG winners in the transport industry, due to their unique ability to reduce greenhouse gas emissions. Rails are, on average, four times more fuel-efficient than trucks, producing up to 75% fewer emissions.

There has been a substantial shift in thinking in the sector over the past few years, with railroads setting emissions reductions targets. Those targets have become increasingly ambitious, and the industry is adopting practices that dramatically improve the efficiency of diesel locomotives.

Businesses are also showing more willingness to shift from trucks to rail in order to reduce their carbon footprint.

In another transport sector, aviation, airports produce low emissions levels compared with other parts of the transport industry. To lower emissions further, airport operators seek to procure renewable energy and install solar panels on their sites.

A more challenging task is to cut indirect emissions, such as reducing unnecessary airline engine operation, emissions from ground support equipment and passenger travel to the airport. Airports are adopting Airport Collaborative Decision Making (A-CDM) to improve airspace and airfield efficiency.

In the electric utility sector, since the Paris Climate Agreement in 2016 most companies have put emissions targets in place and are pivoting from fossil-fueled generation to renewables. As a result, annual renewables generation capacity has doubled worldwide over the past decade, while utilities have been decommissioning thermal and nuclear plants.

In China alone, coal-fired capacity to total capacity has come down from 67% in 2010 to 49% in 2020.

Power transmission and distribution networks are investing heavily to improve reliability and reduce “grid curtailment” of wind and solar (deliberate reduction in output to balance supply).

Energy infrastructure consists primarily of large oil and gas pipelines. The gas pipeline sector has been a significant contributor to the reduction in greenhouse gas emissions in the electricity sector because gas contributes around half the CO2 emissions of coal and has been replacing it as a fuel to generate electricity.

This trend has slowed as renewable energy approaches price parity with fossil fuels. As a result, gas has moved from being a solution to being a target to reduce emissions.

Langley says the trends are positive, but all these sectors face challenges, which must be weighed against the opportunities as investors make their calls.

“The oil and gas sectors face greater challenges than other infrastructure sectors,” Langley says.

“Companies are transitioning away from gas, with some piloting hydrogen and renewable gas, while others invest in wind and other renewables. We are sceptical about the ability of all pipeline companies to benefit from the transition to net-zero emissions. In addition, the development of the electric vehicle market is threatening the future of oil.”

According to the white paper, challenges facing the electric utility sector include maintaining stable grids, the expiry of subsidy support and increased competition as barriers to entry come down.

The biggest challenge facing rail is the threat that regulators, responding to shippers’ complaints, will slow the pace of change.

Airports have a complex array of stakeholders, including state, federal and local governments that need to be taken along the net-zero journey.