Mr Dell has 31 years’ experience in the financial services industry, 26 of which have been in distribution-related roles. He has been heavily involved in the development of several funds management businesses from start-up to maturity.

Prior to joining 4D, Mr Dell was director, distribution at Pinnacle Investment Management. He was previously the head of distribution at RARE Infrastructure for close to seven years, where he worked with 4D’s chief investment officer, Sarah Shaw.

Ms Shaw said Mr Dell has exceptional experience in the funds management industry, particularly in infrastructure, and she was looking forward to working with him again.

“Matt will be able to hit the ground running at 4D, with significant relationships in the industry, a strong infrastructure background, and an understanding of our team and process,” she said.

In addition, 4D Infrastructure has promoted investment analysts Christopher James and Tasneef Rahman to senior investment analysts.

Mr James was previously with RARE Infrastructure as an investment operations analyst, before joining 4D in 2016. He also worked as an accounts analyst at GO Markets and as an accountant at Logicca Chartered Accountants. He has a Bachelor of Commerce from Macquarie University and a Master of Applied Finance from Kaplan.

Mr Rahman joined 4D in 2017 from Crowe Howarth’s corporate finance team, and also worked as a fund data analyst at Morningstar. He has a Bachelor of Commerce and a Bachelor of Law from Macquarie University, and is a CFA.

Ms Shaw said Mr James and Mr Rahman will be taking on more responsibility within the company as it continues to grow.

“Since joining 4D, both Chris and Tasneef have grown significantly as analysts with incredibly strong modelling skills, a growing depth of coverage of their core universe, evolving relationships with companies and brokers, and conviction in portfolio calls,” she said.

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The goal of Net Zero is just not achievable without the right forms of infrastructure investment across both the energy and transport sectors.

The Australian Government recently released its plan to reach Net Zero emissions by 2050, finally joining the long list of countries already committed to achieving this target by 2050 or sooner. The Plan, endorsed as ‘The Australian Way’, is underpinned by existing state and federal policies; supported by new concessional funding; and dependent upon future cost reductions through technology innovation. At the same time the government provided assurances that the country is on track to achieve its 2030 emissions reduction target.

‘The Australian Way’ in a nutshell

• In October 2021, the Morrison Federal Government outlined its plan for Australia to target Net Zero carbon emissions by 2050 (the ‘Plan’). It sees Australia join countries representing ~82% of the global economy to have Net Zero targets by 2050-2070.
• The Plan builds on Australia’s 2030 emissions reduction target of 26-28% on 2005 levels (the target itself remains unchanged).
• The Plan outlines how an 85% emissions reduction will be achieved, with the residual 15% requiring future technology breakthroughs to deliver economic and practical solutions.
• The Plan will involve an estimated investment of at least ~A$100b. Execution is expected to deliver an A$2k/capita increase in 2050 national income and create 62,000 jobs.
• The 2050 target will not be formally legislated, instead relying on governments, consumers and companies collectively driving emission reductions.
• Along with the global decarbonisation thematic, the Plan represents a huge, multi-decade global infrastructure investment opportunity.

What is Net Zero?

Net Zero refers to a position in which annual greenhouse gas emissions released into the environment are balanced by those taken out. It does not necessarily mean elimination of emissions completely: rather, as more emissions are reduced then less sequestration is required to achieve Net Zero.

Decarbonisation is the process of reducing the amount of emissions into the atmosphere.

Global momentum is building to address climate change

The 2015 Paris Agreement on climate change was historic in establishing awareness and momentum for environmental change, with signatories aiming to limit global emissions to Net Zero in the second half of the century. The ultimate goal of such initiatives is to limit global warming to well below 2 (preferably 1.5) degrees Celsius compared to pre-industrial levels. It is a mammoth task, to say the least, and needs support from governments and the populace to balance the often-conflicting goals of environmental sustainability while still fostering population growth, economic advancement and social ideals.

As a result, decarbonisation is now a global phenomenon, with most governments around the world moving to Net Zero targets to limit the impacts of climate change. Countries representing ~82% of the global economy now have Net Zero targets by 2050-2070, up from ~10% just two years ago. 133 of the 142 countries with Net Zero targets are aiming for 2050 or sooner – the US, EU, UK, and Japan have all committed to Net Zero emissions by 2050, and China has committed to Net Zero by 2060.

Australia’s existing 2030 carbon reduction commitment

According to the Federal Government’s projections, Australia is on track to reduce emissions by up to 35% by 2030, above the existing target of 26-28%. This improved trajectory is due to anticipated faster reductions in emissions from electricity generation, which will be almost entirely driven by state-based policies. Despite the reductions achieved to date and the trajectory outlined, the government has not revised the 2030 target in the current 2050 Plan due to heavy resistance from members of the National Party. However, achievement or outperformance of the 2030 target will assist in delivering the goal of Net Zero emissions by 2050.

Despite the above commitments and achievements, based on the assessment in the ‘Climate Transparency Report’ Australia is ranked among the worst nations for climate action relative to other OECD countries^[1]. Several major developed countries have pledged much deeper annual cuts to reach ~50% by 2030 as shown in the table below.

This disappointing showing on the global stage finally saw the government address pushback and release a 2050 plan providing a more detailed roadmap to Net Zero. But is it enough?

What is Australia’s plan to Net Zero by 2050?

In October 2021, ahead of the UN Climate Change Conference of the Parties (COP26), the Australian Commonwealth Government finally committed to a long-term emissions reduction plan to deliver Net Zero emissions by 2050. Prime Minister Scott Morrison has promoted the plan as ‘The Australian Way’.

Having achieved ~20% in emissions reduction to date relative to 2005 levels, the Plan builds on existing state and federal policies, concessional funding, offsets and technology innovation to guide Australia to Net Zero. The Plan outlines how Australia will achieve 85% of its emissions reductions, while it is believed the residual 15% requires future technology breakthroughs to be achieved. Australia is not alone in relying on technology advancement in order to achieve Net Zero goals.

Like the 2030 target, the Plan will not be legislated, thus relying on the Commonwealth, states, territories, consumers and companies to drive emission reductions.

Australia’s targeted emission reductions by category to 2050 are reflected in the chart below.

Already achieved (20%)

The starting point for the roadmap to Net Zero is that Australia has already reduced emissions by ~20% on 2005 levels. Most of the reductions have come from changes in the land sector, with the remainder largely from the rollout of renewable energy in the power sector.

Technology Investment Roadmap (40% of targeted reductions)

Under the Plan, the bulk of the emission reductions (~40%) will be delivered through the Technology Investment Roadmap (the ‘TIR’), which is itself a collation of concessional funding, research and innovation projects. The TIR initiative, which was conceived in September 2020, provides a framework that prioritises investment in new and emerging technologies, aiming to accelerate development and commercialise low emission solutions. The TIR includes an A$1.9bn investment package to be deployed over the next decade towards funding future technologies to lower emissions. While priorities will be continuously reviewed, the initial focus and goals will be directed towards:

• clean hydrogen: reducing production costs to under $2/kg from current costs of ~$4.60/kg;
• energy storage: providing firming for intermittent generation at under $100/MWh from current costs of ~$150/MWh;
• low emissions steel: reducing production costs to under $700/tonne from current costs of ~$900/tonne;
• low emissions aluminium: reducing production costs to under $2,200/tonne from current costs of ~$2,700/tonne;
• carbon capture and storage: providing CO₂ compression, hub transport and storage for under $20/tonne of CO₂; and
• soil carbon sequestration: reducing soil organic carbon measurement to under $3/hectare per year from the current costs of ~$30/hectare per year.

The Plan also added ultra-low cost solar to its list of priorities, with the goal to generate solar electricity at $15/MWh, around a third of today’s cost.

For these ambitious goals to be achieved, the Plan relies on a combination of further supply chain development, large-scale deployment and installation of more renewable generation capacity and further technology innovation to facilitate the reductions in the costs required to make these feasible.

Global technology trends (15% of targeted reductions)

The Plan anticipates that current available technology will deliver up to ~15% in emission reductions. This refers to initiatives already viable and underway, such as the electrification of transport, the staged retirement of coal generation, renewable/low emissions generation installations and development of supply chains.

Abatement (10-20% of targeted reductions)

A further 10-20% in reductions will be met through abatement from international and domestic offsets. Abatements are emissions reduction units generated by real projects/initiatives which promote sequestration – that is, the prevention, reduction, removal or capture of emissions from the atmosphere. Common activities include, but are not limited to, renewable generation, energy efficiency, emissions capture, reforestation and other vegetation management practices. A surplus of units creates credits, which can be traded on a domestic and international scale.

Abatements have a legitimate place in reducing greenhouse gas emissions, so long as the underlying emissions reductions are genuine as they have the same effect on global climate outcomes as domestic reductions. Voluntary abatement action under the plan is expected to cost up to $24/t CO₂-e basis, while international offsets are available to the Australian economy at the global price, $40/t CO₂-e.

Future technology breakthroughs (15% of targeted reductions)

The Plan recognises the need for real investment in low emissions technology, at the same time highlighting that there are currently significant cost differentials and limitations which hinders the ability for such technologies today to fully bridge the gap to Net Zero in a socially acceptable way. Future technology breakthroughs will therefore be vital in bridging the cost barrier to a point of parity with higher emitting alternatives, to provide both economic and practical solutions. The Plan anticipates that new and emerging technologies will reduce emissions by a further 15% through to 2050. In addition to the six priority technologies outlined above within the TIR, the other high potential emerging technologies under consideration are:

• Livestock: technological solutions for reducing methane emissions from livestock through feed supplements (e.g. red algae, chemical inhibitors and tannins), alternative forage feeds and genetic selection and breeding for low methane traits; and
• Low emissions cement: energy storage and carbon capture use and storage deployed along various points of the value chain.

Who pays?

To facilitate the Plan, significant investment is required. The Federal Government will provide A$20bn for investments in low emissions technology, which is expected to unlock a total of A$80bn in private and public investment. The Plan includes five-yearly reviews that will enable the evaluation of progress and adaption for any technology advancements.

Huge, multi-decade global investment opportunity

Decarbonisation must happen, and the goal of Net Zero is just not achievable without the right forms of infrastructure investment across both the energy and transport sectors. This represents a significant opportunity for infrastructure investors, such as 4D, who want to be part of the climate solution.

In Australia, numerous infrastructure owners and operators are committed to climate change action, though building and operating sustainable infrastructure. Transurban, Sydney Airport, APA and even Aurizon (coal-freight operator) all have Net Zero emission ambitions by 2050 or earlier, on which we can capitalise.

Moving beyond the domestic listed market, key global listed infrastructure operators are also looking to capitalise on Australia’s new Net Zero Plan, including Iberdrola out of Spain which continues to build its renewables footprint in the country; Italy’s Enel through its solar generation portfolio; Canada’s ATCO which operates one of the most efficient and environmentally friendly gas-powered generation facilities; and Neoen from France, which was responsible for the world’s first big battery (150 MW/193.5 MWh) in Hornsdale, South Australia.

At 4D, we prioritise both countries and companies with strong management teams, defined strategic environmental goals that integrate with an ESG policy and strong balance sheets to support much-needed investment, and those that are best in class within their sector in building a sustainable infrastructure footprint. This applies whether it be pure play renewable operators, toll roads supporting electric vehicles and a reduction in congestion, or airports that are themselves targeting Net Zero.

By Christopher James, Investment Analyst

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[1] https://www.climate-transparency.org/g20-climate-performance/g20report2021

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Sarah Shaw

The following is an overview of insights from a trip in September/October 2017 when Sarah Shaw, 4D Infrastructure’s Global Portfolio Manager and Chief Investment Officer, and Christopher James, 4D’s Investment Analyst, completed an extensive company engagement and calling program beginning in Hong Kong and continuing to Japan and the United States.

Global politics

As ever, global politics remains volatile. In China, the focus remains on advancing the country’s global position and managing its transformation to a domestic, consumption-driven economy. We first heard Chinese companies mention the ‘New Silk Road’ initiative three or four years ago. Since then this theme has gathered significant momentum, with virtually every company now talking about how they plan to be involved in the project, or how they can capitalise on the opportunity.

Christopher James

In Japan, as a means of solidifying his leadership and seeking a fresh mandate to overcome growing threats and national security concerns in the form of North Korea, PM Abe called a snap election in October. While one may question his motives given the decision came at a time when his approval rating had rebounded from a record low and the political opposition was largely in disarray, the Liberal Democratic Party retained incumbency as it secured 312 of 465 lower house seats and the two-thirds majority needed for any changes to the constitution. The victory boosts Abe’s chances of winning another three-year term next September with the immediate focus being the continuation of policies pursued since he took office in December 2012, including promises to lift the economy out of years of stagnation; enhance the Japan-US alliance; rein in North Korea’s militarisation program; and push to restart the procurement of nuclear energy.

In Europe, the mood remains buoyant although politics remains tense. Progress on Brexit is a positive, although more work needs to be done, while Spain is in turmoil post the Catalan vote. The market awaits progress from President Macron in France, while Italian elections loom in 2018.

Mexico remains stable, although the 2018 elections will inevitably lead to some political posturing. The big issue for Mexico is the NAFTA negotiations. Brazil is making good progress economically, but corruption allegations continue to haunt President Temer. Hopefully the 2018 elections will see some ‘clean skin’ politicians present. In Argentina President Macri is delivering at all levels and increasingly gaining support for reforms, both politically and from the populous.

In the United States President Trump’s policy execution, or lack thereof, is dominating news wires. With lack of party support, Mr Trump has to date been all talk and no action. However, the market remains a believer, with the S&P up significantly since his election in November 2016.

Global economics

We remain in a rare period of synchronised global growth, with both economics and markets remaining buoyant. The big swing factor will be inflation. Without inflation economists remain bullish, as we will have had strong growth with low interest rates. A tick-up in inflation could see the tide turn from both a market and an economic perspective.

In China, the consensus is that the country is completing its economic transformation and we are starting to see real signs of a shift to a domestic consumption-driven economy. The expectation is that headline GDP growth will continue to be in line with government forecasts. However, signs of an economic upswing are evident in consumption growth in various industries and increased consumer spending.

Japan is currently enjoying its longest-ever stretch of economic growth, shrugging off decades of stagnation. The solid growth figures come after more than four years of economic stimulus by Abe under the guise of the three ‘Abenomics’ arrows: a set of monetary and fiscal policies plus promoting employment and private investment. Despite low inflation, the combination of rising domestic activity, strong consumer spending and unemployment down to 2.8% has seen the GDP growth rate revised up to 2.5% as Japan benefits from a strong global recovery.

In Europe, the view is that a growth environment is prevailing. There is little expectation of interest rates rising across Europe any time soon. 

In the United States markets are strong, driven by consumer strength and expectation for Trump policies. Inflation remains muted. The US can continue on a buoyant path as long as the Fed doesn’t raise rates ahead of needs—watch inflation closely. 

Business/political backdrop in the infrastructure and utility sectors

In China, government policy continues to support gas as the preferred fuel source, which will have significant ramifications in China and around the world. Surprisingly, China is facing a water shortage in more than 400 cities which is leading to considerable investment in the sector. However, water is seen as a ‘social service’ so government involvement and control will remain prominent. Waste-to-energy projects are also a priority for the Chinese government, with the sector seeing rapid growth. In user pay assets the market is looking for new policy guidelines on toll roads, while traffic growth remains strong. Port traffic is also recovering. All asset operators have under-leveraged balance sheets and some dividend growth is occurring.

In Japan, a common theme observed among both infrastructure and utility players was the desire to utilise and recycle incumbent assets to create and manage a portfolio of real estate assets. These include commercial leasing and residential, retail and hotel developments. With a sharp rise in inbound tourism, 2020 Olympics preparation stimulating hotel investment and commercial vacancy rates falling, infrastructure companies are actively monetising these real estate assets in their portfolios. In the interim, in the transport sector GDP and inbound tourism growth should continue to drive earnings and investment while deteriorating demographics will have a greater influence in the longer term. In utilities, the liberalisation of the electricity, and more recently gas, markets has opened the sectors beyond the typical regional monopoly of electricity and gas firms. Within the 4D investible universe we have observed all versions of strategy: some players are prepared to aggressively target new electric/gas customers both within and outside their regional footprint, and others sit tight and defend existing market share.

Strong balance sheets and large underlying free cashflows see European infrastructure and utility players cashed up and looking for acquisitions globally. The correlation between GDP and traffic growth (vehicle and flight) has been confirmed this in Spain and Italy. Renewables continue to gain traction in Europe.

In Brazil, a number of public infrastructure assets are expected to come up for sale in 2018, with bidders expected from around the globe (all four airport auctions in Brazil in 2017 were won by Europeans). Air and road traffic volumes continue to recover, accompanying the underlying economic recovery. For Brazilian utilities, ongoing drought conditions have made life difficult in 2017—highlighting Brazil’s need for new generation capacity and, therefore, transmission infrastructure.

Mexican airport operators have delivered attractive passenger growth so far this year. However, we are anticipating a much weaker second half of 2017. Mexican toll roads have also shown strong traffic growth, which we expect to continue. In energy, the market has become more competitive with Europeans and North Americans wanting to take part in the transformation.

The new government in Argentina is reforming the entire energy sector with real potential upside in:

• Distribution: tariff adjustments are being staggered to a more normalised level, with consumer bills moving up from ~$3 a month to ~$41 a month.
• Generation: after a decade of under-investment, significant new capacity is needed and the government is planning 25GW of new capacity by 2025, of which 6GW has already been awarded.
• Energy losses: distribution companies are working hard to address power loss including theft, which is currently sitting at ~17% of production. Any improvement flows straight to the bottom line.

The content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. The commentary in this article in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. In particular this newsletter is not directed for investment purposes at US persons. 4D Infrastructure is a Bennelong boutique.

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