Faced with the ESG onslaught, fossil fuel might be down but they're definitely not out in the emerging economies of the Asia Pacific where investors are seeing energy sector allocation to traditional fuels as a conduit to sustainable energy production.
“Gas is currently a useful fuel to support the transition to renewables. We don’t believe in divestiture, we believe in engagement,” Troy Rieck, CIO of LGIAsuper told AsianInvestor.
The Australian super fund is a case in point.
LGIAsuper’s infrastructure assets include a 19% stake in the North Queensland Gas Pipeline and a 29% stake in the Tasmanian Gas Pipeline.
Because it can be easily turned on and off, gas provides a very responsive source of power when climatic conditions reduce power generated by wind or solar, so it is seen as playing a role in the transition from fossil fuels to renewables, the super fund argues.
Foot on the gas
In July, following the merger of LGIAsuper and Energy Super, new CEO Kate Farrer said the fund was well-placed to increase its investment into the energy sector.
Other investments of the fund include stakes in Queensland's Sunshine Coast Airport and the Port of Portland, in Victoria, a deep-water bulk port.
Rieck said there were significant investment opportunities among in the energy sector, noting investors were vital actors in transitioning these industries towards more sustainable practices.
But he added that the fund always considers the associated long- and short-term performance rewards as well as possible impacts of owning assets such as gas pipelines.
Omers favours renewables
Toronto-headquartered Ontario Municipal Employees' Retirement Systen (Omers) Infrastructure, meanwhile, currently has no gas related investments in Asia, but owns stakes in Indifravit, an Indian toll road business, the Port of Melbourne, TransGrid, an Australian grid operator.
More than 50% of Omers Infrastructure’s AUM is allocated across energy, utilities and renewables.
Beyond Asia it has significant holdings in the gas sector but in Asia, where its major investment themes are renewables, digital and mobility, it is looking away from fossil fuels, Christopher Curtain, Omers Infrastructure’s head of Asia Pacific in Sydney told AsianInvestor.
“In Asia Pacific, there is lot of capital to be invested and a lot of capital required. It’s one of our key target areas to grow the renewables business,” he said, adding that the company is looking at several potential investments in the renewables sector and hopes to buy a single large platform in the coming months.
Currently its only Asia energy sector investment is Azure Power, which operates solar plants in India.
Curtain also emphasised the importance of governance in the company’s investment strategy globally. He pointed to the requirement for strong board representation typically including negative control rights, which provide veto rights on key issues.
“[Generally we] insist on negative control rights for all our investments. This has been part of our investment thesis for a long time. We don’t want to be a passive investor”
Engagement over divestment
Beyond Asia, Omers Infrastructure – like LGIAsuper – favours engagement over divestment for its gas holdings, Alastair Hall, global head of investment strategy and partnerships for Omers Infrastructure in London told AsianInvestor.
“We are working hard to ensure our [gas assets] are part of the energy transition,” he said. The holdings are in SGN, the UK’s second largest gas distribution business, MCV a major gas-fired power station in the US and Net4Gas, which operates gas pipelines in the Czech Republic.
Rather than isolating specific environmental assets to boost the portfolio’s environmental credentials, Omers Infrastructure included carbon as an element in the decision-making process of all investments, Hall said.
Omers Infrastructure is the $22 billion division of Omers responsible for infrastructure investing.
Omers has a 20% carbon intensity reduction target by 2025 and has recently engaged in carbon accounting exercise for the first time, evaluating the emissions footprint for the almost 2,000 assets across its entire portfolio.
Continued appeal of aviation
LGIAsuper has also increased its allocations to aviation. In October 2020, the fund increased its investment in Queensland’s Sunshine Coast Airport from 32.5% to 50%. It is Australia’s first airport to be accredited for carbon neutral operations.
Rieck said the slump in travel following the initial COVID outbreak provided a good buying opportunity.
In May 2021, Moody’s changed the outlook for the global airlines industry to positive from negative on expectations of widespread increases in air travel starting in the second half of 2021 and accelerating through 2022.
The report noted the recovery of the airline industry was being driven by domestic air travel in China, the US and Australia.
Rieck said that ESG considerations in infrastructure investments are made both more important and more complex by the long-term framework - as the large typical size of investments and their illiquidity- under which they're held.
“Subtle risks may become more salient over time, and you can’t sell [an infrastructure asset] next week as if it was listed equity,” he said.
“However, it also means that subtle improvements in ESG or sustainability practices can provide significant rewards over the long term.”