As institutional investors increasingly seek alternative assets, some have turned to infrastructure investments with environment, social and governance (ESG) elements. One particular example to have gained increasing investor interest is the leasing of fuel-efficient ships.

Earlier this month, Royal Dutch Shell’s Singapore unit agreed to long-term charter contracts for six new LNG carriers. Two of these agreements were with investors advised by JP Morgan Asset Management (JPMAM). The firm isn’t allowed to provide details on the investors. However, it said representatives from the entire gamut of asset owners find the transportation sub-asset class within alternative assets to be attractive, from pension funds and insurers to high-net-worth investors.

These institutional investors typically like the asset class due to its steady income-generation and its relatively low correlation to other public market assets.

“Insurance companies are keen because of regular payments. The distribution and the yield-oriented focus is very attractive to them,” JPMAM’s global head of transportation, Andrian Dacy, told AsianInvestor. Distributions are paid quarterly, and the yield of such leases is in the high-teens, he said.  

While declining to comment specifically on that announcement, JPMAM said the leasing timeframe for large shipping assets with investment-grade counterparties, such as oil majors, tend to range from 10 to 15 years or more, depending on the asset.

This is JPMAM’s second such deal. Shell announced the long-term charter of eight ships of the same class in December 2019, in which JPMAM also participated with another group of investors.

 
Andrian Dacy,
JP Morgan AM

Dacy expects investors’ interest in this sub-asset class to increase alongside the growing demand for environmentally friendly transport infrastructure. The International Maritime Organisation has progressively required ships to lower greenhouse gas emissions (GHG). Its current strategy seeks to halve the shipping industry’s GHG emissions by 2050 from 2008 levels and to reduce carbon dioxide emissions by at least 40% by 2030.

From next year, ships are required to limit the sulphur in fuel to 5%. One emerging trend is the greater use of LNG as a fuel because it emits less carbon. LNG is already the fastest-growing segment of the marine fuels industry, according to S&P Global Platts.

As the shipping sector moves to limit carbon emissions, fuel-efficient LNG tankers are the most attractive to lessees with long-term, ESG-focused transportation requirements, said Dacy.

In the JPMAM deal, lessee Shell, which supplies 3% of the world's energy, plans to cut the greenhouse gases emitted from each unit of energy it sells by 30% by 2035 and by 65% by 2050.

Dacy said investors are practically investing in an energy-ESG asset. “You want to make sure that all the ESG elements are aligned with the investment. Clearly, a company like Shell has a very rigorous and proactive agenda in terms of meeting global ESG requirements,” said Dacy.

BLUE-CHIP MAJORS

One compelling aspect of the core-plus transport sector is its end-user or the lessee’s profile, Dacy said. He added that investors are attracted to the quality of the counterparty, in this case, Shell, which helps to underpin the lease rates.

“While the transport market may be buffeted in the short term by trade tensions, regulatory changes and shifts in demand, core-plus transport is protected from such vicissitudes by the balance sheets of its lessees, including energy majors and multinationals, among others,” he said.

In terms of the global transportation asset class, which includes ships, planes, trains as well as auto and truck leasing, JPMAM estimated the sector’s size to be about $2 trillion to $2.5 trillion.

Gabriel Wilson-Otto,
BNP Paribas AM

It's a sector attracting global institutional investor interest. Ralph Berg, global head of infrastructure at Ontario Municipal Employees’ Retirement System (Omers), said the Canadian fund has seen opportunities in Asia related to tankers and energy-affiliated infrastructure such as LNG.

This mounting demand is leading fund houses in addition to JPMAM to seek to benefit. BNP Paribas Asset Management launched an energy transition fund last September which has seen keen investor interest, according to Gabriel Wilson-Otto, head of stewardship for Asia Pacific at the French fund house. 

However, LNG is a fossil-fuel, and some investors have already started to remove carbon completely from their portfolios. In Australia, Future Super, which has A$900 million ($644 million) of assets already has a 100% fossil fuel free portfolio. Australian insurer Suncorp will end any financing or insuring of the oil and gas industry by 2025.

Dacy admits that LNG may not be an ideal shipping fuel, but said the lack of a cheap and carbon-free option makes it a useful transitional fuel as the industry seeks renewable and cleaner alternatives.

"Innovation and development is underway with the use of new fuel technology such as zero carbon footprint hydrogen-based fuels or ammonia-based fuels. In the meantime, LNG as well as hybrid electronic technologies are providing a pathway to transition to lower emissions while the industry works to develop new zero-carbon fuels at scale," Dacy said.

GREEN INFRA ACCELERATION

Meanwhile, the trend towards green infrastructure investment is gaining pace. Acording to a Linklaters report published on July 28 on the role of ESG issues in decision making by infrastructure investment funds, nearly a quarter of 302 European investment fund managers polled expect to grow the proportion of green assets in their portfolios by more than 20% in the next two years.

The fund managers polled had combined assets under management of £1 trillion ($1.3 trillion). “Climate-resilient real estate and electric vehicles are the top green targets for European infrastructure funds - with the US, UK and Asia in line for a surge in investments,” the report said. 

Additionally, the Asian Infrastructure Investment Bank (AIIB) started its Sustainable Capital Markets Initiative last year. Under this initiative, one of its first portfolios is the Asia ESG Enhanced Credit Managed Portfolio, which aims to develop debt capital markets for infrastructure in emerging Asia with a strong ESG rationale in security selection and corporate engagement, a spokesman for the multilateral institution told AsianInvestor.

“If the Covid-19 crisis had a silver lining, this could be the proof-of-concept that an ESG investment strategy would mean maximising impact while minimising risk and underperformance across asset classes, even in emerging markets, where capital can go a long way in doing well and doing good,” he said.