Gresham House: Taking sustainable infrastructure to the next level

Jonathan Walker and Rosie French from Gresham House say alternative assets are vital to decarbonising the economy.

This article is sponsored by Gresham House.

If the world is to reach net zero, investors need to go beyond renewables and put money to work in a wide range of sustainable infrastructure assets. Jonathan Walker and Rosie French, sustainable investment managers at specialist alternative asset manager Gresham House, tell us more about the role of sustainable infrastructure and battery energy storage systems in decarbonisation.

What role does sustainable infrastructure play in advancing the world’s climate ambitions?

Jonathan Walker
Jonathan Walker

Jonathan Walker: We’re a long way from being able to mitigate the worst outcomes of the environmental and social challenges we are facing today. We can’t keep investing in the same way and expect to get to net zero. New infrastructure is required to achieve our global sustainability and climate ambitions. That’s why we invest in new assets that decarbonise harder-to-abate areas of the economy.

For example, our sustainable infrastructure team has invested in vertical farm provider Fischer Farms, which, according to calculations from an expert sustainability consultant, requires less than 1 percent of the total land and water required for conventional farms to produce the same yield. Compared with importing the same amount of yield from Europe, it could save up to 4,000 tonnes of CO2 a year, equivalent to taking 2,100 cars off the road. Assuming that we are replacing crops that have been imported long haul, it’s as much as 1,700 times more carbon efficient.

How can investors in sustainable infrastructure ensure that they create impact?

JW: There are three core elements that set impact funds aside from other funds. They define their social and environmental objectives; they understand how results will be measured; and they can demonstrate that their investments achieve ‘additionality’ in terms of benefits that would not have happened without the investment.

For our sustainable infrastructure funds, we’ve built an impact framework aligned with the Impact Management Project. We consider the social and environmental benefits of our investments at all stages of the process, with detailed analysis of the positive and negative externalities. We align our investments with the relevant Sustainable Development Goals to assess whether they create a long-term competitive advantage.

We engage actively by using our expertise and networks to improve the environmental or societal performance of the businesses we invest in, and we appoint a team member as an investment director on the board. Each investment is intended to build and operate infrastructure that solves social or environmental issues, creating a defensible, profitable market position.

How supportive is the regulatory environment for investment in sustainable infrastructure?

“While our assets have a direct carbon impact, they also enable the decarbonisation of the grid”

Rosie French

JW: Looking at the practicalities of investing into sustainable infrastructure, it is difficult at present for defined contribution (DC) pension schemes to allocate to illiquid or private market strategies. This means there are trillions of dollars that are not being allocated to key areas. The Bank of England governor has recommended lifting the illiquidity cap for DC pensions, and earlier this year the then-pensions minister outlined that he was determined to open illiquid asset classes to DC schemes. The UK’s Productive Finance Working Group suggests around four-fifths of DC pension funds’ investment is in listed equity and corporate government bonds, so lifting these kinds of liquidity caps could be the single biggest policy driver that could deliver investment in sustainable infrastructure.

Looking at environmental regulation, the 2021 Environment Act, which aims to drive new investment into nature and biodiversity, will provide the significant momentum required for our sustainable infrastructure funds to drive new investment in nature and in particular biodiversity net gain (BNG). Further, we eagerly await further details of the UK Sustainability Disclosure Requirements and the UK’s green taxonomy, and hope that this will further catalyse investment into sustainability-orientated funds.

What types of investment are needed to decarbonise the grid?

Rosie French
Rosie French

Rosie French: The UK’s net-zero strategy aims to decarbonise the energy system away from fossil fuels towards low carbon sources of energy. Indeed, this strategy includes a target to fully decarbonise the energy system by 2035. We’re also seeing a shift towards the electrification of the broader economy as part of this strategy, such as the move from gas to electric heating in homes, and the replacement of petrol or diesel vehicles with electric alternatives. This shift will lead to an overall increase in electricity consumption.

As we move to a world where electricity demand is going up and renewables are playing an increasingly important role in providing low-carbon electricity, ensuring a stable supply of electricity is more challenging. Renewables are essential for decarbonisation, but wind and solar alone cannot be relied on to deliver a secure supply due to their intermittency.

Battery energy storage systems (BESS), therefore, are essential in providing stability to the grid. BESS enable electricity to be stored at times of oversupply and supplied back to the grid at times when renewable generation is lower, supporting supply to the consumer. By importing surplus power generation, BESS can also help to maximise the output from renewable energy sources by ensuring that wherever possible surplus generation is not wasted. BESS will play a major role in supporting energy security while we replace more carbon-intensive sources of power.

How easy is it to measure the carbon footprint and carbon impact of these assets?

RF: We’ve worked with a carbon consultant to measure the financed emissions of our portfolio at Gresham House, using guidance from the Greenhouse Gas Protocol and the Partnership for Carbon Accounting Financials. This process has enabled us to estimate the Scope 1 and 2 emissions of our battery assets by using the grid’s half hourly carbon emissions data and net export data to estimate the overall operational carbon footprint of the assets.

While our assets have a direct carbon impact, they also enable the decarbonisation of the grid. Of greater challenge is how to measure the important role that BESS will play in decreasing the carbon intensity of the electricity system, and we’re working to develop a credible means of measuring and demonstrating this.

We also recognise that a lot of the carbon emissions associated with batteries sit in the supply chain and construction of the assets. Our asset management and construction teams are working with contractors and suppliers to start to gather carbon data for upstream emissions and those related to construction. Getting a fuller picture will take time but we are committed to this analysis.