Environmental, Social and Governance now a core part of Blackrock’s real assets investment strategies
Interview with Alan Synnott, Global Head of Real Assets Research & Strategy, BlackRock Real Assets, by Mauro Meggiolaro
1. How is BlackRock currently positioned regarding the infrastructure sector?
Infrastructure investment, which falls within Real Assets, is a strategic priority at BlackRock and an asset class which is gaining increasing interest from our clients. The results of our 2018 Global Rebalancing Survey show that approximately 60% of surveyed clients intend to increase their allocation to the real assets space in 2018, which includes infrastructure and real estate, the most of all asset classes.
At BlackRock, we manage infrastructure worth around $20bn on behalf of our clients as of January 2018, spread across equity and debt mutual funds and separately managed accounts. BlackRock's infrastructure platform takes a multi-sector approach to infrastructure investment, and has deployed capital across a wide range of sectors including power, energy, renewables, transport, and social infrastructure.
2. Governments have increasingly cut their investments in infrastructures over the last 10 years. As a consequence, much of the world's economic infrastructure is now resting in the hands of specialist private investors. How do you evaluate this trend?
Since the global financial crisis, governments have experienced constrained public and fiscal expenditure. At the same time many governments have sought to pursue pro-growth structural reforms, and infrastructure investment has been high on the agenda for many powerful economies globally. As a result, governments are increasingly reliant on institutional equity and debt capital from the private sector to fund the essential infrastructure their societies depend on.
At BlackRock, we believe this presents a compelling opportunity for our institutional clients, primarily pension funds and insurance companies. They match long-dated liabilities with long-term infrastructure investments, that typically benefit from stable yield, an attractive premium to public market equivalents, and often offer inflation protection either implicitly as real assets or explicitly through inflation-linked revenue contracts.
3. Do you see any obstacles to a larger employment of private capital in this sector?
We would point towards the discipline dilemma currently faced by investors in the asset class. The infrastructure asset class has seen tremendous success in terms of fundraising from institutional investors over the past several years, and this trend continued in 2017. While global infrastructure deal flow remains deep and diverse, transaction volumes in 2017 moderated in some regions. This combination has resulted in tight competition for assets, which poses a discipline dilemma for infrastructure investors looking to deploy capital, after many years of strong performance in the asset class. At BlackRock, we look to focus on some key areas as we seek to deliver compelling returns in the infrastructure space while maintaining a disciplined risk mindset. This means, among others, looking for areas of structural change that are likely to benefit from strong market participation and investment opportunity, for example the opportunities created along the energy value chain as we undergo the current smooth global energy transition to a lower carbon economy.
4. What measures could be taken to make "major works" more appealing to professional investors? What role should the European Union, national States and local communities play to further boost this sector?
Infrastructure investment is important for economic growth, job creation and improving productivity, and this is why it has been high on the agenda in most countries globally. Private capital can help, and is already helping, to bridge the shortfall in infrastructure funding, and institutional investors, such as insurance companies and pension funds, could potentially increase their allocation to infrastructure over the long term. To promote a greater role for private capital in infrastructure projects, policy makers need to craft a policy framework for infrastructure investing tailored to investors' needs.
Infrastructure projects are long-term investments, and can often need financing for up to 30 years or more. Regulatory uncertainty often increases both the risk profile of infrastructure investments and the cost of providing private capital to help fund public infrastructure. Reducing political and regulatory risk can pave the way to attracting private capital towards infrastructure investment.
5. Which are currently the main infrastructural gaps in Europe in your opinion?
We are facing a substantial global infrastructure gap today, and according to McKinsey the world needs to invest $3.3tn a year through to 2030 to meet the current needs of our global population across a wide range of sectors.
To take Europe, and the energy sector as an example, the EU's intended target of 30% renewable energy of total energy consumption by 2030 needs continued substantial investment to be achieved. Wind and solar investment is helping to shift the dial towards this target, with renewable energy accounting for around 17% of the EU's energy consumption today, but much more is needed. This need equally provides investors with significant opportunities to find a home for their long-dated debt and equity capital.
6. In his latest annual letter to CEOs, BlackRock's Chairman and CEO Larry Fink states that BlackRock is increasingly integrating Environmental, Social and Governance (ESG) matters in its investment process. How is this happening in the evaluation of companies and projects in the infrastructure sector?
Infrastructure and real assets investments are typically large, physical assets of an essential nature which occupy the communities which they serve. By their very nature, this requires a long-term mindset with a view to delivering sustainable investment outcomes.
At BlackRock, ESG is a core part of the investment process across our real assets investment strategies. To take an example, investing in renewable power is helping to offset global greenhouse gas emissions as coal plants are decommissioned. Elsewhere, investments in social infrastructure whether that's through social housing, hospitals, schools or student accommodation, delivers a positive impact to the communities they serve.
Sustainable investing is also front of mind for a growing portion of our client base, and infrastructure offers institutional investor with a wide array of opportunities to invest with positive impact, whether that be through essential social infrastructure such as social housing, or by displacing greenhouse gas emissions through investing in renewable power generation.
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