The role of infrastructure in the energy transition
The first article in this series discussed the role that infrastructure can play in enabling the low-carbon transition. The transition presents risks and opportunities for infrastructure investors, many of whom have made net-zero commitments of their own. Some assets actively enable the transition and some can be re-positioned to support it. But for those with no credible decarbonisation plan, obsolescence is a material risk.
So how can investors understand the emissions performance of their infrastructure investments and assess their alignment with net zero?
Counting and allocating carbon in infrastructure – why it matters
Since 1997, the Greenhouse Gas (GHG) Protocol has set the standard for carbon accounting and how to allocate emissions across three ‘scopes’:
- Scope 1 – direct emissions from company activities
- Scope 2 – indirect emissions from purchased electricity/heat
- Scope 3 – emissions from many other activities, including the use of sold products.
To supplement the GHG Protocol, there are now other standards – the Partnership for Carbon Accounting Financials (PCAF)1, for example, which is designed to support financial institutions. Besides basic accounting, these standards help to highlight the level of control and influence stakeholders have over each emissions source – and, by extension, their ability to reduce them.
As a sector, infrastructure has a few quirks that are worth keeping in mind. Most of the sector’s emissions (around 76%2) result from the end-use of infrastructure services and not the construction or operation of assets (24%). Assets often have monopolistic characteristics and decades-long lifetimes, so the end-user doesn’t always have alternatives if they want to put the lights on, heat their home or have their wastewater treated.
Net-zero categories for infrastructure
For the purposes of net zero, there are two categories of infrastructure asset.
Those that provide climate solutions. These assets are inherently ‘good’ for the transition (e.g. renewable generation). Once operational, they have very low (if any) emissions across all scopes. By displacing more carbon-intensive alternatives, they enable wider decarbonisation while maintaining infrastructure services. To quantify the benefits of these assets, it’s often useful to be clear about what they’re displacing. This practice has given rise to a whole new emissions category: Scope 4 – avoided emissions.
Those that must decarbonise or risk obsolescence. There will be winners and losers in this category. These assets need to plan ahead and reduce the carbon intensity of their services or risk being displaced by climate solutions. A typical gas utility, for example, might aim to decarbonise its supply mix over time by increasing its use of biomethane. In doing so, it may attract greater policy support and may lose fewer customers to competing heating solutions like heat pumps. If the company was able to implement this strategy, the Scope 1 emissions of its customers would reduce through no action of their own and the company’s Scope 3 emissions would also decline.
For category 1 assets, the priority is unlocking investment to accelerate their roll-out. The EU Taxonomy attempts to provide a common set of criteria for these assets. That’s another article, though, so we’ll focus on category 2 for now where the more practical decarbonisation challenges exist.
Defining net zero for infrastructure
Once the carbon is counted and allocated, we need a way to determine what ‘good’ standards look like. On the face of it, the definition of net zero is simple: an entity’s GHG emissions must add up to zero or less by a certain date. But how do you include all scopes? What’s the right pathway? How big can the ‘net’ be? And how can we believe a company’s net-zero claims?
For some sectors of the economy, it’s relatively (I stress, relatively!) simple to establish a carbon budget, divvy it up and trend it to zero by 2050. Some assets will win and some will be squeezed, depending on their relative costs to decarbonise. This is essentially what the Carbon Risk Real Estate Monitor (CRREM) does for the real estate sector. But infrastructure is different. It’s wildly heterogeneous and separating the good from the bad and the ugly is much more complicated.
The publication of this framework is an important milestone for the infrastructure sector
Net zero Investment Framework (NZIF)
This is where the recently published Net Zero Investment Framework (NZIF) for infrastructure comes in. Following a period of intense industry collaboration, the Institutional Investors Group on Climate Change (IIGCC) has created a common definition and an actionable framework for the infrastructure sector. The framework provides criteria that any infrastructure asset can be measured against. It also recognises that not all assets can and should be net zero in the near term. Although decarbonisation is needed urgently, it’s a long-term transition and stepping-stones along the maturity scale will be necessary. Crucially, the requirement for assets to demonstrate credible decarbonisation strategies will support investors’ understanding of transition risk in their portfolios.
The publication of this framework is an important milestone for the infrastructure sector. As long-term direct investors in the European infrastructure mid-market, decarbonisation is already a key component of our investment and asset management process. We look forward to building on this approach using the NZIF, and working with our portfolio companies and investors to further accelerate the infrastructure transition.