The strategy's investable universe includes utlities, toll roads, railroads, airports, energy infrastructure, mobile towers and data centres. These assets have high barriers to entry, effective pricing power, sustainable growth and predictable cash flows. Within this space, we seek companies that are contributing to sustainable development within a framework of good corporate governance.
Why invest in Sustainable Listed Infrastructure?
Make a positive difference - The strategy invests in high quality infrastructure companies that take a responsible approach to sustainability.
Long-term focus - A sustainability lens can provide important insights into how a company operates, its long term risks and potential rewards for investors.
Attractive performance - A sustainability focus has the potential to improve performance and help deliver positive risk adjusted returns, thanks to a strong focus on, and understanding of, ESG related risks.
Inflation protected income - The nature of infrastructure assets means they are typically able to increase prices in line with inflation, providing a stable and growing distribution yield over time.
Diversification - As well as low correlation with other asset classes, the portfolio itself is well diversified by sector and country, reducing exposure to event, regulatory and political risk.
Liquid and transparent - The size of the listed infrastructure market is more than US$2 trillion, so investors can have freedom to move in and out of positions. Listed funds also provide daily pricing so investors know exactly what their portfolio is worth.
Xcel Energy is a US-listed regulated utility serving 3.5 million electric and 2 million gas customers in eight Midwestern and Western states, primarily Colorado and Minnesota. We have invested in the company due to its combination of strong environmental credentials, and an attractive 5-7% earnings per share growth. This growth is being driven by its investment in decarbonising its power generation assets: replacing coal with wind; rid advancement; smart meters; transmission; and electric vehicle infrastructure.
Colorado and Minnesota are at the forefront of climate change with adaptive policies promoting cleaner energy generation and electric vehicle infrastructure. Minnesota recently announced a new set of policy proposals that would require the state's electric utilities to generate power using 100% carbon-free resources by 2050. Colorado has set statutory targets for the state to cut climate pollution by at least 90% by 2050 (relative to 2005 levels). These policies have enabled Xcel Energy to significantly grow its wind portfolio, with plans to add 4,700 megawatts of wind capacity to their system - enough to power approximately 2.3 million home per year.
Its significant investment in renewable energy with limited, if any, impact to customer bills aligns Xcel Energy with the United Nations' Sustainable Development Goal 7 of "Affordable and Clean Energy: ensure access to affordable, reliable, sustainable and modern energy for all". The company is tracking ahead of its home states climate policies, and is aligned with the UNFCCC Paris agreement to limit global temperatures rise this century to "well below 2 degrees Celsius above pre-industrial levels".
Source: Xcel Energy and First Sentier Investors, as at 30 June 2020
The potential of solar
The last decade has seen carbon-free renewables, with the help of low cost natural gas, start to displace coal and oil from the developed world's electricity supply. The International Energy Agency predicts that between 2019 and 2024, the world will add enough renewable generation capacity to power the entire United States.
The continued build-out of renewables, and the need to upgrade and expand energy transmission networks, is expected to underpin stable earnings growth across the utilities sector. Consumers and the environment stand benefit from increasing supplies of clean, affordable energy. One of the largest positions in our portfolio is NextEra Energy, a large cap US utility whose assets include regulated utility businesses and clean energy leader NextEra Energy Resources.
Australia is both leading and lagging in the development of solar
While Australia leads the world in rooftop solar, we lag other markets like the US in the development of large scale solar infrastructure, with government policies and incentives less attractive than other markets.
Whether it is solar, wind or water, the opportunity for investors is ever growing. But not all countries are developing at the same pace – making global research and access to global markets vital to investment success.
Australia leads the world in rooftop solar...
… but lags in large scale utility solar
Source: Bloomberg as at 2018.
Source: Australian Photovoltaic Institute, Bloomberg as at 30 November 2019.
Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.