We’ve been hearing a lot about our infrastructure over the past few years: How much of it is falling apart, how much worse it is in the U.S. than elsewhere, and how much we have to gain from improving it. Sustainable investment might just be the best way to do this.
President Obama has been vocal about the need to improve the country’s bridges, highways, power grids, water systems and public transportation, dedicating stimulus funds to the cause and returning to the issue again and again in his public remarks.
Michael Underhill agrees on this point too. In fact, he is so convinced that the demands on infrastructure – both in the US and around the world – must translate into across-the-board improvements and expansions that he co-founded a firm in 2007 that invests almost exclusively in that space. That firm, Capital Innovations, now oversees more than $2 billion in assets. It concentrates on investments in timber, agriculture and infrastructure, though Underhill says the investment team devotes roughly 90 percent of its time to infrastructure.
It wasn’t just infrastructure investing that captivated Underhill’s interest – it was, more specifically, sustainable infrastructure investing. Investors needed a way to whittle the universe of possible infrastructure investments down to those projects and companies that had the capacity to endure, he figured, and he believed he could help them do that by applying a sustainability filter as part of his investment process. He’d only allow into his firm’s portfolio those publicly traded and private companies, as well as projects, that demonstrate best practices in the areas of the environment, climate change, social issues, health and safety, governance and transparency.
“I didn’t see anyone else offering investors this type of unique platform to invest in hard assets, which is why I wanted to start it,” says Underhill, who in 2010 was a co-founder of the Infrastructure Steering Committee, an arm of the United Nations Principles for Responsible Investment initiative that aims to shape policy, publish research, and report to the PRI about infrastructure investing. In October, he presented at the UN PRI conference in San Francisco as the authority on sustainable infrastructure.
Underhill says that, as he sees it, all that’s required is a run-through of figures on population growth to come to the conclusion that stresses on infrastructure systems demand swift attention – and investment. A recently released Eurosif white paper on infrastructure reports that the world population is expected to shoot from 6.8 billion in 2008 to 9.2 billion by 2050, with nearly all the growth happening in urban areas.
“When you look at the numbers, inevitably you get to the amount of energy that’s needed in China or India,” says Underhill. “Or the amount of water in India, or transport needed in Brazil.” He hastens to add that such growth also means that the right infrastructure projects must be invested in – which is where the sustainability angle comes in. “Energy investing in China is very attractive, but investing in natural gas rather than new coal-fired power plants is a much more sustainable solution.”
Underhill says that all of Capital Innovations’ investments go through an internal sustainability filter. In general, the investment committee focuses on top-down fundamentals and bottom-up local market intelligence to identify the opportunities it wants to pursue. The firm seeks out companies that the team believes utilize incentive structures and capital allocation processes that encourage employees and executives to do what’s best for the company long-term.
“It’s a matter of finding the companies that have these governance principles in place so they can control things like compensation metrics and provide behavioral economic drivers for people to do the right thing,” Underhill says. “In other words, what kind of capital allocation program do they have in place? Not only to pay their employees, but also to budget. When their stock price is down, what do they do? Do they try to financially engineer something; do they take out a loan? Or do they step up to the plate and buy some of their own company stock to try and invest in their company long-term?”
Examples of companies and projects that have made it through this filter, and with whom Capital Innovations currently invests, include SBA Communications, an independent owner and operator of wireless communications towers in the US; Empresa Nacional de Electricidad (Chile), the nation’s largest electric utility company; and Sithe Global Power, a gas-fired power plant in Toronto.
According to Underhill, the institutional investors he works with (Capital Innovations primarily manages customized separate accounts for institutional investors) are most often drawn to infrastructure investing because of its strength as an inflation hedge and because of the diversification it provides to a portfolio.
But zoom out from the investors’ perspective and the investment theme may offer even more significant selling points. According to the Eurosif report mentioned above, more than $2 trillion will be required annually to finance world infrastructure by 2030 – a disturbingly large number, especially since government spending in the area has been decreasing for the past 20 years. Private investment will be key as ballooning population growth and changing demographics continue to apply increasing pressure on the world’s infrastructure.
