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S3E12 - Infrastructure Finance w/ Alex Ayscough
45 Plays25 days ago
Can investors make a return on sustainability?
"We see really good value creation investing in sustainability," said our guest in this episode of Infrastructure Connections. Alex Ayscough is an Investment Director at the infrastructure investment firm Morrison.
"I think sustainability provided investment opportunities for us, and a lot of other infrastructure investors as well."
Alex holds a Master of Applied Finance from Macquarie University, a Bachelor of Business from the University of Technology Sydney, and is a graduate of the Australian Institute of Company Directors. She focuses on originating new investment opportunities and managing infrastructure assets across Australia and New Zealand. She also serves as a Director on several infrastructure-related boards, including Transgrid and Altogether Group. Alex was named Infrastructure Investor's 2024 Rising Star in Infrastructure Finance, saying, "Sustainability is both a driver of investment and foundational to long-term value creation."
The ISC is focused on both valorising infrastructure sustainability and providing the framework to achieve it. In order to realize gains, proponents need to incorporate sustainability early, long before they start looking for funding. This allows funding institutions and private investors to align their own internal sustainability KPIs with the projects they invest in. This helps ensure that the projects carry through with sustainability initiatives and realise those returns.
"What we've seen is that those more nebulous physical risks of climate change are translating now into very real commercial and financial risk. They are now starting to form much more a part of the core due diligence on a new investment."
Sustainability can provide core value creation and returns through a strong focus on:
Economic
Environmental
Governance
Social
Infrastructure is more than an investment in concrete and steel. It's an investment in our collective future.
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Transcript
Opening Remarks and Key Investment Opportunities
00:00:00
Speaker
I think sustainability is actually really provided for investment opportunities for us and a lot of other infrastructure investors as well.
00:00:14
Speaker
Hello and welcome to Infrastructure Connections, the podcast where we explore what makes sustainable infrastructure work.
Introduction and Guest Introduction
00:00:22
Speaker
Brought to you by the Infrastructure Sustainability Council.
00:00:26
Speaker
I'm your host, Rebecca Santiago, and today we'll be speaking about infrastructure finance with our guest, Alex Eskew. Alex is currently an investment director at Morrison, where she focuses on analyzing new investment opportunities and managing infrastructure assets across Australia and New Zealand.
00:00:50
Speaker
Thank you for joining us here today. problems, Rebecca. Great to meet you I think we'll have a ah fun conversation. Before we get into the meaty stuff, I would like to start with you. So tell us, what drew you to infrastructure finance in the first place?
Attraction to Infrastructure Finance
00:01:04
Speaker
um Look, so short answer, I'm a really simple creature. I like highly tangible things. I have ah i've pretty wholeheartedly subscribed to our purpose statement here at Morrison, um which is we invest wisely in ideas that matter.
00:01:21
Speaker
I think infrastructure is ah great asset class where you know you can be you're working with assets and companies that people genuinely need um and it just um helps you know give you that feeling that what you're doing has at least a little meaning.
00:01:37
Speaker
Looking back over your career, what's the biggest shift you've seen in how infrastructure is funded and prioritized in
Shift to Digital and Renewable Infrastructure
00:01:45
Speaker
Australia? The the biggest shift I've seen um is is really what people deem infrastructure.
00:01:51
Speaker
um You know, in the early 90s, it was, you know, airports and toll roads and and those kind of classic privatization assets. um And in recent years, we've seen such strong growth in, say, both renewable and digital infrastructure. which are kind of um growing rapidly at the moment, particularly data centres in the digital space. And look, while those traditional um infrastructure assets still see appetite from investors, like airports aren't going anywhere, I hope not, I really like them. um You know, the the priorities I think for investment have really shifted away from utilities and transport into digital and renewable energy. um Those are kind of the two sectors seeing, you know, the majority of growth in investment.
00:02:32
Speaker
um Which also then sort of changes how things are funded, I think. You know, that that first wave, if I call it that, of of infrastructure investment opportunities were generated from privatisations. So the airports here in Australia and a couple in New Zealand in the 90s, you know, like this second wave of investment in infrastructure um in the digital and renewable energy space is really driven um off the bat from from private sector investment, um not not so much governments.
00:02:59
Speaker
um And I think, look, obviously an increased focus on sustainability and sustainability objectives um has driven changes in funding and also the prioritization of of different infrastructure. I mean, renewables is the obvious example. um You know, it's a sustainability strategy you know commitments as people make net zero targets that are really helping to support the investment in that space. um you know Because so superannuation funds, banks and and you know other private investment investors um all have their own sustainability targets, which I think is really helping helping support that too.
Sustainability in Investment Strategies
00:03:34
Speaker
What really stands out now is that sustainability isn't a side conversation anymore. It's right in the middle of how investors think about funding and driving long-term value.
00:03:47
Speaker
So Alex, from an investor perspective, where do you see sustainability most clearly translated into financial value today?
00:03:58
Speaker
Yeah, look, I mean, certainly here at Morrison, where we've seen it translate most directly is actually in our in our farm, in our funds under management or our asset values, right? I think we've been a so a sustainable investor, albeit we probably didn't call it that back then since kind of the mid-90s.
00:04:18
Speaker
um you know I think sustainability has actually really provided for investment opportunities for us and a lot of other infrastructure investors as well. um you know, three of the key themes that we invest behind, which which is you know pretty common with other infrastructure investors as well, is um things like decarbonisation, circular economy and also global mobility, um in which like there are lots of businesses and investment opportunities supporting the energy transition and the pathway to low carbon operations. um like We're probably one of the earlier investors in renewables in the world, and We incubated a a business called Tilt Renewables out of Manoa Energy in New Zealand, which was called Trust Power at the time, um from like the late 90s, early 2000s, before Tilt was spun out as its own own entity in 2016. And like when you think about it, like that is really early to be investing in in wind and solar projects um versus where we are now.
00:05:17
Speaker
and And similarly, you know, we've invested um behind a management team in the US to create a business called Long Road, which, you know, started from some good people and some capital and is now, I think, um roughly the fifth largest renewable developer in the US.
Managing Climate Risks
00:05:32
Speaker
Like, so So, yeah, I think fundamentally sustainability has actually translated into FUM for us, which every investment manager likes to have. So, so it's really great. we've seen We've seen really good value creation investing behind sustainability. um And then look, obviously, you know, in some of our assets that are maybe less directly linked to sustainable investment um trends, you know, we we definitely see financial value value in sustainability as a risk management tool.
00:06:05
Speaker
um Particularly with the changing climate, um there's increasing physical risks um to manage across, you know all infrastructure assets, you know, things like sea level rises to storm activity, and even just you know more extreme weather points driving demand for things like energy and water. All of that kind of impacts the businesses that we're invested in and you know creates opportunities, but also creates additional risks that that we need to manage. um We're really focused on protecting the future value of our investments from things like climate change. While we talk about sustainability driving value, the alignment isn't always there. yeah Where do you still see the biggest disconnect? Yeah, look, I think that's a fair point.
00:06:51
Speaker
I think sometimes in that business case creation, and in that articulation of the need for the investment into the sustainability initiative, there's sometimes a gap between, say, the sustainability team and the finance team or the risk and compliance team um on the benefits of spending that money. um But like we see these kinds of differences in, say, just an operational team wanting to spend CapEx to solve a problem. um So I think those kinds of disconnect or having to really come together and collaborate exist across our businesses right now. It's not sort of a a unique challenge with sustainability. But, um but yeah, we just the biggest gap is just making sure that the sustainability teams are able to talk to the finance teams and the risk teams and explain things in a way that then
00:07:39
Speaker
translates into the broader plan and how those people think too. So, you know, it's it's that kind of being able to communicate the the benefits of of an initiative to make sure that we can fund it. And this is where the narrative seems to be evolving from build more to build smarter. Yeah. Yeah.
00:07:59
Speaker
So Alex, infrastructure is no longer just about building assets. but about managing risk and long-term value. How much has that mindset shift accelerated over the past
Risk Management and Value Creation Shift
00:08:14
Speaker
few years? um Look, I think for the infrastructure asset class, um you know, that that focus on long-term value has always been there.
00:08:23
Speaker
um You know, particularly for us at Morrison, um we're we're a really long, long investor in a lot of our assets. um You know, we've owned Wellington Airport since the mid-90s, early 90s, actually, um and many of our other assets for for quite a long, long period of time. So I think infrastructure investments naturally lend themselves to that that longer-term focus. um And I think just the particularly, you know, with with the increase in climate change and and what it's doing to that physical risk piece, that focus on risk management just really needs to be a lot sharper. Yeah. just to make sure that, you know, we we're looking to the future a bit more because there are some headwinds where previously they kind of maybe weren't before. Okay, let's now talk about water infrastructure because you've written in The Infrastructure Investor that Australian water infrastructure doesn't really get the attention it
Challenges in Water Infrastructure Investment
00:09:21
Speaker
deserves. And that's interesting when you consider how often droughts and floods make national headlines. Yeah.
00:09:29
Speaker
Why do you think water is constantly being minimised compared to transport and energy? I'm just really passionate about water infrastructure. Like, I really like it. um But but to be fair to be fair to the kind of current proponents in that sector, I think it is a tricky asset to prioritise in Australia in particular. um Look, it's a space where you know the traditional drinking water and wastewater infrastructure is dominated by various public water utilities who, don't get me wrong, do a great job, um not sort of you know saying that that should be privatised because they're not doing it properly or anything like that.
00:10:06
Speaker
um But because of that, there just aren't kind of the volume of investable opportunities in the sector to actually look at and diligence and kind of build some credentials, build some knowledge of that sector in. versus say things like transport and certainly versus energy in this in this space.
00:10:23
Speaker
um Just that lack of private ah lack of private sector investment minimises the amounts of kind of investment investment opportunities that you have. um i really hope that this will shift going forward though. i think similar to like the remote energy um opportunities that are popping up here in Australia, there are more kind of remote water um or smaller water opportunities. um popping up in obviously the mining sector um and also, um you know, support of new housing developments in sort of potentially some further flung regions kind of outside the typical, particularly the typical Sydney metro basin um and places like that. And, you know, while the focus here is is currently, you know, sorry, the focus here in relation to climate change is is really on the energy transition. um in this country, mean not to sort of make it this too Australia focused, but we're going to have to see a greater focus on water security.
00:11:22
Speaker
um So look, I see at least opportunities in that space around you know, not privatizing Sydney water or something like that, but around the edges of that main kind of carriage service where, you know, we could use water better by installing recycled water capacity, particularly in any new kind of land and housing developments that we're building.
00:11:45
Speaker
So, being being more efficient with our use of water, um as well as, you know, maybe more desalination. i you know have to say we're an investor in Sydney desal, so I've got a positive view on that. I know Some people don't, but, you know, we've got to find other sources of water. um And I think that that, you know, additional desalination capacity stacks up pretty quickly in a country where we are very likely to have some very real water security issues down the track. um And, you know, we obviously have access to the ability to generate, you renewable energy without our strong capacity for wind and solar as well.
00:12:22
Speaker
And what risks are we creating by delaying this type of investment? That's a really hard question um and hard to judge, I think. um It's the delicate balance, again, I sort of mentioned for the private sector investment, you know, investing always has to stack up on a returns basis, um which means, you know, does it drive additional earnings? um Does it maintain value, you know, from that risk management perspective, those kinds of good things. you know, or or alternatively, you know, if if if an investment isn't stacking up on either of those, you know government really needs to step in in in some in some way.
00:13:00
Speaker
um i think I think going forward, the investment required in the in water infrastructure and the water sector should be for a mix of both government and the private sector. But the hard part when you're managing a more like a very future focused risk like water security is is knowing exactly when that or knowing roughly when even when that risk is likely to overwhelm you.
Addressing Water Security Risks
00:13:23
Speaker
um You know, water infrastructure has a long lead time to build with the various regulatory approvals required, um as it should, by the way. um And, you know, while dams are full now here in New South Wales in particular, as we saw with the millennium drought um in the early 2000s and then the very sharp drought conditions that we saw between 2017 and 2019 in this country, you know, our water security position can change really quickly. um New South Wales reached a low, I think, of a low 20% dam capacity in 2019, which is very nearly out of water, let's let's be honest. like That's quite a scary position to be in. And and we reached that position really, really fast.
00:14:07
Speaker
You know, those conditions were only over that kind of three-year period. um Luckily, it did start pouring rain in early 2020 and we were we were saved and dam levels have been, you know, pretty adequate, if not great ever since. so So that's fantastic. But there will be a next time and next time the rain might not save us. But, you know, investing in, you know, for desal plants and and been mandating recycled water schemes across all new housing and land and housing developments right now, um you know, from a government would probably seem extreme or a little bit bonkers at the very least. um it It seems very excessive to do to do something like that.
00:14:44
Speaker
um But, you know, dam levels could fall quickly um as the climate continues to change. And then we could very, very quickly be facing that similar threat as we did in 2019 with water security. um So I think, you know, what we can do in the meantime is take at least some smaller steps to, you know, find new sources of water. So I keep saying desal as an example, but, you know, investigate others um and also, you know, make our use of water more efficient by recycling more of it. um You know, I think where for our our you know climate, we're way too lax with how much water we use in this country. Obviously, everyone's used to drought restrictions and things like that when when a drought's on. But, um you know, we could be much more efficient on a system system systematic basis um about our water use that would help us in times when when there are kind of supply issues.
00:15:37
Speaker
um And look, I think Morrison already invests behind both of these kinds of things, i.e. new water sources and recycled water. So i mentioned we're an investor in Sydney Desal and we also have an investment in al grow that Altogether Group, which I'm a director on, um which provides with those recycled water schemes for new land and housing developments as well as high-rise buildings as well. So, yeah, what you know, we're we're trying to do our bit with that investment piece. um And I hope that, um you know, any change in kind of water security doesn't happen too fast so that, you know, we collectively, private sector investment and the governments um have time to invest to to kind of fix it.
00:16:16
Speaker
Climate risk has clearly shifted from an ESG to a core financial risk. We're starting to see Australia line up more closely with global frameworks and expectations and as mandatory climate disclosure comes in.
Climate Risk as Financial Risk
00:16:34
Speaker
So with that shift happening, how are investors now pricing climate risk into infrastructure assets? Yeah, look, I think over the last few years, we've all seen like the physical risks of climate change become a lot more real, um you know, with bushfires, floods, um you know, massive storms um to even just, you know, that little bit less dramatic, but still impacting people, you know, changing weather patterns, causing extreme temperatures, um you know, those those 43 degree days or 42 degree days are not comfortable, right? um And if they persist for too long, it's ah's a public health risk, which is really awful. um
00:17:12
Speaker
And I think so so what we've seen is that those, I guess, more nebulous, um you know, physical risks of climate change, which everyone thought was just sea level rising for a while, I think, um you know They're more translating now into very real commercial and financial risks. you know There are impacts to businesses from storms in terms of clean up and repair. um you know And we need to consider those things when we're investing in new assets as well as managing existing ones. um I think you know they are now starting to form much more a part of the like the core due diligence, I'll call it, on a new investment, which I think is really good.
00:17:51
Speaker
um And I think that, yeah, that the due the due diligence from investors and lenders um is now much more focused on assessing those risks as part of any investment. It's become much more embedded.
00:18:05
Speaker
So as we know, Australia has made big net zero commitments, but we're operated in an environment of much tighter government budgets.
00:18:16
Speaker
So from an investor perspective, Are current funding and investment models aligned with net zero goals or through tighter budget risk pushing decarbonisation down the priority list?
00:18:36
Speaker
Yeah, look, I think like from an economy-wide perspective, we're sort of broadly still investing behind those net zero goals and decarbonisation is still a really high priority. um You know, sometimes initiatives might get, you know deprioritzed because of specific funding considerations in the short term. However, I don't think they kind of get get totally taken off off the list.
00:19:01
Speaker
um I think, you know, there are other sort of challenges in in in funding kind of particularly, you know, very strong decarbonisation linked initiatives like renewables.
00:19:12
Speaker
um You've got supply chain constraints, um things like that, actually trying to get the raw materials, like labour constraints sometimes, you know, this whole Transition to ah to a really low-carbon economy is happening kind of everywhere all at once. Every country is trying to meet their net zero goals. um And so ah it drives kind of ah a competition for resources.
00:19:32
Speaker
But I think, you know, like what we try to do is sort of assessing what we're doing in that space um via detailed business cases. working out is there a slightly different way to achieve the same target and really just being clear on where the biggest bang for buck is in terms of reducing our carbon foot footprint.
00:19:52
Speaker
um So, for instance, um Perth Airport, which is a portfolio company of ours, and i have to mention actually the number one scoring asset in Gresb, in infrastructure, in the whole world. So that's pretty cool. um they set They set their net zero goals And then actually went through a really detailed plan in terms of specific initiatives, timing of those initiatives, um who they were going to partner with, how they were going to do it, why the order was it was what it was, and to how they were kind of going to achieve those targets as well as um the costs and benefits of each. It's great. They've got the the why from a sustainability perspective, but also, you know, very detailed analysis on the costs and benefits.
00:20:33
Speaker
um So we can feel confident around supporting initiatives. So recently they've sort of done some green energy procurement, which you know is great for achieving their targets and also actually stacks up on a cost basis for the business, which is awesome.
00:20:45
Speaker
So now that the Winter Olympics are happening, it's a reminder that major sporting events are really massive infrastructure programs. Let's talk about Brisbane Olympics 2032.
00:21:01
Speaker
Could the urgency of the Olympics reshape funding pipelines in a way that delays essential projects? Yeah, look, I mean, i can't sort of talk from a government perspective about what they might change in their priorities, but I think it probably would there. But from us in the from the private sector perspective on that, what what it definitely does do is contribute to those kind of supply chain constraints I mentioned earlier. um Brisbane is a big amount of civil construction, mainly, you know, building housing for the Olympians and, um you know, the stadium, upgrading the stadiums, um you know, ensuring roads are, you know, adequate for the amount of people, as well as obviously that public transport side of things as well, which hopefully Brisbane will really benefit from the investment in that. But I guess selfishly, what it does from my perspective is um is is is increase the competition for labour in particular. um as well as kind of more more materials um as we're also trying to support, ah you know, growth in transport infrastructure. So Perth, again, has um ah quite an ambitious construction program on the cards. They're building a new runway as well as new terminals. And, you know, you might think that's different to building things with the Olympics, but it's still largely civil construction.
00:22:21
Speaker
And it's the same firms that we're going to to get resources to help us with that project. um and And what the Olympics does there is just, you know, crowds out resources, I guess. um So I think, you know, it doesn't do anything from a private sector funding perspective, realistically.
00:22:39
Speaker
That's not something, you know Morrison was ever going to invest behind directly, but it but it does compete for resources and and make life tough as we're kind of trying to make make make investments in our existing portfolio, yeah. For leaders that are navigating this environment, what's one mindset shift you think it's critical right now to manage tighter budgets without losing sight of sustainability and long-term value?
Sustainability as Long-term Investment
00:23:05
Speaker
The biggest shift that is happening already and needs to continue is is thinking about sustainability as a cost to the business or kind of another thing that one has to tick the box on on compliance. I think that's not the way to think about it. um but shifting shifting the thinking of leadership, you know, to thinking of sustainability as an investment to preserve value in the long term.
00:23:29
Speaker
And it goes to, you know, fostering greater alignment between your finance team, your sustainability team, your risk team to ensure that they're actually collaborating on these things um and and educating each other, you know, on on finding that, you know, the real big hitters in terms of sustainability initiatives that are actually going to move the dial because, you know, with any investing, with any business, you can't do everything. So so you really have to to really prioritise things. And I think thinking about sustainability initiatives as an investment in value and value creation or value protection is is really um is really important. You know, it's thinking through the answers to questions like, you know, what future, and let's be honest, likely larger um costs could we avoid by acting now instead? um
00:24:17
Speaker
You know, which nature or climate resilient investments reduce multiple risks at once? You know, how can we kind of do more at the same time? um And, you know, how how can we prioritize infrastructure investments that, you know, deliver a range of benefits? Obviously, we need the economic, we need returns. but also that kind of social and environmental impact that that we're really looking for. And looking ahead, what do you think will most reshape infrastructure finance?
Rise of Green Financing
00:24:44
Speaker
Would it be technology, capital markets, policy settings, climate risk or any other? Yeah, look, I think, you know, in the long term, it's my strong view that, you know, green financing or ESG linked bonds and things like that like won't exist.
00:25:03
Speaker
um for the reason that, you know, that will be BAU. You know, it will be a a hygiene factor to even getting funding. Unless you are an asset that can demonstrate that you are doing certain things and acting in a certain way and delivering kind of particularly on that kind of climate change net zero um targets and things like that, but as well as the kind of more social and governance objectives, I think that will actually just limit your access to funding.
00:25:30
Speaker
Like we won't have kind of green bonds because everything will end up a green bond because you just won't be able to fund it if you're if you're not like that. Alex, and before we wrap up, what's the single most important question decision makers should be asking before committing to an infrastructure investment? People should be asking themselves, is it an essential service? um Is it something people truly need and can't live without? Like that that has to be the North Star with infrastructure. There are lots of things around the edge you can obviously invest in and make money and it's infrastructure-like, but I think that is that is the core of of investing in this sector.
00:26:08
Speaker
um And look, i'd count investments in energy, water, transport, and even data as as kind of falling into that tick essential need bucket.
00:26:19
Speaker
um And also I think going forward that things that are supporting, you know, us to have a more circular economy um should increasingly be thought of in that way, like that. like that recycled water point, as well as, you know, reuse of waste, um being more efficient with the resources that we have. I think that will kind of hopefully be the next sector that that joins those kind of essential service buckets. Well, that brings us to the end of today's episode. Thank you so much, Alex, for joining us. Thanks so much for having me.
00:26:52
Speaker
Thank you for listening to Infrastructure Connections. If you enjoyed today's episode, please be sure to follow us on your favorite podcast platform and connect with us on socials.
00:27:03
Speaker
We would love to hear your thoughts. Your feedback help us to shape the narrative and conversations that we bring to life. Until then, keep connecting, keep building.
00:27:14
Speaker
Till next time. Thank you.