May 5, 2021
With much of the world dedicating funding to infrastructure as well as climate change mitigation, how might these two be linked? At the BNY Mellon annual investor conference, our investment professionals shared their thoughts.
(SH) Suzanne Hutchins, investment team leader, Real Return at Newton
(JL) Jim Lydotes, senior infrastructure manager at Mellon
(DR) Dan Rabasco, head of municipal bonds at Mellon
Q: Have clean energy plans been sidelined due to COVID-19?
JL: A lot has been put on pause but infrastructure spending on clean energy hasn’t slowed down at all. In fact, it’s one area we believe is accelerating despite the events of the last 12 months. For example, last year—for the first time ever—the production of energy from renewable sources outpaced that of fossil fuels in the UK. It was the same case for the European Union more broadly.
In the US, renewable power currently generates 20% of all electricity and that will go higher. Throughout the last year, it’s become a way of stimulating economic activity and getting people back into jobs. Governments are looking to accelerate this push and southern Europe has been leading the way. Italy and Spain were very committed to the buildout of renewable energy before Covid and they’ve actually accelerated their commitments throughout the pandemic. We think we’re going to see 10 years’ worth of renewable energy growth over the next five years. And the cleanest way of playing that will be with regulated utilities in Italy and Spain, where growth rates are likely to hit levels we haven’t seen in the last 20 years.
Q: How can investors stay ahead of the curve when renewable technology is accelerating at such a fast pace?
SH: There are many listed equities they can do this with. Additionally, there are closed-end investment trusts that provide daily access and liquidity to solar-generated electricity and wind farms. While those approaches may one day become obsolete, technology should reshape the landscape in order to continue to make renewable energy more productive and efficient, and to ensure it remains accessible through similar vehicles.
JL: I think technology has gotten to the point where it may be possible to retire coal-fired electricity generation anywhere and bring in fully capitalized renewable power. And even without subsidies, we think customers’ bills can go down and there’s less pollution. If you look toward regulated utilities with carbon intensive asset bases, they have the ability to transition that to more renewable power that will allow them to grow. I think that’s one of the best undiscovered opportunities: utilities with legacy generation bases that still have the ability to transition.
Q: How can investors combat climate change and seek investment opportunities?
DR: Climate change impacts are only getting worse. Urban, suburban and rural communities are being confronted by climate change challenges including extreme weather events, floods, droughts and wildfires. Many of these communities are looking to enhance their infrastructure to provide resiliency, enhance sustainability and ensure the delivery of critical services during and after periods of climate stress. In our view capital in the form of municipal bonds will be needed to fund these initiatives and repair damage to infrastructure.
For the US domestic investor, municipal bonds issued for infrastructure purposes are typically of highcredit quality and provide an attractive stream of tax-exempt income. For overseas investors, a taxable sub-set of municipal bonds are equally of high-credit quality and can provide an attractive relative yield and diversification benefits. Another compelling reason to own municipal infrastructure bonds is its potential to benefit future generations by helping preserve the planet and improve the quality of life. If you desire a positive social impact and wish to achieve an attractive yield, they can make a lot of sense.
Q: How are countries around the world confronting climate issues?
SH: The EU strategy for green infrastructure is intended to stop the loss of biodiversity and reduce the degradation of the ecosystem. There are many ways in which they are approaching this; whether it’s through the purification of water, improving air quality, or creating space for recreational play. These goals serve the dual purpose of addressing social issues and climate change.
The €750bn European recovery fund, which the EU launched last May, goes a long way towards funding much of this investment, as well as other opportunities investors can use to play a role. About 30% of the recovery fund will be through the issuance of green bonds1. This is a global phenomenon; in fact—the US, Germany and France respectively, issued the most green bonds in 2020. There is quite a strict criteria and hurdle rate for those issuing the bonds to make sure key performance indicators are being met.
Q: What about local governments?
DR: When it comes to climate change, state and local governments are on the front lines. They’re the ones that are directly impacted. The trends we’re seeing in terms of severity of storms and frequency of events have been hitting them hard and this trend will probably continue unless climate mitigation steps are taken. As a result, many are putting together sustainability and resiliency strategies to combat climate impacts. There will be infrastructure spending for that and we’re likely to see debt issuance in the form of municipal bonds to finance their strategies.
Q: Where is all the government and investor capital going?
SH: We’re seeing spending go towards schools, airports and transportation more broadly. A major beneficiary—not just in the US, but globally—is this trend toward climate mitigation and sustainability. A lot of this money is being put into renewable energy to power electric vehicles, fund battery operators, and there are also opportunities in semiconductor businesses. Brick-and-mortar retailers and solution providers are all big beneficiaries of this trend.
1 Green bonds: A type of fixed income instrument that is specifically aimed at raising money for climate and environmental projects.
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. The amount of public information available about municipal securities is generally less than that for corporate equities or bonds. Legislative changes, state and local economic and business developments, may adversely affect the yield and/or value of municipal securities. Other factors include the general conditions of the municipal securities market, the size of the particular offering, maturity of the obligation, and the rating of the issue.
Sustainable investing is a general term for investment disciplines that consider Environmental, Social and Governance criteria when selecting a company stock, which could result in relative investment performance deviating from other strategies or broad market benchmarks.
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