Energy infrastructure – a historic investment opportunity

Everyone is talking about ensuring a secure supply, and it is a high priority. What does this mean for pension funds?

Beat Goetz: Pension funds are the key pillar of retirement provision and represent the most important source of income for the vast majority of current and future retirees. Due to the long-term nature of their obligations, pension funds also have a very long investment horizon – which in general ties in well with the longevity of energy infrastructure investments.

Renovating and modernizing the energy sector to produce lower CO₂ emissions, while simultaneously ensuring a secure energy supply, is a major challenge.

The current energy shortage is due not only to the war in Ukraine but also to a failure to invest over recent decades. This is now resulting in enormous investment needs, providing an opportunity for institutional investors to contribute to energy security through long-term investments in energy infrastructure while simultaneously generating stable, and in some cases regulated and inflation-protected returns.

The Federal Office of Energy expects that at least CHF 1.5 trillion in investment will be needed by 2050 in Switzerland alone – twice the amount of Switzerland's gross domestic product in 2022. The global requirement for investment in the renovation and modernization of the energy sector is many times higher.

You mention inflation protection. Rising inflation and the associated measures taken by central banks are putting pressure on the markets. What happens to energy infrastructure in this environment?

Thanks to their macroeconomic importance, investments in energy infrastructure tend to be more robust in the face of economic downturns and therefore less exposed to market fluctuations than other asset classes. As the backbone of modern economies, energy infrastructure is systemically important and thus offers increased resilience during times of crisis.

These outstanding qualities are clear to see in the case of the investments we have made so far if we take the examples of the COVID-19 pandemic and the current energy crisis. In addition, the income from energy infrastructure is often secured via long-term contracts or regulatory regimes and in some cases directly or indirectly linked to the development of inflation. This generally results in regular, stable distributions that are highly predictable.

Energy infrastructure is a complex asset class that requires sizable investment volumes. How can institutional investors participate in this megatrend without cluster risks?

In view of the enormous investment required to renovate and modernize the energy infrastructure, we have developed a global investment solution with the Credit Suisse Investment Foundation.

The geographic focus is on Europe and OECD countries outside Europe that have a correspondingly high ESG rating. Within these countries, we focus on the sub-sectors of renewables, energy transmission and distribution, system flexibility, and energy storage. These four sub-sectors are hardly correlated with one another and also have a low correlation with other infrastructure sectors and asset classes.

This gives investors access to an investment universe that is broadly diversified, both in terms of geography and technology. After all, diversification is also needed in this asset class. Collaboration with sector specialists who focus exclusively on the energy market is generally advised given the complexity of infrastructure investments.

What role does sustainability have in investing in energy infrastructure?

Environmental and social responsibility is a key factor for successful investments in energy infrastructure. Together with our investors, we are facilitating the comprehensive renovation and modernization of the energy sector. Institutional investors can play an important role in this process by contributing to positive economic and social development, to retirement provision for the population, to energy security, and to a future with fewer CO₂ emissions.

The impact is tangible: Investments made on behalf of our clients will produce enough renewable energy in the next 25 years to supply electricity to 1.5 million households. What's more, energy infrastructure is a broadly diversified and resilient sector that encompasses a wide range of business models, technologies, and geographical areas with different regulatory systems. These investments nevertheless have one thing in common: the crucial role they play in the current and future economy and society – now more than ever.