Why climate impact infrastructure debt is particularly relevant in 2024 

Each month, LBP AM provides video analysis of market news. Today, Bérénice Arbona, Head of Infrastructure Debt at LBP AM, explains why climate impact infrastructure debt is relevant in early 2024.

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Following the various challenges of 2023, investors are reassessing their investment strategies and trying to identify the best risk/reward investment opportunities. We believe that climate impact infrastructure debt is particularly well-placed to fulfil the needs of current investors. To understand why, let’s look at the main concerns of investors today. There are three main concerns today. 

The first is resilience. Investors want to invest in an asset class that can withstand the current macroeconomic context – marked by persistently high interest rates and inflation, volatility in liquid markets, increasing geopolitical tensions and a difficult macroeconomic environment. Infrastructure debt is a defensive asset class that has demonstrated its resilience and offers good protection against inflation thanks to the essential nature of the assets, which benefit from high barriers to entry and a supportive regulatory framework. The cash flows of infrastructure assets are also less tied to economic cycles than those of other asset classes.

Offering risk-adjusted returns

The second main concern for investors is profitability – or more precisely, risk-adjusted profitability. Investors want to invest in funds that offer good risk-adjusted profitability and a low default rate. 
Infrastructure debt currently offers stable yields of between 5% and 6%, independent of exit multiples. Our asset class has directly benefited from the rising interest rate environment, as it is a rate-plus-spread market. The illiquidity or complexity premium remains attractive to asset managers who can capture the alpha of private markets. The asset class’s low default rate was demonstrated during the Covid crisis, and the value of the security package enables infrastructure debt to offer higher recovery rates than other asset classes.

Decarbonisation and ESG: the icing on the cake

The third concern for investors is decarbonisation and ESG. Investors also want to invest in assets that can contribute positively and measurably to meeting the challenges of the energy transition and carbon neutrality. Financial performance is a prerequisite, but ESG and impact are the icing on the cake. 

The massive investment needed to meet climate change challenges offers significant and diverse investment opportunities in infrastructure. It is not only a matter of building new renewable energy capacities, but also of financing new and innovative sectors such as hydrogen, battery storage and energy efficiency projects. The track record and expertise of asset managers will be crucial in defining financing structures that align with the risk profile of these assets. 

Experience in ESG analysis and the ability to measure environmental performance indicators and impact KPIs are also crucial for producing meaningful ESG reports for investors. 

Given the focus of investors on these three concerns, we believe that Climate impact infrastructure debt is highly relevant in the current context.