As the move towards net zero carbon emissions by 2050, investment into the transition is just as important as the outcome, according to Alex Araujo, manager of the £297m M&G Global Listed Infrastructure fund.
The UK was the first major economy to commit to reaching net zero carbon emissions by 2050 and has recently been joined by Japan, but it will require countries to behave differently.
Araujo said: “What many people don't understand is that it is a transition. That is the operative word.”
For example, when Germany decided to phase out coal-powered generation and nuclear power generation at the same time it “came to the very quick realisation that you can’t just switch all of that generating capacity to renewables overnight,” according to the manager (pictured). 
He explained: “You need to find the sites, you need to find the capital, you need to build, and you need to connect. This takes a long time.”
He noted that it has also become a politically sensitive issue, particularly over coal-powered energy, because of the displacement of labour, compensation requirements and various other issues.
Indeed, Germany is set to spend some €40bn to help certain regions of the country cope with its phase-out of coal by 2038 and nuclear power by 2022.
“We cannot snap our fingers and transition to renewables overnight as much as we’d like to do that,” the manager said. “There is a rapid advancement, but we need to remember it is a transition. We need to phase out coal as we are phasing in renewables.”
He added that natural gas for example, needs to be used as a bridge from one form of electricity generation to another that is less carbon intensive.
Therefore, he believes there are a range of opportunities available for investors to finance and benefit from this green transition, and he revealed that one way to do this is via investing in the utilities sector, which he admitted has a little bit of an ‘identity crisis’.
“It is one of the worst offenders when it comes to greenhouse gas emissions and pollutants globally, but at same time, they are central to the requirements around the energy transition,” he said.
Utilities are a very important element of infrastructure for us as constituents of the global economy, and as a result they also form an important part of the fund’s strategy.
The M&G Global Listed Infrastructure fund targets asset backed cash flow streams from critical infrastructure businesses, many of which are heavily involved in the energy transition.
This is because a lot of the growth of those cash flows come from businesses that are focused on the structural requirements around the energy transition, renewable energy, and the changing economy.
One example of this is in its position in Italian energy multinational, Enel Group, where it has a 4 per cent position.
“It’s a fantastic story when it comes to energy transition,” the manager said. “It is deploying renewables in Italy and around Europe and Latin America at an accelerated pace, so it is a market leader in the deployment of renewable energy installations.
“But at the same time, it is also Europe’s most prolific builder of electric vehicle charging stations and networks.”
He also pointed out that the company is a transition story in of itself because it has some legacy coal-powered generation in its portfolio, which they are rapidly phasing out.
Performance of Enel Group share price YTD
Source: Google Finance
However, Araujo also emphasised the importance of being extremely selective when it comes to the energy transition and climate change.
He noted a few of considerations, the first being the impact of climate change on assets.
The manager said: “Because we’re investing in businesses that are physically asset backed, we have to be very careful about the impact of climate change on physical assets whether its forest fires or things like rising sea levels or other exogenous factors.”
He said we’ve already had the world’s first large scale corporate failure that has come as a result of climate change, when California company BG&E, which had to declare bankruptcy a little over a year ago on the back of climate change liabilities owing to forest fires.
The second consideration he highlighted was how a companies are capitalising on the opportunities in the energy transition.
In his view, not all renewable energy deployments are created equal.
He said: “One has to think about regionally where the best opportunities are because very often the deployment of renewables is incentivised by governments, federal, regional, state, [and] what have you.
“Some of the biggest opportunities where we’re invested are in renewable deployments where we identify very high capital return prospects relative to the cost of capital.
“Then you start to get into very interesting nuances around opportunities in hydrogen or natural gas as a transition fuel particularly in developing economies such as China.”
He said that some of the fund’s investments in China facilitate the transition from coal fired power generation and coal-based heating in homes in rural China, to switch them to gas as an intermediate step towards renewables.
He also said the fund has investments that capitalise on the opportunity in energy efficiency deployments, such as putting solar panels on the rooftops of warehouses or goods distribution centres, or more efficient energy applications in hospitals.
Electricity transmission networks are also critical to the transition, he said, because “when you deploy renewables you require different configurations of distribution networks and you need to connect those renewables to the grid”.
He finished: “At a more local level you needed to establish distribution networks that are multi-directional and smart and built for purpose to accommodate things like electric vehicles charging.
“There are elements of infrastructure that don’t spring to mind as being renewable but are critical to the energy transition.”
Since inception in 2017, M&G Global Listed Infrastructure has delivered a total return of 28.8 per cent, compared to 30.5 per cent from the average IA Global peer, and 30.75 per cent from the benchmark MSCI ACWI index.
Performance of fund since launch
Source: FE Analytics
It has a yield of 2.75 per cent, and an ongoing charges figure (OCF) of 0.85 per cent.