Future Transformation Topic infrastructure

Actively expanding horizons and being able to soundly justify investment decisions are central elements of responsible investment. For this reason, Raiffeisen Capital Management installed interdisciplinary working groups in its fund management several years ago that work with the Future Transformation Topics, or future topics, of energy, infrastructure, raw materials, mobility, circular economy, technology, and food and health care. Fund manager Stefan Grünwald directs these teams and is also the head of the infrastructure working group. We asked him about important infrastructure topics in relation to the transformation, and what investment opportunities they offer.

Fund manager Stefan Grünwald about the infrastructure transformation and investment opportunities

The following article is an abbreviated version of the interview from the "Der Börse- und Wirtschaft"-Podcast Von Bullen und Bären.

You call infrastructure the backbone of a society. Can you briefly explain how you define this term?

Grünwald: Infrastructure has a key impact on our lives because performance can be delivered and offers provided through it, and it is the framework by which our processes are organised. But the infrastructure itself is also subject to significant change. Fifty years ago, our infrastructure was entirely different from our infrastructure now. And it will be very different again in 50 years. This change is driven significantly by the general political conditions, but also by global trends.

At Raiffeisen Capital Management, you are the head of a team that is dedicated to the Future Transformation Topic of infrastructure. What is your approach to this, and what is most important to you?

Grünwald: In the first step, we examined which global megatrends change infrastructure. These are topics such as the energy transition, digitalisation, mobility, urbanisation, and demographics. The topic of artificial intelligence will also play a major role in the coming decades. It made sense to us to break the field down into physical infrastructure – everything involving grids, pipelines, storage, buildings, power plants, and the like – and intangible infrastructure, which covers topics such as telecommunications, smart grids, and digital data and information exchange. We want to determine where these megatrends impact infrastructure, because these are the points that garner investor interest. It is exactly here, where infrastructure is changing and needs to be adapted, that interesting investment opportunities arise. We evaluate these investment opportunities and these changes with a very strong ESG* focus. Not every infrastructure change is positive from an ESG perspective. Our assessments then form the basis for our investment process in terms of infrastructure, and benefit the entire fund management.

Can you name any examples of such infrastructure changes?

Grünwald: Many different changes will be needed as part of the energy transition. We already know today that there will be massive problems with feeding electricity from larger photovoltaic systems into the grid because the infrastructure is not capable of handling the input surge. This means that massive changes will be needed in the power grids, storage facilities, and also building infrastructure. This also includes the digitalisation of the electricity grids. The energy supply will become decentralised because essentially, everyone can provide energy themselves through photovoltaic systems and other systems. Demand will also become decentralised. Supply and demand must be balanced out and synchronised. In addition, sun and wind – which will be important energy sources – cannot deliver the same volumes of power at all times of the day or in all seasons, and regional differences also play a role. This also needs to be balanced out. The transmission capacity of the power grids and also the local distribution capacity need to be increased. And we need efficient energy management and simultaneous coordination within the network. This will very significantly change the structure of the grid.

The share of intangible infrastructure compared to physical infrastructure will increase rapidly, correct?

Grünwald: Yes, this trend is already evident and will accelerate as a result of increasing digitalisation and through artificial intelligence, regardless of the specific forms of application. Physical infrastructure will of course not disappear – we will still need roads, transportation networks, buildings, etc. But the manner in which we generate exchange, for example conduct commerce, will change in future. The manner in which power is provided and how this is managed will change. And these changes are linked very closely with the digital world, and also with artificial intelligence farther down the road.

What changes are these exactly?

Grünwald: I already talked about the significant changes in the electricity grids. Aside from that, we will also use energy much more efficiently in our own homes. This involves digital control, in other words when what device is provided with power or not. Or when storage batteries are charged. Smart water is another concept that will become more firmly established. This refers to the digitalisation of the water supply, the real-time monitoring of the water supply system. Data such as water flow, pressure, temperature, and quality are recorded continuously for this. At the same time, the supply and use of water will be optimised. This will reduce water losses and improve the quality.

What can we expect to see with telecommunication?

Grünwald: A very important aspect is 5G expansion. We are already talking about 6G in some parts of the world, namely Asia. The fifth generation of mobile communications technology offers higher speeds, higher transmission and receiving times and capacities, and improved reliability. The Internet of Things, autonomous driving, industrial automation, and other topics also ultimately depend on significant expansion here. We took a look at these topics, as well. Which digital offerings are provided by the public sector and which by the private sector will also be important. Digitalisation created a new kind of infrastructure over the past years that allows us to take actions and also exchange information in this space. And this will become a major trend that will significantly change our infrastructure and the manner in which we use it.

You make significant use of past data for the qualitative assessment of Future Transformation Topics – does that work?

Grünwald: That is correct. We naturally assess these topics on the basis of data, but the conclusions that we draw are highly qualitative in nature. This means we have to decide what we tend towards and what we tend away from. There is no real thinking in black and white. We also have to make qualitative assessments that are not based solely on numbers. This is moving us fairly far away from a pure score-based view, as is otherwise typical in ESG approaches, and towards a qualitative assessment of topics, risks, and opportunities. These changes often impact ESG topics not only in infrastructure but also in other areas of the economy, and this also presents growth opportunities. In general, however, considering ESG aspects allows certain risks to be avoided. This new manner of conducting business must be assessed, whether resources are used responsibly or not. We follow this approach. The qualitative assessment of ESG aspects will become increasingly important in evaluating topics.

The necessary investments in infrastructure are massive in scale. Where is the money going to come from?

Grünwald: The large-scale financing projects will fall more in the public sector. But there are limits here. This is evident in the discussion in Germany, where the debt cap is impeding major transformation projects for the energy transition. And this is thus a hurdle to the financing of these extremely large projects. What governments should definitely give more consideration to here is whether money should not be borrowed or raised through the issuance of green or social bonds for infrastructure transformation in particular. We are already seeing such a trend internationally and also in Europe. This will gain momentum. And it is of course also possible to bring private-sector companies in to finance major projects. For example in the form of public-private partnerships. In this case, the government defines the framework, says what it wants, and the private-sector company finances, builds, and is then allowed to operate the infrastructure – for a certain fee – and then usually generates a profit from this infrastructure. Private-sector financing will play the greatest role in smaller projects – adaptation, renovation, or expansion of existing infrastructure, which is also an important avenue for reaching the climate targets.

What infrastructure areas are interesting from an investor perspective?

Grünwald: It is clear that there will be a major ESG push in global terms in future due to the political framework. It will be important here to assess the opportunities and risks of these developments. The energy transition offers a great deal of investment potential. Because the projects that are financed here are implemented by companies that can generate profits. But we see great opportunities not only in the energy segment, but also in building infrastructure. Because high volumes of carbon emissions can be saved here. Billions in investments are also planned here, and can give rise to good opportunities for investors if they position themselves well.

And in which funds are these findings being applied?

Grünwald: Our knowledge, work, and assessments benefit the entire fund management in general. But the funds that invest significantly in the energy transition, megatrends, and infrastructure profit the most, above all Raiffeisen-NewInfrastructure-ESG-Aktien, which is managed according to ESG criteria.

The Raiffeisen-NewInfrastructure-ESG-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.

Explanations:

*Sustainable finance within the meaning of the EU’s Green Deal refers to the process of integrating environmental, social, and governance (ESG) considerations in investment decisions in the financial sector, which leads to longer-term investments in sustainable economic activities and projects.

**The mentioned investement universe are internal, non-binding rules that can be changed any time without prior notice.