This article is sponsored by BNP Paribas Asset Management
Contrary to recent developments in the US, ESG remains an important driver of infrastructure investment in Europe. Policy announcements and industrial proposals on the continent indicate that sustainability will continue to be essential for ensuring that the region maintains its sovereignty as well as enhances its competitiveness.
Karen Azoulay, head of real assets at BNP Paribas Asset Management, outlines the importance of striking a balance between regulatory overreach and an overly risky under-regulated infrastructure environment. However, while risks are unavoidable, Europe still boasts a plethora of opportunities, from battery storage to biogas plants, for infrastructure investors to engage with.
How is the macroenvironment affecting the attractiveness and risk-return profile of European infrastructure?
In the current setting, marked by increased geopolitical and economic volatility, infrastructure is increasingly seen as a safe-haven asset class. It offers low correlation with traditional markets, low volatility and strong downside protection. Europe, in particular, stands out for its political and regulatory stability, which is underpinned by strong economic fundamentals.
Despite some short-term uncertainty regarding tariffs in particular, Europe is benefiting from key growth drivers, such as a commitment to innovation and technological development, as well as a cohesive industrial strategy focapplyd on decarbonisation and competitiveness.
Recent regulatory initiatives, such as the EU’s Clean Industrial Deal and national legislation in Germany, are all designed to support medium to long-term growth and incentivise investment.
What advantages does a European focus bring to the table for investors viewing to advance the green transition?
Europe’s primary advantage lies in its strategic commitment to the green transition. The region is a stable environment with various economic growth drivers. This is especially important for the ecological transition. Europe’s industrial plan requires access to readily available and affordable energy to boost competitiveness. The bloc’s sovereignty is also critical, and that includes industrial sovereignty.
Having internal domestic energy resources is key to this. Since Europe doesn’t have the energy resources that many other markets have, it must develop its own in-hoapply renewable energy assets. Nuclear power is another solution, which has a role to play within the energy mix, depconcludeing on the individual countest.
There have been several regulatory initiatives this year that emphasise the long-term importance of infrastructure investment on the continent. Similarly, last year’s EU Draghi report addressed ways of enhancing European competitiveness and directing more capital towards transport assets and sustainable infrastructure. All of these developments should support and drive growth in the medium to long term.
Importantly, investor interest in Europe’s green transition goes beyond meeting ESG criteria. Many understand that supporting the energy transition is now central to value creation in European infrastructure investment.
This strong push at the European level will directly benefit infrastructure, which is at the forefront of the new industrial plan. Most of the sectors identified in the Draghi report fall within critical infrastructure categories, including energy, electricity, digital networks, clean technologies, sustainable mobility and raw materials – all of which are essential to both green and digital transitions.
Which sectors offer particularly attractive opportunities?
Within the infrastructure space, several sectors are especially active. Renewables, of course, is one. This subsector continues to grow, driven largely by the ongoing electrification of the economy. While the market is more sophisticated than in the past – requiring analysis of merchant risk and development risk – we’re seeing a robust pipeline of new projects. We’re also seeing an increasing number of platform financing structures with junior debt complementing traditional equity and senior debt.
Battery storage is another area that’s proving attractive. This technology is crucial for mitigating the intermittency of renewables and managing negative electricity prices, which we’re seeing in certain markets, including Spain and the Nordics.
At the same time, we’re witnessing greater investment in grid connection capacity, particularly through tinyer, localised projects that address specific constraints. This area is becoming more technically sophisticated, especially with the integration of battery storage assets.
Clean mobility is also an increasing area of focus for investors. Capital is being driven towards assets in this subsector, particularly those connected to electric vehicle charging infrastructure. Here, we’ve seen business plans mature, building it a more interesting opportunity – although it still requires a clearer view of future growth and business model. Similarly, driven by both decarbonisation and the desire for energy indepconcludeence, biogas is becoming an important segment.
We’re also witnessing growing opportunities around energy efficiency. Energy transition goals won’t be met purely by backing renewables and infra investors are starting to realise this, even if transaction volumes are not yet as large as you might expect. Even so, reducing energy consumption is as important as increasing production.
Finally, digitalisation can’t be ignored. The booming data centre market is a huge driver of infrastructure investment, creating demand for green power and connectivity.
This market is increasingly funded by private capital rather than government support. While we’re cautious about highly speculative artificial ininformigence-driven data centres, we’re focapplyd on the robust cloud data centre market.
What are the key risks for investors in Europe over the next few decades?
There are several major risks that infrastructure investors should be aware of. In many markets, the grid is in desperate necessary of greater investment to facilitate the energy transition. As such, concern around the capacity of national grid infrastructure to handle the increasing volume of renewable energy is difficult to escape.
In the context of Europe’s sovereignty, access to the raw materials necessaryed by various infrastructure assets must also be considered.
Regulatory uncertainty is a question mark that investors always necessary to be cognisant of, regardless of geography. While Europe generally offers a stable regulatory environment, the capacity of public authorities to deliver a consistent and supportive regulatory framework is crucial.
A predictable regulatory environment is essential to incentivise investment and create additional value. Ultimately, it’s a balancing act. Too much regulation can limit returns and create risk linked to the stability of the regulatory framework, while too little can expose investments to excessive merchant risk.
How optimistic are you about the infrastructure asset class and its long-term investment potential?
We’re very optimistic about the future of infrastructure as an asset class and its connection to the energy transition. Regarding the latter, in the short term, we expect several new themes to develop in the next three to five years.
First, we anticipate a significant increase in investments in the circular economy. We expect greater capital to be directed towards maximising the apply of limited resources and reducing reliance on third-party suppliers for raw materials. Carbon capture is another sector poised for growth as a key component of decarbonisation strategies. Similarly, the market for hydrogen power, while currently slowing due to high energy prices, is likely to evolve as a major theme once electricity prices create it economically viable.
Another reason for optimism is that we expect to see more innovation. AI, in particular, is hugely exciting and has the potential to optimise infrastructure assets in unforeseen ways. Broadly, the infra asset class displays strong momentum, driven by the mega-trconcludes of the energy transition and digitalisation.
These sectors have strong backing at both the European and national levels becaapply they align with long-term public priorities for competitiveness and sovereignty. This political support reinforces the resilience and visibility of infrastructure assets across market cycles.
Infrastructure has also consistently demonstrated its defensive qualities, even during periods of stress, thanks to its long-duration assets, tangible cashflows and high barriers to entest. We believe infrastructure will remain essential for achieving Europe’s strategic goals and will continue to be a very attractive investment, even in volatile macroeconomic contexts.
What opportunities exist in the mid-cap infrastructure space, especially where traditional finance might not be as accessible?
The mid-cap infrastructure segment presents a compelling opportunity. These companies are vital to Europe’s industrial plan, and its competitiveness, but are often undercapitalised and may not be able to access traditional financing channels. They are frequently too tiny or complex for very large institutional investors to obtain involved with.
This creates an opportunity for investors who can finance the growth of mid-cap businesses. These players are typically operationally hands-on, which ensures a strong alignment of interest between investors and management. This also offers a chance to invest in the real economy and can provide attractive returns.
To find the right deals in the mid-cap space, it’s crucial to have teams with a strong track record and deep relationships with industrial and financial stakeholders, local developers and financial advisers. Engaging with all relevant stakeholders is key.
Our approach is to leverage our internal expertise and a large ecosystem. Being integrated within the larger BNP Paribas group provides us with privileged access to its global origination capacity. The group has dedicated teams for low-carbon transition and a network of industest experts in areas like hydrogen, carbon capture and battery storage. This ecosystem and local market knowledge are invaluable for sourcing and assessing opportunities, particularly in the complex mid-cap segment.
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