Returns from ‘green’ infrastructure are expected to fall in the near term, and are likely to be below returns available on traditional infrastructure – which may have a far higher carbon footprint.
This could mean that DC schemes looking to boost allocation to infrastructure may have to make a trade off in terms of return if they are looking to use increased infrastructure and private equity assets to help meet net zero targets.
Delegates at Corporate Adviser’s summit were told that the cost of building many of these renewable energy projects, such as solar or offshore on onshore win, had risen, calling yields to fall. EDHEC Infrastructure Institute associate director and head of product development Abhishek Gupta said that returns on solar for example were set to fall from around 10 to 12 per cent to around 5 to 6 per cent. This would be below the returns available on ‘dirty’ infrastructure projects.
However Gupta told the delegates that there was a convincing argument for DC schemes to increase allocations to infrastructure in DC schemes. He pointed out that in 2019 pensions scheme were found to have an average allocation of just 2 per cent. This figures included DB schemes which typically had far higher allocations to this asset class.
Gupta said that allocation rates of around 10 per cent were likely to provide both the diversification needed while producing a more positive risk return profile for DC funds. His projection figures showed that this applied across different investors profiles, including more cautious investors – typically targeting a 20/80 equity bond split – as well as those pursuing more aggressive investment objectives (typically a 60/40 equity bond split).
However Gupta pointed out that those seeking cautious investment objectives there is likely to be a greater weighting towards infrastructure debt rather than private equity.