Paul: Welcome to Index Ideas from FTSE Russell. I'm Paul Amery, your podcast host. In this podcast, we look into how indices are built and why. We explore index ideas that can help you address real-world investment challenges. As a reminder to listeners, you can't invest in an index. And so the concepts that we discuss in this podcast are not investment advice. Any reference to potential investment strategies is intended for informational and educational purposes only.
Paul: In this episode of the podcast, we look at the global demand for better infrastructure. A significant portion of future spending in this area will be on green or sustainable infrastructure. To discuss how green infrastructure fits into an index context, I'm joined by Jared Butters, who is Sustainable Investment Product Manager at FTSE Russell. Jared, welcome to Index Ideas.
Jared: Thanks, Paul. Great to be here.
Paul: Jared, how does FTSE Russell define green or sustainable infrastructure?
Jared: So our green and sustainable infrastructure indices I think are built on our standard infrastructure indices. And so when you're looking to define green and sustainable infrastructure, we would probably start from our standard infrastructure definition. So those companies that are exposed to core infrastructure activities like transportation, energy and communication. And I think that these infrastructure activities have a number of attractive investment characteristics, things like inflation sensitivity and defensive qualities like resilience in market downturns. Then when you're looking at green and sustainable infrastructure, you are also then trying to manage the primary climate and sustainability risks and opportunities that are associated with these sorts of activities. Things like higher energy use, carbon intensity compared to other energy sectors. And also trying to enhance the defensive qualities can be brought from hedging against these climate risks and sustainability risks alongside the traditional infrastructure characteristics, I think that they pair very well.
Paul: What impact has the Iran war had on investors’ views about infrastructure and the associated risks?
Jared: Well, I think since the conflict began, we have seen really sustained and deliberate attacks across critical infrastructure assets in the region and also impact on infrastructure more broadly. I think that the whole energy transition plan associated with sustainable infrastructure meeting the resilience and security needs of countries across the world in terms of sustainable infrastructure. And so this has pushed investors, pushed countries to see sustainable infrastructure more through a resilience lens, sort of focusing on reliability and redundancy that it can offer for the diversification from traditional infrastructure means, as well as sort of a shift towards more decentralised and resilient designs from an infrastructure point of view. We've seen that attacks have been not just on traditional energy infrastructure, but also more broadly on water supply, things like transport corridors, ports and data centres have been affected. So I think this has really highlighted and put infrastructure and these sort of industries right at the heart of investors’ mindsets again.
Paul: And what do we estimate the future spending on infrastructure to be? And what proportion of this is likely to be sustainable?
Jared: So according to Global Infrastructure Hub, the global infrastructure requirements will demand around $100 trillion by 2040. So there is a massive future need for global spending at the moment, and increasingly with debt at all time highs, I think that governments must rely on private capital to close that investment gap as well. You can see that in investor activities. I think that investors are responding to this: AUM in infrastructure funds has nearly tripled over the last decade. I think this reflects the asset class reputation for resilience and stability, as mentioned before. Around two thirds of that investment demand is linked to sustainable and low carbon infrastructure driven by the needs for energy transitions, the need for electrification. More recently the need for digitalisation and climate resilience as well.
Paul: And what particular trends are driving investment in sustainable infrastructure?
Jared: I think I alluded to some of them there, but energy transition is obviously front and centre of the sustainable infrastructure investment demand, building next-generation green infrastructure to enable the transition, things like renewables, energy efficiency measures, batteries, smart grids, etc. to both enable increased production of renewables, but also more energy efficient ways of using energy, once we have it. The second trend I think is digital and AI infrastructure, something that we've seen erupt over the last few years, massive returns and investment generated around this mega trend and the infrastructure that is required to support digital and AI infrastructure is increasingly becoming front and centre of investors’ mindsets as well, looking forward. So I think you'll continue to see that moving forward as AI continues to expand, climate and physical risk are a big part of the future going forward. I think that upgrading existing infrastructure will be necessary and also generating new solutions as well. The losses that we've experienced over the last few years just to physical risk put really front and centre the need for updated infrastructure for infrastructure that's going to be resilient to the future climate. And finally, I guess the circular economy, the need for resource efficiency will become increasingly important. I think that the water treatment and efficiency and advanced waste management could deliver up to 45% of global carbon reductions needed to meet net zero targets. And so this really is an important area of infrastructure investment.
Paul: Thank you for explaining all that. And turning to FTSE Russell's offering in this area, what green infrastructure index families are part of the FTSE Russell range?
Jared: So we have three main sustainable infrastructure offerings. We have our FTSE Global Core Infrastructure TPI Climate Transition index, our FTSE Global Core Infrastructure 50/50 Climate Transition CTB index, and then our FTSE Green Revenues Select Infrastructure and Industrials index.
Paul: And for people who are not familiar with the detail, how could you explain in general terms what distinguishes them?
Jared: Yes. The Global Core Infrastructure TPI Climate Transition index I would think of as our core climate transition offering in this space. It employs our carbon emissions data alongside exclusions data and our TPI management quality and carbon performance to provide a holistic assessment of the climate transition performance of companies in our global core infrastructure underlying index. And so this would be for asset owners, managers seeking similar infrastructure diversification. The CTB Climate Transition benchmark version of the Global 50/50 index is a more ambitious version of the same strategy, employing similar data sets, but along the EU CTB framework, which is an ambitious climate framework looking at decarbonisation of portfolios over time alongside some other core climate goals. And then the Green Revenue Select Infrastructure and Industrials index is a slightly different approach to sustainable infrastructure, focusing heavily on solutions. It utilises LSEG Green Revenues data in order to select companies with activities exposed to the sustainable infrastructure transition, looking from a solely opportunities perspective.
Paul: And how do we work, you mentioned some external partners there. How do we work with them in developing and managing the indices?
Jared: Absolutely. Yes. Our external partners are a core part of the index design. Our underlying global core infrastructure index is built with our partner LPX, selecting companies with revenue exposure to the three core infrastructure sectors I mentioned earlier of transportation, energy and communications. And so they are key to forming the underlying sustainable infrastructure universe that we are then building upon. And then our TPI, our partnership with Transition Pathway Initiative, is also key in assessing the companies in the universe for their climate transition governance. It has two metrics, the management quality metric and the carbon performance metric. And our partnership with TPI helps to assess companies holistically on their governance and their targets and how they are aligned to those targets once they've set them.
Paul: And how are FTSE Russell's clients using these indices?
Jared: There are multiple ways in which the clients are using the indices. We have ETFs on some of the indices. So our green infrastructure select index has an ETF from iShares,on the back of it. We have passive funds with clients including Mercer on the TPI index. And there are many active clients as well, on top of these benchmarking against the index universes.
Paul: So how would you summarise the investment opportunity for people using the green infrastructure index? Either as a benchmark or as a tracker fund target.
Jared: I think that there is plenty of structural growth baked into the sector. I think as discussed earlier, there are plenty of investment cases through the megatrends that we are seeing drive demand in the space more generally. And also going forward, the need for heavy investment in the sector of around $100 trillion through to 2040. I think that the sector also benefits from the characteristics, I think alongside the traditional characteristics, the infrastructure exposure gives you, I think that sustainability objectives and managing the risks associated with the climate transition pair very well with the traditional benefits of an infrastructure portfolio.
Paul: And which areas of product development are you working on with your colleagues?
Jared: So we continually review our index methodologies to make sure that they remain up to date and reflective of what the indexes are trying to achieve. We're currently looking at the methodology of the tilting that we apply to the indices to see if it's remained fit for purpose in terms of what we're targeting in outcomes. But also we're looking at data enhancements as well. Our partnership with the TPI has allowed us to gain access to more data around climate governance target setting. And so definitely we'll be looking at if that would be a beneficial improvement for the indices going forward. Having said this, currently we don't have any fixed. Product development ideas at the moment. We believe that the current index series remains well positioned in the current environment.
Paul: Where can listeners go to find out more about this topic?
Jared: Materials that summarise the topics we've discussed today can be found on the FTSE Sustainable Infrastructure Index landing page. This includes details on all the infrastructure indices in the series, as well as some supporting FAQs, overviews and there will be a paper that we are writing around recent trends in sustainable infrastructure that you can find on that page as well once launched.
Paul: Jared, thank you very much for joining me. And that's it for this episode. If you've enjoyed the conversation, then please follow Index Ideas and give us a rating or review on your preferred podcast app. If you'd like to get in touch with the show, you can do that via the email address
[email protected]. But for now, from me, Paul Amery. Goodbye.
