How infrastructure can protect against inflation

Pension funds are increasingly looking to sustainable investment in infrastructure as protection against inflation

Infrastructure is an asset class that can help protect against rising inflation and interest rates. 

That was the clear message at the Local Authority Pension Fund (LAPF) Strategic Investment Forum in London in February. The UK forum is one of the leading industry conferences for senior local government pension scheme (LGPS) fund managers and their advisers to discuss the issues that matter.

With our extensive experience as a partner to 60 of the LGPS across our Real Assets Platform and more than 80 LGPS across the Firm, BlackRock joined a panel of industry experts (Source: BlackRock, 31 December 2021).

Rising inflation was high on the agenda as the Panel discussed infrastructure investment as a way to mitigate inflation’s potential to erode values. It is one of the many reasons why infrastructure is becoming more important to LGPS funds looking for a steady return in the current economic climate.

Inflation is the number one topic

Infrastructure assets suit Local Government Pension Schemes due to in-built, long-term revenue contracts, typically of 10-20 years. These often have an explicit link to inflation through long term contractual offtake and concession agreements.

They tend to perform better than most asset classes in an inflationary environment. Pre-contracted revenue streams are particularly advantageous. 

It’s not uncommon for infrastructure assets to have fixed expenses, such as operations and maintenance contracts.

Meanwhile, construction cost inflation can increase the capital value of existing assets as new assets becoming increasingly expensive to build. That, in turn, has a knock-on effect on the value of more mature assets.

Moreover, since inflation reduces the real burden of debt and fixed interest payments, it can help borrowers at the expense of lenders. 

Sustainability, too, presents an unprecedented opportunity for infrastructure investment – boosted by last winter’s COP26 in Glasgow, UK Government investment in green infrastructure projects and, of course, the well-documented global upsurge in demand for future proofed, ESG aligned infrastructure investments.

Large amounts of global greenhouse gas emissions come from real assets construction and operations such as power plants, buildings and transport. 

But now, owners of existing infrastructure assets have increasing obligations as well as incentives to decarbonise. Importantly, this presents a significant investment opportunity not only to invest in clean, sustainable climate infrastructure assets, but a need to decarbonise and improve existing infrastructure assets which are essential to the functioning of modern society. Decarbonisation is a journey that will require direct capital from institutional investors across the full spectrum of infrastructure assets.

Infrastructure for a lower-carbon future

Last year, BlackRock established one of the world’s largest investment funds dedicated to renewable energy. Funds totalling just under $5 billion are targeting renewable energy and climate infrastructure assets that will generate around 11 terawatt hours (TWh) of clean energy per year. (Source: BlackRock, December 2021)

That is enough energy to power 50 million homes. It will avoid 68 million metric tonnes of carbon dioxide emissions and create more than 25,000 jobs in construction and operation.

In the UK, BlackRock via its global infrastructure platform is backing the development of H2NorthEast, a blue hydrogen production facility in Teesside in the north-east of England, a £1 billion project that could create around 100 long-term operational jobs together with approximately 400 jobs during construction and significantly more in the supply chain, and reduce carbon emissions by 2 million tonnes of annum. H2 NorthEast is being developed in response to customer demand and is in line with the UK government’s strategy to create a hydrogen economy and would contribute 20% of the government’s target of 5GW of blue hydrogen capacity by 2030.

The attraction of infrastructure as an asset to protect against inflationary pressures is clear to see. And with the rise of ESG, sustainability is non-negotiable.

Why BlackRock?

BlackRock is a trusted partner for more than 1,000 UK pension schemes, including over 80 Local Government Pension Schemes. Our Real Assets investment team manages around $68 billion of capital globally split 50/50 between infrastructure and property. (Source: BlackRock, 31 December 2021)

Our extensive experience of working with Local Government Pension Schemes across their entire Real Assets portfolio, Infrastructure and Real Estate, Equity, Debt and Listed Securities, supported by over 430 professionals and a dedicated LGPS Relationship Management Team, gives confidence that we have the experience and skills required to help the Scheme’s achieve their objectives.

Stuart Wright
Director, BlackRock Alternatives Specialists, EMEA