June 20, 2024
Investment

Investing in the Inputs | Chief Investment Officer


Art by James Yang

Sustainable infrastructure investing is becoming more than just owning solar and wind farms and is extending to the materials needed to build those and other large projects. It is also forcing investors and consumers to consider a circular lifecycle of products, rather than seeing outputs as a single use.

Sustainable materials are a niche sector, but a growing one, as more companies, investors and asset owners consider how to reach their net-zero carbon emission targets. This sector is also ripe for innovation as the buildings and construction sector accounts for 37% of global emissions, according to the United Nations Environment Program, with much of it coming from producing materials such as cement, steel and aluminum, which use high heat in their processes.

There is also a push for more infrastructure development globally, both in the U.S. with the Inflation Reduction Act encouraging the buildout of sustainable infrastructure, and in Europe with the REPowerEU initiative, as the continent intensifies its efforts to build more clean energy infrastructure.

Even so, there is a gap in global infrastructure spending, says Dan Abbassi, principal at investment manager Douglass Winthrop Advisors, who oversees the firm’s sustainable equity strategy. Last year alone total global infrastructure spending was $2.9 trillion, but the world needs $3.4 trillion, he says, citing the G20’s Global Infrastructure Outlook. If that trend continues, the spending shortfall will be $15 trillion over the next 15 years, he says. As these projects are built, sustainable design may become more important.

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There are public and private ways to invest in sustainable materials, and experts say institutional investors should think broadly about the space, looking not only at materials companies, but also those firms focusing on resource efficiency and specialty chemicals to reduce carbon emissions across the supply chain and in outputs.

Greening Cement

Manufacturers are making strides in reducing the carbon emissions from cement, which is made by firing limestone, clay and other materials in a kiln. The energy used to heat the kiln and the chemical reaction produced by the mixture causes carbon emissions.

Christian Hernandez, managing partner in venture capital firm 2150, part of multi-strategy asset manager Urban Partners, which focuses on sustainability in urban areas, says in 2020, only about 10 firms were working on reducing cement emissions, but now there are around 80 companies in various stages of development attempting to green cement.

The first cement company investment for 2150 was in CarbonCure, which injects captured carbon and mixes it into cement. Hernandez says 2150 invests in later-stage private companies with the ability to scale. Another 2150 investment in sustainable concrete is Biomason, which uses microorganisms to build concrete and cement, mitigating 95% of carbon emissions when compared to traditional methods.

Investing in truly green cement producers in the public equity sphere is limited, says Pascal Dudle, lead portfolio manager for Vontobel Asset Management’s global environmental change and global impact equities strategies. Dudle says he prefers to own specialty chemical companies that are working with cement and concrete producers to lower their carbon footprints. His funds own Linde, which works with CarbonCure, to trap carbon in cement. He pointed to another specialty chemical company as an example, Sika AG, which he does not own, which is using additives to reduce cement consumption, clinker content and water use in cement mix. Clinker content, which is over half of cement’s carbon emissions, is produced by the chemical reaction of heating ground limestone and clay. is

Improving Energy Efficiency

Using sustainable materials during new infrastructure construction lowers embodied carbon because the materials use less carbon during the manufacturing process, Hernandez says. However, the best way to lower a building’s embodied carbon, the emissions associated with a structure’s materials and construction process, is to retrofit existing infrastructure to improve its energy efficiency, he adds.

Dudle concurs. “When you live in buildings, that’s almost a bigger part of the emissions because you can live there for decades,” he says.

One of 2150’s companies in the energy-efficiency space is Aeroseal, which uses a non-toxic formula to reduce ductwork leaks and can be used around the building envelope to seal air leaks.

Dudle says making buildings more efficient also includes improving building automation, and there are several publicly traded companies in this space, including heating, ventilation and air conditioning companies Carrier and Johnson Controls, both of which he owns.

Investment Limits

While manufacturers are making some strides in greening building materials, reducing carbon in other sectors remains difficult. Hernandez says 2150 has not found a suitable green steel investment yet, saying much of the technology is still in the research phase or requires significant government subsidies to build and  is difficult to scale. “We’re still struggling on the steel side,” he says.

Publicly traded steel producers have started a few projects, but it’s not part of their core output. Linde announced in May it will supply industrial gas to Sweden’s H2 Green Steel, which is being supported by debt and equity financing, including EU subsidies.

Some larger steel companies, such as ArcelorMittal and Cleveland-Cliffs, are also working on projects to reduce carbon emissions at individual steel plants. Neither company returned requests for comment on the topic.

Recycling and Reuse

The growing field of circular design considers the entire lifecycle of a product so it can be reused, rather than a single-use product that is eventually thrown away. Reusing and recycling products are critical to reducing total carbon emissions.

Dudle points to a subsidiary of waste management company Clean Harbors, Safety-Kleen, a re-refinery and recycler of used oil, as an example. The company creates lubricants out of spent oil.

Andrew Siwo, director of sustainable investments and climate solutions at the $248.5 billion New York State Common Retirement Fund, says the state’s Climate Action Plan has a $40 billion sustainable investment goal, including investments in green infrastructure and resource efficiency, which involves making the most of available natural resources.

One of the pension fund’s investments is Nordic real estate manager NREP, also part of Urban Partners, which focuses in part on reducing the carbon footprint of new construction by repurposing and reusing previous construction materials, including concrete from construction and demolition projects, windows from abandoned buildings and wood floors.

Reusing these materials sharply cuts the amount of new raw material for new projects, the quality is equal or even better, he says, and it makes permitting easier since reusing material helps NREP meet environmental standards.

“This is not being done just because it makes the world a better place. There is a business imperative as well,” Siwo says.

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Tags: 2150, Andrew Siwo, Christian Hernandez, construction, Dan Abbassi, Douglass Winthrop Advisors, Inflation Reduction Act  of 2022, Infrastructure, New York State Common Retirement Fund, NREP, Pascal Dudle, REPowerEU, Urban Partners, Vontobel Asset Management



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