Institutional investors are particularly focused on the ESG credentials of lenders’ distribution transactions, according to Hanley.
“If we turn up with a project and are exploring distributing, say, £50 million, one of the first questions they will ask is ‘what are the ESG credentials of the project?’. If it is, say, a waste plant creating noxious plumes of smoke in the English countryside then that will be a very short conversation, whereas if it is a project that is well thought through, has good sustainability and environmental credentials, then you are into a different conversation, so the institution market, from what I can see, is driving a significant change in the pattern of behaviour,” he said.
Frew said that some prospective investors in infrastructure may want to consider a reorganisation of their corporate structures to ringfence part of their business as a venture capital arm that can pursue higher risk opportunities in relation to modern methods of construction or new technologies. She also said that, in the case of new low carbon technologies specifically, consolidation in the market could provide “balance sheet support” and encourage investment.
According to Frew, low carbon technologies are often developed by small companies with small balance sheets, and this can dissuade potential investors from investing in new technology due to how they perceive the balance of risk and reward. If those providers are acquired by larger businesses, this could give prospective lenders greater confidence over the viability of the technologies and enable related infrastructure projects to go ahead, she said.
Workman said financing solutions had previously been found for the problem of small balance sheets behind new technology in the waste management industry.
“Some of the technologies that were being used in the waste management industry, the balance sheet was just far too small,” Workman said. “Fortunately, a large proportion of those were then corporately financed rather than project financed. That allowed some of the bigger waste operators to take a view as to how they would wrap the technology within the construction. In some instances, it was proven technology for them, and they had used it for a long time, so it was easier to do that. The private sector then, in its capacity as a corporate financier, became a non-commercial lender, which was an interesting model at the time.”
Public finance is needed to catalyse investment from commercial lenders in the ‘cleantech’ infrastructure projects required to decarbonise the global economy, according to Hanley.
Hanley said commercial lenders are likely to limit their investment in new low carbon technologies until those technologies have been “well established and proven”. He said governments and development banks have a “hugely important” role to play to support those technologies through to the point that they are “investable” more widely.
“As a commercial lender we prefer to look at tech that is proven and has an established track record rather than taking technology development risk,” Hanley said. “We have seen a number of projects across the jurisdictions we operate in which have had innovative new technology, or new configurations of pre-existing technology, which simply have not worked. That comes at a significant cost to the sponsors and the lenders when it all goes horribly wrong.”
“For the emerging technologies to support the energy transition, we are looking to development banks, such as the EIB and the UK Infrastructure Bank, as these are the institutions that should be offering support. If the government is serious about transforming the economy away from a carbon-based economy to a ‘net zero’ economy then the technology will need to be supported for three-to-five-to-10 years until they are well proven and well established and then they will become investable from a commercial project finance perspective,” he said.
