Commentary
The recent blockbuster $12.5 billion infrastructure fund purchase by BlackRock, the world’s largest asset management firm and the leading proponent of sustainable investing on Wall Street, offers another chance to revisit a pressing U.S. policy question: From a national and economic security perspective, who should and shouldn’t be allowed to own critical infrastructure assets in this country?For some time now, there has been broad bipartisan support for preventing foreign companies (even from friendly nations) from owning strategic facilities such as U.S. seaports. Watching China’s predatory Belt and Road Initiative play out in Europe and the developing world over the past decade has only served to reinforce this political consensus.
Financial investors, though, have always been viewed more favorably. As public-private partnerships (P3) have proliferated over the past 25 years because of the budgetary and other constraints of the government sector, fund managers such as the soon-to-be-acquired Global Infrastructure Partners (GIP) have stepped in to build, own, and operate countless bridges, highways, pipelines, and liquified natural gas export facilities across the United States, as well as globally.
As a rule, fund investors, by being more focused on operating efficiency, profitability, and financial return, have been perceived as being more disciplined and benign asset owners and managers.
The recent advent of environmental, social, and governance (ESG) investing on Wall Street, though, adds a new wrinkle to this previous calculus as subjective sustainability considerations (especially climate change) are now trumping objective pecuniary factors for an increasing number of financial investors, including infrastructure funds.
Since 2015, ESG has been integrated into almost every pocket of the global financial markets, including real assets and private infrastructure funds. Notably, the industry incumbent GIP, which was founded in 2006, belatedly signed up for membership in the U.N.’s Principles for Responsible Investment, the leading ESG advocacy group on Wall Street, in 2020.
For all the anti-ESG focus of late on the public equity markets and annual shareholder proxy votes, privately owned infrastructure is a much more pressing sustainability threat given that these capital-intensive physical assets, which serve as the connective tissue for the broader economy, are usually majority owned and operated, with exceedingly long useful lives.
For perspective, the average lifespan of an S&P 500 Index company is currently less than 20 years, while the new infrastructure assets now being placed into service are likely to be around for the next 100 years.
Combined, energy and transportation account for the lion’s share of the physical infrastructure underpinning the U.S. economy. Since both of these sectors are driven by fossil fuels, this places infrastructure investing squarely in the crosshairs of the ESG movement.
Given that the stated goal of climate and sustainability activists is to strand oil, gas, and coal assets and drive the energy transition away from fossil fuels—no matter what the cost or technological barriers—what’s the risk posed to the U.S. economy by infrastructure investors with net-zero targets and portfolio decarbonization goals that also have complete discretion over strategic assets such as electricity generating stations, refining terminals, toll roads, and airports? How will such climate commitments color their decisions on long-term business strategy and maintenance and replacement capital spending over the coming decades?
In the age of ESG, the concept of asset stewardship has taken on a whole new activist meaning for many investors. Simply ramping up clean energy infrastructure investments is no longer enough; there must also be a concomitant ramp-down in fossil fuels.
Helping to facilitate the latter would be the various perverse financial incentives now swirling around the markets, including the ability to generate carbon credits from non-economic activity such as keeping hydrocarbons and minerals in the ground, leaving agricultural land fallow, and blocking timberland from being cut. Government cash is also being provided to power generators that agree to shut down coal-fired plants.
All of this economic deconstruction is occurring beyond the view of the U.S. public in the less-transparent private arena.
Many infrastructure investors mean it when they pledge allegiance to the climate goals of the U.N.’s Paris Agreement and 2030 Sustainable Development Goals, neither of which international treaties were ever ratified by the U.S. Senate as required under the Constitution.
Entrusting the United States’ critical economic assets to ESG investors with an inherent conflict of interest and a clear double agenda is incredibly short-sighted and makes for bad national infrastructure policy.
Until ESG is finally flushed from the global financial system, Congress would be well advised to scrutinize financial investors (both foreign and domestic) as closely as Chinese companies whenever key U.S. infrastructure assets change hands.
At a minimum, more extensive due diligence should be performed when certain types of investors—say, a European fund manager bound by the EU Green Deal or a public pension fund in a blue state member of the U.S. Climate Alliance—engage in P3 concessions or participate in infrastructure auctions.
Things were a lot simpler on Wall Street when investors only served mammon.
