DWS - Mon, 01/31/2022 - 06:00

Infrastructure Strategic Outlook 2022

In a nutshell:

  • Decarbonisation policies and technological change are reshaping the economy and the outlook for infrastructure investment, broadening the investment pipeline, and providing an opportunity for alpha generation in a market environment characterised by increasing medium-term volatility risk.
  • Infrastructure fundraising continues to grow, with thematic and sustainability-linked strategies emerging beyond traditional core and core plus. As the infrastructure investment landscape broadens, investors seek more sophisticated strategic asset allocation and portfolio construction processes.
  • Infrastructure deal volumes continue to recover, as renewables, digital and emerging infrastructure sectors accelerate. Return expectations remain supported by comparatively favourable entry valuations.

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1 / A Profound Economic Transformation

Economic Transition: As the global economy recovers, the effects of the pandemic continue to weigh on the outlook amid supply-demand bottlenecks, with the risk of new Covid variants jeopardising growth. Fiscal and monetary policy have played a central role in supporting the recovery but may have also increased vulnerabilities, with higher debt and asset prices contributing to an uncertain outlook for inflation, interest rates and return expectations in the medium term. Despite the risk of a more volatile and divergent economic environment, Covid-19 is acting as a catalyst for a deep social and economic transition converging on decarbonisation, technological change, and sustainable growth. With infrastructure at the centre of this transformation, these three trends are anticipated to provide investors with more opportunities for alpha generation. Decarbonisation Accelerating: Decarbonisation has become the world’s third largest economy, behind the U.S and China, with annual investments in excess of USD 5 trillion or 4.5% of world GDP by 2030.1 At the COP26 Climate Change Conference in November 2021, several governments announced ambitious initiatives to reach net zero emissions, but these pledges would limit global warming to 1.8°C, a level still above the Paris Agreement target of 1.5°C.2 Therefore, in the medium term we anticipate policy commitment to grow, contributing to an even wider infrastructure investment gap.

Annual Nominal GDP By Country And Size Of Investment Needs To Achieve Net Zero Emissions


Source: DWS, IEA “Net Zero by 2050”, IRENA “World Energy Transitions Outlook: 1.5° C Pathway”, as at October 2021. Notes: F = forecast, E = expected. There is no guarantee the forecast shown will materialise. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. 


Climate financing is increasingly at the top of the policy agenda across mature and emerging economies. Governments are allocating a substantial share of their recovery packages to climate change mitigation policies to decarbonise energy and transportation. However, with public debt reaching new highs across both advanced and new economies, private capital is expected to contribute materially to decarbonisation. Therefore, although we anticipate increased flow of public investment in traditional infrastructure sectors supported by Covid-19 recovery packages, we also expect an increase in the use of Public-Private-Partnerships (PPPs).

In the United States, the Infrastructure Investment and Jobs Act is expected to deliver USD 550 billion of new investments into infrastructure projects over the next five years.3 The E.U. is expected to dedicate at least 37% of the EUR 750 billion recovery fund to green investments.4 Moreover, the E.U. is progressing with a roadmap to introduce an extensive package of new directives and regulations labelled EU ‘Fit for 55’, anticipated to drive a further acceleration of decarbonisation in Europe.

The E.U. reform proposal includes an expansion of the existing EU Emission Trading Scheme (ETS). The proposal aims to accelerate decarbonisation objectives, extend the scope of the EU ETS to include the shipping sector gradually from 2023, and to gradually phase out free allocations for the aviation sector by 2026. The EU Commission also plans to regulate road transport and building emissions through a new, separate trading system anticipated to come into force by 2026.5 Over the past decade, the EU ETS has contributed to a partial coal-to-gas switch for power generation. The recent reform proposals have contributed to expectations around a material acceleration of energy transition policies and higher power prices in Europe, with carbon emission pricing exceeding EUR 79/tonne in December 2021 (from EUR 32/tonne in January 2021),6 and long-term renewables power purchase agreements (PPAs) exceeding EUR 60/MWh (from EUR 38/MWh in December 2020), as investors focus on hedging against the risk of power prices increasing further.7

The last decade was marked by an initial shift from thermal power generation to renewables. We anticipate the pipeline for large-scale renewables to expand, as renewable energy increasingly achieves grid parity amid higher power prices, with developed markets continuing to lead in terms of investment volumes, supported by a comparatively mature regulatory framework. However, we expect distributed generation and small-scale renewables to form an essential part of the pipeline over the coming decade. Regulation supports small-scale renewables through a range of measures, such as feed-in-tariffs, tax reliefs and grants that vary by country. This supports the installation of rooftop solar and energy efficiency technologies including smart meters, battery storage, efficient boilers, and the electrification of heating and cooling systems.3

Pipeline Of Renewable Energy Projects (Global, Number Of Projects)


Source: Inframation, as at November 2021. For illustrative purpose only. Past performance is not a guide for future results.

Technological Innovation: Ambitious decarbonisation policies, stronger public investment and robust renewables growth will not be sufficient: achieving net-zero emissions may require more significant transformational changes and larger investments in sectors spanning from transportation to industry, with the adoption of innovative technologies and private capital playing a pivotal role. Covid-19 appears to have accelerated the adoption of digitalisation and innovative technologies. Technology is contributing to a reshuffling of the structure of our economies and changing the way consumers and industries operate. Importantly, technology is contributing to the emergence of sustainable, low emission solutions expected to play a pivotal role in achieving net zero, with digital infrastructure, battery storage, transport electrification, new mobility services, green hydrogen solutions, smart cities, logistics automation and decentralised water services at the centre of the development of a new economic platform and innovative business models. As new business models emerge, the competitive environment is changing, with transportation companies, utilities, Oil & Gas companies, new entrants and even telecom companies aiming to capture a share of this rapidly evolving market.

In our view, private infrastructure investors will play a central role in providing the capital needed to support the transition to a greener and more innovative infrastructure platform, with transaction volumes in emerging infrastructure sectors already showing signs of growth. As emerging technologies and business models gradually mature further, we anticipate growing interest from private infrastructure investors in emerging infrastructure sectors, a broadening of the investment pipeline, and more strategies focusing on the small and lower-middle end of the infrastructure market, where the pipeline for these opportunities is anticipated to be stronger. Emerging infrastructure sectors are likely to offer an opportunity for alpha generation, platform strategies and capital appreciation, but also will likely be exposed to higher volatility and an initial lack of historical return track-record. As a result, we anticipate investors will increasingly focus on portfolio construction and diversification.

Emerging Private Infrastructure Sectors - Transaction Volume (Global, EUR Billion)


Source: Infranews, as at November 2021. Past performance is not indicative of future results.

Beyond emerging investment opportunities, technological change will, in our view, also create a base for implementing value-enhancing asset management initiatives and for improving the sustainability profile of existing infrastructure assets. For example, public transportation may benefit from electrification of bus fleets to reduce emissions, sensors to improve asset efficiency, and digital connectivity solutions to integrate with smart city multi modal transport.

Sustainability and Infrastructure: Infrastructure plays a pivotal role in the achievement of a more sustainable global economy. The UN Sustainable Development Goals (SDGs), established by the UN General Assembly in 2015, introduced 17 global objectives that include climate action, but are more broadly focused on an inclusive improvement in quality of life around the world. Infrastructure, either directly or indirectly, influences the attainment of the Sustainable Development Goals (SDGs), including 72% of the targets.8 SDGs are increasingly contributing to orientating policymaking and private investors’ capital allocation decisions. Even though most efforts and capital flows have historically focused on investment in renewable energy, we now observe stronger policy making and private capital focus in supporting emerging infrastructure sectors that will play an essential role in supporting SDGs. For example, water security has been widely identified as one of the major global risks, with UN’s SDG 6 aiming to ensure access to safe water sources and SDG 14 focused on safeguarding ocean and marine resources sustainability. Over the next 30 years, an estimated USD 6.7 trillion may be required just to upgrade ageing water infrastructure across OECD markets and sanitation for all by 2030.9 With technological innovation in the form of new decentralised water supply and treatment systems offering innovative solutions for the provision of water and wastewater sanitation services, we anticipate strong focus from policymakers and private capital in supporting governance frameworks enabling the financeability of innovative water infrastructure projects.

Over the coming decade we anticipate the adoption of innovative infrastructure technologies to play an unparalleled role for the achievement of several key SDGs, requiring a considerable investment flow into supporting infrastructure such as small-scale renewables, battery storage, transport electrification, green hydrogen infrastructure, carbon capture, alternative fuels, energy efficiency services, or advanced recycling. In our view, these emerging infrastructure assets tend to be outside of the traditional remit of public investment; however, as these technologies mature further, and regulatory and contractual frameworks standardise, we anticipate private infrastructure capital to play a pivotal role in providing investment needed to contribute to the achievement of key SDGs.

Examples Of Emerging Infrastructure Investment And United Nations Sustainable Development Goals


Source: DWS, as at December 2021. This information is intended for informational purposes only and does not constitute investment advice, recommendation, an offer or solicitation. Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect.

1 IEA, “Net Zero by 2050”, May 2021.
2 Bloomberg, “Top Energy Agency Says COP26 Pledges Signal 1.8°C of Warming”, 4 November 2021.
3 Reuters, “Biden signs $1 trillion infrastructure bill into law”, 16 November 2021
4 Reuters, “Germany to spend 90% of EU recovery money on green, digital goals”, 27 April 2021.
5 European Commission, “European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions”, 14 July 2021.
6 ICE, December 2021.
7 Pexapark Euro Composite, 29 November 2021.
8 University of Oxford, “Infrastructure needed to achieve 72% of Sustainable Development Goal targets”, 2 April 2019, citing Nature Sustainability, “Infrastructure for sustainable development” (2019).
9 ECD, “Principles of Water Governance”, June 2015.

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