A tale of two pensions lays bare infra’s challenges

New York was not one of a handful of key swing states that played a role in deciding the US election for Donald Trump on Tuesday, so not too much focus has been placed on the Big Apple.

Infrastructure managers, though, might want to turn their attention to the Empire State, following a recent move by New York City comptroller Brad Lander to ban three of the city’s pension funds – the New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York and the New York City Board of Education Retirement System – from committing to private equity and infrastructure funds that invest in midstream and downstream energy infrastructure, such as pipelines, LNG terminals, and gas-fired power plants. The systems are all overseen by the NYC Bureau of Asset Management.

The move has significant repercussions for both the Bureau of Asset Management as an LP and for the managers it invests with. Much of the capital committed through those retirement systems has headed to infrastructure’s premier managers, such as Global Infrastructure Partners, a part of Blackrock, Brookfield Asset Management, KKR and Stonepeak. Beyond the significance to the GPs, it’s an interesting move in an era where energy security has dominated the conversation.

Granted, NYC BAM’s head of infrastructure Petya Nikolova told Infrastructure Investor earlier this year that she wants to diversify those systems’ portfolios towards more mid-market funds anyway. But there will still need to be a fair degree of filtering within that space to adhere to the new conditions – and that’s before one considers Nikolova’s comments that she still struggles to see many energy transition funds that display true infrastructure characteristics.

The onus is now on the NYC pensions to find the mid-market funds without fossil fuel exposure or find the transition funds that fit the bill.

A sideways look to Europe suggests that might be easier said than done. ATP, Denmark’s largest pension fund with DKr 712 billion ($103.5 billion; €95.5 billion) in AUM, has been struggling with its own transition plans, which in 2021 envisaged getting to DKr 200 billion of “green investments” across asset classes by 2030. CEO Martin Præstegaard has cooled on that goal after facing headwinds in direct investments in Swedish battery manufacturer Northvolt and Green Hydrogen Systems.

“It has clearly become more difficult to work with climate ambitions, and we’re not going to do stupid financial things to achieve them. We need to ensure good pensions and then we’ll see how the market for green assets develops,” Præstegaard told Danish outlet FinansWatch last month.

Præstegaard attributed the U-turn to rising interest rates, which made capex on green projects more challenging, in addition to “hype” that “expectations of future demand were built up, but these have yet to materialise”. ATP’s green investments “goal” has now been downgraded to an “ambition”, according to Præstegaard.

Obviously, there is a middle ground between NYC BAM having to tilt its infrastructure portfolio away from its current makeup and the troubles in the energy transition sector being experienced by ATP.

However, the challenges both schemes face pose a challenge for the asset class itself: how far should LPs go in driving decarbonisation? Can LPs walk before running on climate, while also achieving fiduciary success? And what solutions can managers offer to help infrastructure LPs struggling to find the right transition solutions?

A warming world awaits.