Academic Brett Christophers has warned that governments’ attempts to outsource the response to climate change to asset managers, such as those at Blackstone and Brookfield, will have damaging consequences.
Christophers, who recently published Our Lives in their Portfolios, told City A.M. that “the infrastructural response to climate change both in terms of mitigation and adaptation is essentially being outsourced by governments to the private sector.”
In recent months, governments around the world have attempted to scale up their response to climate change – with the Inflation Reduction Act (IRA) in the US being the most prominent example.
In the UK, the Labour party has touted for its own £28bn Green Prosperity Plan and shadow chancellor Rachel Reeves has expressed her admiration for the IRA and ‘Bidenomics’.
But, as Christophers points out, “to the extent that the public expenditures are involved it is about catalysing and subsidising private expenditures rather than investing in publicly owned assets.”
In particular, governments are turning towards asset managers to act as the “hub” of private sector investment against climate change.
Christophers warned that asset managers in particular are about as “unsuitable as you can get amongst private sector owners” for combating climate change. He suggests the negative consequences of the privatisation of infrastructure are “particularly marked” in the case of asset managers.
Although asset managers claim to invest for the long term, Christophers noted that many investment funds are closed-end funds. These funds are only committed for a fixed period of time, typically around 10 years, before the money is returned to investors, ideally with a profit.
Within this framework, there is little incentive for asset managers to invest in an asset if the benefit will only be felt after the end of the fund’s lifetime.
Instead Christophers argues that “asset managers are buying these assets not to hold them but specifically to sell them.”
In the book, Christophers points to a range of examples around the world where assets are sold at a dizzying pace with each sale netting the asset manager a healthy profit.
While the asset is held, the managers cut costs and hike rates in order to generate a stable income stream.
As Christopher said, “the general tendency one sees with asset managers as owners is a concerted effort to lift rents or rates as far and as fast as possible while minimising the costs associated with owning and maintaining the infrastructure.”
In short, they are incentivised to be “ruthlessly extractive”.
This trend isn’t going anywhere, Christophers argues. Infrastructure is a good hedge against inflation, making it an attractive investment proposition in a world where inflation remains stubbornly high.
While higher interest rates might make it more difficult to secure bank financing for big infrastructure deals, Christophers points out that investment funds are increasingly providing the finance themselves.
“In a sense, they’re disintermediating the banks in terms of the debt financing of these leveraged buyouts of infrastructure,” he said.
“While inflation remains high, even if that means as it does higher interest rates, you’re likely to continue to see institutional investors and their asset managers maintaining high proportional investment allocations to infrastructure and residential real estate to serve as a hedge against inflation,” he concluded.