Profile: In conversation with Federated Hermes’ head of infrastructure

The current industry-wide dialogue on net zero is not “honest” or “realistic” about the nature of that transition challenge, according to Perry Noble – head of infrastructure at asset manager Federated Hermes.

Instead, he says the investment industry must act by introducing a “high level of realism into the conversation”.

For Noble, realism is a core aspect of the asset class he works with every day. Major and essential assets, such as waterworks, railways, motorways and energy grids, require years of investment and planning. This requires an honest view to be taken for the future, and the role climate change will undoubtedly play.

In the frankest sense, Noble believes that anybody managing money on behalf of institutions “should now be thinking in a sustainable manner”.

The transaction lawyer turned infrastructure investor has 28 years of industry experience, notably overseeing essential infrastructure projects.

The nature of such essential services has left an impact on Noble, who now “finds it difficult to believe that not everybody is an advocate for sustainability”, owing to his tenure overseeing numerous infrastructure projects. There is a tangible connection between infrastructure and the institutionalised pivot towards ESG strategies, he says, owing to the way infrastructure assets “touch a lot of points from a societal perspective”.

ESG now, net zero later

While Noble is quick to acknowledge the rapid uptake of sustainability-linked thinking within the investment industry, he says the “ESG conversation” has already created a “dynamic impact” in how the investment industry operates. A similar shift regarding net zero will come later.

He notes the newly prominent “recognition of the social contract implicit in the licence to operate” elements of essential infrastructure, and how that has resulted in an industry that is more heavily scrutinised from both a societal and regulatory standpoint.

“When I first came into infrastructure, it was regarded as a very dumb asset class,” he tells Net Zero Investor. “It was below the radar. We would call it dumb because we weren't over-reliant on management teams because of the nature of the asset and the regulatory framework.

“That is no longer the case. It is a very dynamic environment. We are heavily scrutinised, and we have high expectations of ourselves.”

As such, regulators are “all over us”, says Noble, while public awareness through news cycles and social media has increased that scrutiny.

But, currently, that scrutiny broadly falls into the ESG camp rather than on net-zero efforts, yet this will inevitably change as net zero becomes pivotal. For infrastructure investors such as Noble, this represents greater scrutiny from investors, regulators and the wider public.

Concrete and cognition

Predictably, difficult compromises will have to be reached ahead of the transition to net zero. Noble points to the substantial need for concrete within new and expanding infrastructure projects as one contentious matter that may prove to be a headwind for investors. Research by the Global Cement and Concrete Association forecasts global demand for contrate to increase by more than a third by 2050.

It is “inevitable” that new infrastructure technologies and assets will “require us to make some more concrete, which is ironic given the extent to which concrete is responsible for emissions,” Noble says. On the flip side, smarter digitised infrastructure “must be part of the solution,” allowing for more assets to be retrofitted to high sustainability standards.

“You can use technology to enhance existing infrastructure without necessarily replacing it, and that should always be the first thing you attempt to do before you dig another hole,” says Noble.

But in that conundrum lies one of the most decisive elements of the transition to net zero – behavioural change.

Factors such as reducing the amount of concrete used in the construction of new projects “have a role to play”, Noble says, but encouraging invested businesses to take the onus when it comes to consumption is becoming central to ESG and net-zero efforts.

There needs to be “high-level change” in the behaviour of invested businesses, Noble adds, a factor he views to be on par in importance with new investments in different businesses.

“We encourage our businesses in which we're invested to be as equally concerned with reducing consumption and encouraging consumers to reduce their consumption as they are with building yet more kit,” he says.

Steering the conversation

While current efforts on ESG have spurred investors to adopt new behaviours, the real challenge will come when the need to kickstart the transition to net zero becomes vital, Noble says.

“Once you transition, everything will be fine, but that transition is everything. That means being honest and realistic about where we're starting from, where we need to get to, and what levers we're going to pull to achieve it,” he adds.

But the need to be forthright and honest about the transition to a green economy is paramount, Noble says, and a culture of embedding difficult conversations into the funding and utilisation of infrastructure assets must emerge to facilitate the transition to net zero.

In light of issues currently being faced by the energy and water sectors, investors can drive meaningful dialogue on how these companies operate, he says, but investors and consumers alike “can’t afford to lose net zero in that conversation”.