2023: A crossroad for Infrastructure Investments

Europe is leading the change towards net-zero, creating unique investment opportunities in clean energy and green infrastructure.

Other major trends continue to stimulate the demand for these inflation-resilient assets. What can be anticipated for 2023, and what part will Luxembourg play?

Europe’s move towards net-zero emissions drives clean energy investment

The humanitarian crisis in Ukraine has continued to present risks to businesses and economic activities globally. This situation, together with growing turmoil from fluctuation in commodity prices and foreign exchange rates has driven a short increase in volatility across markets.

This crisis is also expected to permanently change the energy infrastructure as the EU and its member states seek energy self-sufficiency and aim to reduce their dependence on importing gas from outside Europe. Infrastructure managers continue to face pressure to enhance their environmental, social and governance commitments, driven by an increasing demand from investors and a series of global and European regulations towards a favorable environment for investment in clean energy, and transition to a Net-Zero world (emissions need to be reduced by 45% by 2030 and reach net zero by 2050)¹.

Thus, increased investment in renewables, particularly within Europe, is expected to help decrease the dependency on Russian-supplied gas and oil, which has been a long-term goal for many European countries.

The Impact of Renewable Energy on Green Infrastructure Investment Strategies

As highlighted in COP27, governments are requested to revisit and strengthen the 2030 targets of their national climate plans by the end of 2023, to accelerate efforts towards the phasedown of unabated coal power and phase-out inefficient fossil fuel subsidies. In this view, green infrastructure funds focus on investing in renewable energy, electric vehicle charging, and energy efficiency projects – raising significant funds to accelerate investments in this space.

Digital Infrastructure: A path to sustainable development and resilience

Another trend shaping Infrastructure investments is the ongoing rise of public demand for digital and smart infrastructure.

The World Economic Forum has been advocating for an inclusive, secure, and equitable digital infrastructure for the world for years, and private investment in this area can help build the foundation for shared global infrastructure. Asset managers are also keen to align their investment thesis with EU’s Digital Decade policy program², with concrete targets and objectives for 2030.

According to Infrastructure Investor data, digital assets accounted for 31% of total asset class fundraising, the highest share on record³. This developing interest in digital infrastructure has been supported by headwinds in growing digital infrastructure needs namely, data centers, fiber optic network, servers. With the United Nations projecting that two-thirds of the world's population will live in urban areas by 2050, urbanization is also expected to stimulate the high demand in technology and digital assets, as well as broader smart city projects.

Inflation-resilient Infrastructure: A stable return in uncertain times

The current inflationary backdrop may provide a positive push to infrastructure fundraising, as these assets often have longer-term inflation-linked contracts. This acts an attractive hedge that helps outperform global stocks and bonds returns during inflationary periods. The demand for investments in infrastructure assets, because of their ability to pass along inflationary costs, is expected to increase in the short-term.

Luxembourg, as a leading cross-border hub for alternative funds, offers a wide range of infrastructure fund products for investors. The country has seen a raise in the establishment of infrastructure funds, managers, and investment platforms, which is expected to continue in 2023.⁴