The managing director of asset management at Omers Infrastructure, admits that for investors in UK utilities “life was much simpler in the past”.
He laughs as he goes on to say: “Of course, it wasn’t easy then! But it’s much more complex now.”
For Omers, a pension fund for municipal workers in Ontario, Canada with infrastructure assets of $22.1 billion under management globally, there is now a clear expectation that its investments will be a force for good. The company states its ambition to embed Environmental, Social and Governance (ESG) principles across its investment analysis and in partnership with management teams across the firms it backs.
McNicholas acknowledges that the term ESG has become somewhat saturated over the past few years and that “the danger is it has become a must-have badge”. He adds that Omers is open about the fact that embedding ESG is a long-term process.
“We have been clear in our ESG framework that there are critical elements under environment, social and governance where we need to up our game and make sure our assets are upping their game too. We look at each asset in our portfolio and how and where we are scoring. That’s changing all the time – what was good five years ago isn’t going to hit the mark in five years’ time.
“We look forward, what are the trends and imperatives that are coming up and how do we position our assets and our investment thinking for long-term, sustainable growth and success?”
McNicholas sits on the boards on both SGN and Thames and says that part of his role is to develop those conversations about investing in social value.
The framework for discussing the response to climate change differs between Omers’ investment in UK utilities, however.
“The challenges for SGN and Thames are almost diametrically opposite, in that one has a long-term, critical, clear need to be there and it’s not critically impacted by net zero, but it must play its part. Whereas you could say SGN is existentially impacted by net zero.”
McNicholas insists Omers sees this as an opportunity as opposed to a threat, with the potential to be in the vanguard of a transition to green gas.
He points to the H100 project, where the gas distribution network is creating a green hydrogen-to-homes heating network on the Fife coast, as an example of SGN taking a lead on decarboniation.
“There is a whole public information piece around hydrogen, to explain it and reassure people. The H100 project is a super example of exactly what we need there.”
Meanwhile, Thames continues to grapple with the challenge, faced by the whole water sector, of decarbonising its operations by the end of this decade.
McNicholas says: “The bigger issue is around addressing the infrastructure needs so we ensure long-term delivery of safe and clean drinking water for our capital but also the environmental issue of treating that water.
“We need to get the industry and all stakeholders to net zero on pollution as well as on carbon.
“It’s the responsibility of all stakeholders to think about how we are going to deliver these services in the future at the lowest cost but in a way that the resilience and reliability is assured.”
But McNicholas stresses that “utilities can’t do this alone” and ultimately “net zero needs a policy response”.
“The old model of incremental innovation and incremental investment is not going to get us to net zero in 25 years. You look at the journey offshore wind has gone over the past few decades and it’s great but we have to go much faster and be even more ambitious.”
This comes down to creating the right investment framework where long-term capital, as opposed to “high risk / high return” venture capital is incentivised to back emerging renewable solutions.
“It cannot be about winners and losers. There has to be a solution where there’s a balance of outcomes and everyone is appropriately recognised and rewarded for it and customers are not left picking up an unfair share of the costs. There is so much ‘good capital’, long term responsible investors, out there looking to invest in the right projects that I think that’s eminently achievable.”
McNicholas says the UK regulatory model for critical infrastructure has been world leading and driven “phenomenal” efficiencies.
However, he adds: “There’s a general sense that we now need to consider the right regulatory model for the next phase. How do we equip regulators to achieve the same ambitions of the old model and deliver net zero as well?
“There is an infrastructure deficit in every modern economy, the UK is no different. How do we incentivise the capital to flow through to help solve that problem?”