How Infranode is navigating sustainability and ESG in digital infrastructure

Maria Tunberg:

Welcome to the Analysys Mason podcast. My name is Maria Tunberg and I'm a partner at Analysys Mason. During this series of podcasts, we will be joined by business leaders from across the TMT landscape to hear their insights on sustainability, ESG and what it means to them, their organisation, and the wider industry.

Today, I'm delighted to be joined by Max Engardt, Senior Manager of Asset Management at Infranode. Max has been with Infranode for three years, and prior to that, he supported the executive management and board at Swedish telecoms and mobile network operator Telia, where he was also responsible for the fibre-to-property market business.

Infranode is an investor platform that invests in essential infrastructure projects within the Nordic region. The goal of Infranode is to create long-term value for investors and society through responsible and sustainable ownership and management. The focus of their infrastructure investing is within energy transport, digital and social infrastructure sectors, and they partner with both the private and the public sector to create stable, predictable returns.

A warm welcome, Max. It's really great to be talking with you today.

Max Engardt:

Thank you, Maria. Likewise, great to be here and great to have this important conversation.

Infranode's approach to ESG and sustainability

Maria Tunberg:

So Max, could you please start by telling us a bit about the ESG and sustainability ethos at Infranode?

Max Engardt:

Absolutely. Very happy to do that. I mean, in essence, it's integrated into everything we do as fund managers and as owners and as investors, and it's truly been with us from the beginning when we started Infranode around 10 years ago. I didn't start Infranode, but when Infranode was started 10 years ago. And when we look at potential investments, we look at where we can drive change and make a sustainability impact and transition together with our partners. And also, once we've done investments, we're truly active owners, and sometimes we actually push quite a bit in the boardroom and with our co-owners, so we really take an active owner role in our investments.

Then there's nuances in who's engaged in what across the company. So personally, I'm very engaged in health and safety. I think that's a very, very important topic and something I feel... Again, this is my personal view, but something that you can really make a big difference with setting the tone from the top and really always stating that healthy comes first. And I think also, to add a bit on that, for us as infrastructure investors across many of our sectors or verticals, the business angle and the ESG angle, they very much go hand in hand.

We do quite a lot of renewables project. That one explains itself, of course. We do electrified cranes in many of our port investments. And if we get into the topic of this discussion more on the digital infrastructure and on fibre in particular, and this I'm happy to discuss more throughout this conversation, but we think a lot about overbuild, using basically infrastructure that you have already and not building a parallel fibre network, because that's quite a lot of waste of resources the way I see it. And it's during the construction or building fibre networks that's when a lot of the emissions take place.

Aligning business and ESG goals in infrastructure investing

Maria Tunberg:

Well, thank you very much, Max. That's all very interesting. I hear you saying that sustainability is really integrated in every part of your operations or within your business, and that as you explained, you're driving this together with your partners, so the assets that you're working with. If we think about the specific sustainability strategy and policies, could you elaborate a little bit on how you at Infranode are integrating the ESG principles into the business strategy? So you said that it goes hand in hand, the business and the sustainability side, but if you put a few more words on that, how does that work at Infranode?

Max Engardt:

Yeah, absolutely, and I will try to be quite concrete here and try to answer how we look at and what we do in practise with regards to ESG across what we do. So first of all, when we look at a potential new investment, we always do an ESG due diligence where we look at a number of things. Risks is one thing. It could be climate-related risks, or again, on the health and safety side, or the net-zero perspective, which I'll get back to a bit more later.

But we do spend a fair amount of time here, and it's one of the absolute key work streams in all our investments. Also, it's not uncommon that we say no to investments based on what we find in these due diligence findings, because it's truly critical that the ESG adds up in the investments that we do. So from that perspective, it's very integrated.

And maybe I'd actually like to send that question back to you there a bit, Maria, because your team and yourself have supported us a few times on this. I mean, you've seen us work with the ESG, so I am curious to hear if you have any reflections from working with us there.

Maria Tunberg:

Yeah, absolutely. It's very interesting to see how seriously to take the sustainability due diligence part as one piece of the puzzle of the complete diligence process, and also that you say that it could actually lead to a decision to not go ahead, so really symbolising that this is a crucial part of the overall due-diligence package. And indeed, that's also what we see within other similar investors, that they take this as a very important step in the overall due-diligence process, so it's very interesting to hear you saying that, okay, so this is the first and crucial step.

After the due diligence being done, then, let's say that okay, this actually leads to a go-ahead decision. Then you would move forward. What are the next steps as you see it, from your perspective?

Post-investment ESG management and KPIs

Max Engardt:

So then we have a very robust way of working with what we call asset management, so that's basically the whole portfolio of our investments, and of course, we follow up the financials and all of that, but we truly also follow up on the ESG aspects of an investment. And what we do and what we're very proud of is that it's integrated into the same structures and into the same forums. So we have our portfolio follow-ups, which we do monthly and quarterly with a very structured process where ESG is a key component.

I think what we're doing, and we're also spending a lot of resources on getting even better at, is putting this into key people's KPIs and bonus structures and so forth, and that's where we find that it really does drive change. So when a CEO of a district heating company or a fibre network is also evaluated and steered on ESG areas, we find that he or she typically spends even more time on it, so that's a policy that we have integrated in our portfolio.

Maria Tunberg:

Well, that's very interesting. Could you say something, Max, on the learnings from developing and establishing these KPIs as a very concrete and tangible way of ensuring that sustainability aspects are integrated in the asset management?

Max Engardt:

No, I think a challenge around that is that it needs to be very measurable and action-oriented. Just as any other KPIs, it can't be just work around ESG. It has to be very, very tangible and very easy to say that, "Hey, you've actually done your job here," when the year is over.

So right now, the main focus in Infranode throughout our portfolio is developing... We've committed to working towards net-zero in all our portfolio in 2040. So now a KPI, and key focus areas for the CEOs, CFOs and the management teams in our companies is developing this roadmap, and that is a typical KPI that we would have then and evaluate them at the end of the year. Have you developed this first roadmap towards 2040? So I think the learning is that it really needs to be actionable and measurable, the things you typically need in KPIs also on the ESG front.

Opportunities in the intersection of sustainability and digital infrastructure

Maria Tunberg:

Well, thank you so much, Max, for elaborating a bit on that. I was thinking we should move into discussing a bit about opportunities with regards to this intersection between sustainability on the one hand and digital infrastructure on the other hand. So I was wondering then, from your perspective, Max, what are the sustainability-related opportunities that you see within digital infrastructure right now?

Max Engardt:

Yeah, so I think there's both the right-now angle that you're talking about; I think there's a long-term angle as well, and we can get into that later. I mean, here and now, I think it boils down to two things to be very concrete. One is to... I think unfortunately we need to also strengthen the robustness of networks and digital infrastructure, acknowledging that climate change is happening and a lot of things that come with that, be it floodings or other extreme weather or heat.

And I think there are a number of cases in the Nordics where we work primarily where you see that the digital infrastructure is not fully suitable for a world where some climate change happens. It could be server rooms or node rooms for fibre networks that are in basements underground. And there have been several examples in Sweden, for example, where networks have been down for some time due to floodings like this, and I think that will get even more severe if we don't invest in our networks.

There's also a lot we see in many of the cases that we look at fibre overground rather than built underground, which is again to the robustness of the networks. So we need to strengthen that for sure, I think, and that grows across the Nordics.

Then I believe there's a big opportunity, and I mentioned this earlier as well, around the overbuild, and the way we see it is that the best, both from a business perspective but truly from a sustainability perspective, is to use the infra that's already in the ground. From a fibre or digital infrastructure perspective for sure, that's using the fibre that's there rather than building a parallel fibre network infrastructure.

And then back to your question there, what the opportunity is, I think there's lots of work to do around the business models in the fibre networks. How can we ensure that we can get good competition and good services towards the customers on more open networks rather than building these in parallel? So I think here and now, I would say it's those two, strengthening the infra and working with these more open business models towards consumers and businesses.

Maria Tunberg:

Thank you, Max. So if we're looking right now on some of the opportunities that you see now, and then you yourself opened up, then there are perhaps other opportunities if we look further ahead. So if we do look into the future a bit, that's always a bit difficult, but if we try to move forward, how do you think that the digital infrastructure space is going to develop in terms of sustainability aspects? I mean, if we're looking, for example, for the next decade, what do you think are going to happen?

Max Engardt:

I think coming from an angle of an investor in infrastructure as a whole, I tend to take that view, and I think, then, digital infrastructure is quite underutilised from the ESG angle, and there's also quite a lot of cross-pollination you could do across these infra types. And I believe that there will be business models where these infras meet, and let me be a bit concrete.

So I think one very interesting example: we are one of the biggest owners of district heating in the Nordics. And then what does district heating have as an input? It's heat to give to your customers. And take a data centre or a server hole. There, the waste product is actually heat, and I think that's a gigantic opportunity. It's very, very early stages still, and there's lots of work and regulatory aspects maybe that needs to be set up, but I think there is a typical cross-pollination of infra types where you can have the waste heat from a data centre actually heating up apartments in a city. So I think there's lots of underutilised infra within the digital infra space.

Maria Tunberg:

Well, this is very interesting, right? As you say, potential cross-pollination, I think that was your word, and giving the district heating and data centre as two examples. Do you see any differences throughout the Nordic region? Because Infranode is active in different countries in the Nordic region? Are there any regional differences in terms of the opportunities when we talk about this cross-pollination potential?

Max Engardt:

Absolutely I do, and if you're listening in from outside the Nordics, I think it's easy to see the Nordics as one market, but it's truly not once you dig into it. For one thing, the market development, for example, in fibre rollout is very different if you take Norway or Sweden where we've come very far, but in Finland, for example, which is very much still a mobile network country, a lot driven by Nokia being there from the very beginning, there I think the opportunities will come sooner. And Norway and Sweden, they are also much more developed in terms of district heating.

Then again, there's big differences in the regulatory landscape. And when we look at infrastructure, in particular when we get to these cross-pollination opportunities, I think the regulatory aspects will play a major role. This is what I work with on a daily basis. The regulators in the different countries take very different views on things. So I see how that plays out. How much incentives regulators will give to this, that will also a lot affect where we see the opportunities the most.

Maria Tunberg:

So really a deep market understanding of that specific region seems to be an important aspect of being able to tap into the potential cross-pollination opportunities, and the regulatory framework comes in. That's of course a very important part of understanding that market and how you could tap into opportunities.

Max Engardt:

Yeah, and I think my message to regulators would be that I think they need to be a bit bold. I think if they set the incentives for these types of business models, I think they will happen, but you need to be really smart and into the details when you design these schemes. But I think that will be very, very important over the next decade.

Maria Tunberg:

It will be interesting indeed to follow, to see what's happening, how this is developing. We've been focusing so far much upon the opportunities, both here and now and also if we look forward a decade or so, but if we touch upon some of the challenges. So I'm quite curious to hear what you see as the biggest challenges for ESG and sustainability in the investment space if we start right now.

Max Engardt:

I think I look at it from an industry perspective, but it's of course truly not an industry question. It's truly a global question that we all need to work on. I think what the industry, both as a me as a fund manager but also in the digital infra space... Quite easy to just do the bare minimum. Both just do the EU reporting or the regulatory reporting or the check in the box for the sustainability report. I think the challenge that everybody faces now is moving from this, which I think that everybody does now, into true action. So I mean collecting data is important, having that under control, but truly moving to action. That's the big challenge.

And there, that's also why that's where we are spending a lot of our time at Infranode, then, with our portfolio companies, developing the net-zero roadmaps towards 2040, where in essence all of our companies are involved. So targeting this, really a challenge that you focus so much on the details and the reporting that you get stuck on it. Now it's really a matter of getting into action and doing the job that needs to be done from a real long-term perspective.

Maria Tunberg:

So really getting into action. Does this connect back to when we were talking about how Infranode is integrating sustainability into its business strategy? And you were mentioning, well, within the asset management it's really important and getting into the overall structures, getting these KPIs in place. Is that part of this moving into action or is there anything in addition?

Max Engardt:

No, it definitely is. I think now we've set the very good robust structure in terms of the reporting that we do, the good governance, the KPIs on ESG we have for management and so forth. So we've structurally set that platform and now we're going to move to actions with our very, very concrete and action-oriented plans towards net-zero.

Maria Tunberg:

Well, it would be very, very interesting when we are at 2040 to look back and learn from all the successes of reaching net-zero.

Max Engardt:

Absolutely, and I think we'll for sure see progress well before that as well.

Maria Tunberg:

Fingers crossed.

Max Engardt:

Yeah.

Maria Tunberg:

And maybe finally, Max, if there was one sustainability-related message that you would like to share with the digital infrastructure investment sector right now, what would that be?

Max Engardt:

No, I think it's that everybody needs to do their part here. We need to move to a net-zero world or a carbon-emission-free world. And one could think about digital infrastructure, and we're not doing that much emissions, but as I mentioned, this is truly a global problem, and the solution needs to be truly global as well. So this means that everybody needs to do everything that they can in their respective industry.

So what does that mean for digital infrastructure? It's again, I think, the future-proofing of the infrastructure, the node rooms in basements and so forth. It's about minimising the overbuild and using the networks that we already have, avoiding emissions from doing parallel networks. And then on a long-term basis, it's to continue to explore this, we call it cross-pollination business opportunities, where we can truly make an impact here from the digital infrastructure industry. So doing your part in this path towards net-zero,

Maria Tunberg:

Doing your part in the path towards net-zero, I hear you saying, and I also hear some keywords that you keep coming back to. Robustness, overbuild, the opportunity of cross-pollination, and action here and now. Thank you so much, Max, for your time today. It's been really great talking with you and learning about how sustainability fits into your area of investing.

Max Engardt:

Thank you so much. It was a pleasure to be here.

Maria Tunberg:

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