Why energy transition infrastructure matters in a higher-inflation world
As investors adapt to a changing economic backdrop, infrastructure's combination of inflation linkage, essential services and long-term growth drivers is becoming increasingly relevant to retirement outcomes.
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Over recent periods the macroeconomic orthodoxy has shifted, as volatile geopolitical events and weakening of national and international institutions have upended what had become a prevailing backdrop of low inflation, normalising interest rates and consistent, if not specular, growth.
A succession of issues ranging, from US tariffs to the latest conflict-induced energy price shock in the wake of the (still unresolved) war in Iran, have brought the focus once again to inflation risk – and the potential consequences for rates and growth.
While some of the more alarming signals have eased amid a fragile ceasefire and against the backdrop of a deal that is designed to re-open the Strait of Hormuz, what is clear is that the debate has evolved.
Firstly, with two energy prices shocks now having rocked the global economy in the past four years – with especially significant impacts on economies in Europe and Asia that are more exposed to imported fossil fuels – energy security has risen up the policy agenda.
Secondly, and crucially for investors, inflation is now an increasing part of investors and consumers consciousness. Global energy prices, and so headline inflation rates, rose markedly in the wake of the Iran conflict, while the ripple effects will mean that price rises will likely remain higher for longer.
In the UK, economists expect inflation to remain above the Bank of England’s target for much of the year – although the recent easing is likely to quell pressure for rates hikes. However, an understanding of the volatility of inflation, increasingly linked to a more fragile geopolitical landscape and less robust national economic institutions, means the risk of sudden spikes feels more ever-present.
Evolution of consensus forecasts for 2026 inflation
Sources: Consensus Economics, Schroders. May 2026. The forecast should be regarded as illustrative of trends. Actual figures will differ from forecasts. Please refer to Important Information regarding forecasts
This matters in particular for defined contribution (DC) pension funds, reflecting that retirement outcomes are ultimately determined not by nominal returns, but by the ability of portfolios to preserve and grow purchasing power over time.
In this context, this article will examine the portfolio role of energy transition infrastructure, which notably is also benefitting from structural tailwinds in relation to the focus on energy security, in helping enhance inflation resilience.
Rethinking portfolio resilience and return
The challenge facing long-term investors is not simply generating returns. It is generating returns that can withstand a broader range of economic outcomes. Many investors are therefore seeking assets with characteristics that may help portfolios become more resilient.
This is one of the key findings of Schroders’ Global Investor Insights Survey 2026, which found that investor’s key current concerns are related to the knock-on effects of geopolitical uncertainty and volatility – and that as such portfolio resilience and diversification, including via private market strategies, are clear portfolio priorities.
Infrastructure has long been viewed as an asset class within the universe of private markets that is particularly well suited to enhancing resilience; providing opportunities to generate differentiated and resilient long-term returns.
Our separate research among DC investors shows a clear appetite for the asset class, including as a way to meet the government’s drive for more investment in private assets and the domestic economy. Four in 10 schemes said that, at their most recent review, they had increased or considered increasing exposure to UK infrastructure.
Moreover, infrastructure ranked as the most popular asset class for sourcing the “best investment opportunities” in the UK, selected by 58% of respondents. Renewable infrastructure specifically was by far the most popular asset class for sourcing the “most attractive net zero investment opportunities”, selected by 82%.
Infrastructure assets sit at the heart of economic activity. Electricity generation and networks, communications systems and transport links are essential to the functioning of businesses, households and public services alike. This essential nature often underpins business models that differ from those found elsewhere in public markets.
Moreover, because infrastructure returns are derived primarily from essential, non-cyclical assets, they are less exposed to volatile market sentiment and shifts. The long-term contracts, regulated frameworks or concession agreements that underpin infrastructure revenues also provide visibility over future cashflows – and a hedge against rising inflation. In many cases, contracted revenues are directly linked to inflation measures, helping preserve the real value of cashflows generated by the underlying asset.,
These characteristics provide strong diversification benefits to portfolios. This is particularly true when compared to the traditional equity and fixed income allocations that dominate DC asset allocation in a UK context. This diversification benefit is especially prominent in energy transition infrastructure, as we will cover in more detail below.
The infrastructure opportunity set is evolving
The infrastructure market itself has evolved significantly over recent years. Historically, investors often associated infrastructure with sectors such as transport, utilities and conventional energy assets. Today, however, the opportunity set has changed considerably, with some of these more traditional areas largely now in the hands of long-term ownership, while the opportunity set in other parts of the market has considerably broadened.
The energy transition is perhaps the most significant example. Governments around the world continue to pursue decarbonisation objectives while simultaneously, and importantly, seeking to strengthen energy security and modernise ageing energy systems.
Reducing reliance on expensive, volatile and dirty imported fossil fuels means building out new clean energy generation while at the same time electrifying areas such as transport, heating and industry. This, in turn, is creating substantial demand for new sustainable power generation that was already growing against a backdrop of digitalisation and the AI revolution. Meanwhile electricity networks require significant upgrades to accommodate changing patterns of energy production and consumption.
Across energy transition, investors can therefore now access assets spanning solar and wind farms, electricity transmission and distribution networks, battery storage, digital infrastructure facilitation, electric vehicle charging networks, alternative fuels such as green hydrogen and biomethane, and more. This adds to a flow of investment opportunities that already accounts for the largest share of infrastructure deal activity globally.
Unlike many cyclical investment themes, these trends are not expected to play out over a single market cycle. Instead, they are likely to shape investment opportunities for decades to come, offering opportunities to access income-oriented operational assets, as well as more growth-oriented emerging platforms that can boost overall total returns.
Energy transition in inflationary periods
For DC investors specifically, the focus is generally on operational infrastructure: investing in portfolios of essential, already-operational assets – in the case of energy transition infrastructure, this would include solar parks or wind farms – and hold and manage them for the long term.
Returns come primarily through yield. In simple terms, investors benefit from the premium generated by the income stream over the amortised cost of acquiring and operating the asset. This is typically modelled through discounted cashflow analysis, incorporating variables such as power price forecasts, generation yields, and interest rate assumptions.
These assets also provide access to a set of risk premia that differentiate them from, say, global equities and bonds, bringing valuable portfolio diversification and potentially enhanced resilience and returns.
Unlike development-based strategies that rely on successful project delivery and future capital gains, which in turn require step-changes in an asset risk profile that may take a number of years to robustly identify, operational infrastructure provides investors with tangible, near-term income streams.
Notably, and as covered earlier, the cashflows, and so ultimate returns, generated by energy transition infrastructure have performed well in inflationary regimes compared to traditional equities and bonds – and even compared to diversified infrastructure.
This reflects the fact that one of the key components driving inflation in recent years – energy prices – is a positively correlated risk premia for many energy transition assets, which often have exposure to energy prices but do not capture rising input costs related to fossil fuels.
Energy transition infrastructure returns during periods of elevated inflation
Simulated performance is based on past performance which is no guarantee of future returns. Source: Schroders Capital, 2024. This simulation covers the period (30 September 2015–30 September 2025). For illustrative purposes only. There can be no assurance that any objective or intended outcome will be achieved. No strategy can guarantee future results. The views shared are those of Schroders Capital and may not be verified. Based on simulated performance. Inflation RPI (all items) UK sourced from UK ONS data, average quarterly inflation of simulated period 1.1%, there were 12 quarters with above average inflation over this period. Information is based on based on certain assumptions and models which may not prove to be accurate.
At the same time, the need for vast new development to build out energy transition infrastructure creates a need for developers to recycle capital, which creates a ‘buyers’ market’ for operational assets that has supported a fundamental re-rating of returns in recent years. This translates to higher effective yields, further underpinning the ‘real’ return potential of these assets.
Taken together, these factors have contributed to energy transition infrastructure providing broader benefits to portfolios, again including compared to diversified infrastructure, in terms of both standard risk-return metrics and directly mitigating downside risk.
Why add energy transition infrastructure to a portfolio?
Simulated performance is based on past performance which is no guarantee of future returns. Source: Schroders Capital, 2024. This simulation covers the period (30 September 2015–30 September 2025). For illustrative purposes only. There can be no assurance that any objective or intended outcome will be achieved. No strategy can guarantee future results. The views shared are those of Schroders Capital and may not be verified. Based on simulated performance. 1Energy Transition Infrastructure Returns are based off quarterly prices, these returns are constructed using a combined Net Asset Value (including dividend) performance of Schroders Greencoat listed vehicles. Diversified infrastructure is based off pitchbook benchmarks: private markets data (published Q423) sourced from LP reports and then estimated across entire funds covering core, core plus, value added, opportunistic and greenfield infrastructure funds. Global equities returns is calculated from MSCI World Gross USD prices. Fixed income returns are calculated from Bloomberg Global Aggregate Credit Total Return Index.
Direct vs indirect inflation linkage
While many infrastructure assets enjoy direct inflation linkage through regulation or long-term contracts and subsidies, recent changes have complicated the picture for some UK assets in particular.
Earlier this year, the UK government announced changes affecting the indexation of certain legacy renewable support schemes, moving future adjustments from the Retail Prices Index (RPI) to the lower Consumer Prices Index (CPI) measure. The move generated considerable debate across the sector because it reduces the expected benefit of inflation indexation going forward.
Yet the broader investment case remains intact.These assets continue to enjoy revenues that are linked to inflation, even if the mechanism is somewhat less generous than before. Many assets also benefit from various indirect inflation hedging effects, for example, and as already discussed, related to pricing mechanisms that mean cashflows are positively influenced by energy prices, which are a key input to inflation.
Investors evaluating infrastructure opportunities today need to look beyond headline labels and assess the underlying, long-term drivers of cashflow generation. Understanding where inflation protection is contractual, regulatory or correlated through market dynamics can be critical when constructing resilient portfolios.
Why this matters for DC investors
The increasing accessibility of private markets within DC schemes has created new opportunities for portfolio construction.
Historically, governance requirements, liquidity considerations and operational complexity limited the role that private assets could play within DC arrangements.
Over time, however, regulatory developments and innovation in investment structures have expanded the range of options available to pension schemes.
As DC investors seek to improve member outcomes, attention is increasingly shifting from individual asset classes towards the overall resilience of portfolios. This is important, as DC members (particularly the vast majority in the default) will largely focus on the overall impact and outcomes achieved.
Rather than viewing infrastructure solely as a source of income, investors may increasingly see it as a strategic portfolio building block. Exposure to essential assets, long-duration cashflows, structural growth themes and varying degrees of inflation linkage can help create portfolios that are better equipped to navigate a wider range of economic environments.
The energy transition infrastructure universe is particularly relevant in this context, Many assets are positioned to benefit from long-term investment trends that are likely to persist regardless of short-term economic fluctuations.
At the same time, their operational characteristics can provide features that investors increasingly value in a world where inflation risk has re-emerged as a meaningful consideration. It is this unique blend of risks that drive it, and that are very diversifying versus traditional DC asset classes and assets allocations, which mean that the segment is more impactful and efficient when added to portfolios.
No one can predict the future path of inflation with certainty. Recent years have demonstrated how quickly economic assumptions can change and how difficult it can be to forecast the interaction between geopolitics, energy markets and economic growth.
Yet one conclusion that appears increasingly difficult to ignore is that the conditions that characterised the investment environment of the 2010s –abundant globalisation, ultra-low interest rates and consistently subdued inflation – and the structures that supported them may prove to have been meaningfully challenged, making for a more volatile period in the future.
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