Rhyadd Keaney-Watkins, head of ESG at Arjun Infrastructure Partners, reflects on the past year and looks to 2023.
Looking back at 2022, were there any pivotal events, moments or developments in terms of sustainability in private markets?
Concerns of “greenwashing” have continued to escalate through 2022. We have also seen a swathe of financial products in-scope of the European Union’s Sustainable Finance Disclosure Regulation (SFDR) being downgraded from ‘Article 9’ to ‘Article 8’, which is telling.
These downgrades and regulators’ actions have generally focussed on passive strategies and listed equity.
Other notable events include the June to August heatwaves which hit Europe. Aside from record maximum temperatures, the number of days above 30˚C and 35˚C were also above average. These events may have resulted in asset operability impacts and businesses should examine the lessons learned, upgrade their climate risk management – including emergency preparedness and response processes – and reassess the commercial viability of resilience investments.
Thinking specifically about private markets, do you think the industry has made progress on climate in the last year? Where are the bright spots? Where has it disappointed?
I have seen significant progress on the understanding of climate risk, how this may impact enterprise value in the long-term, and the need for decarbonisation. There are also regulatory tailwinds, such as mandatory TCFD (climate risk management) disclosures; reporting of greenhouse gas emissions via SFDR; and the forthcoming Corporate Sustainability Reporting Directive.
Real assets generally, particularly infrastructure assets, are relatively mature in considering climate risk. Whether it is a water business managing water resource risk, or motorway service areas transitioning from petrol/diesel fuelling to EV charging, climate risk is fundamental to the long-term resilience of infrastructure and is inextricably linked to business success.
Looking ahead to 2023, what is your firm’s next priority in terms of the climate? What would you like to have completed over the next 12 months?
Our climate priorities can be split into physical risk and transition risk.
For physical risk, we have completed climate scenario analysis looking as far out as 2050, including ‘business as usual’ (worst case) and ‘Paris-aligned’ (best case) scenarios. From this, we have extracted physical risk parameters including extreme heat, extreme wind, wildfire, flooding. We will be using these parameters, together with the impacts observed during the June to August heatwaves, to challenge asset managers and portfolio companies on the potential operability and resilience risks. Where impacts are commercially material, we will also look at the associated mitigation.
For transition risk, we have held portfolio engagement sessions through 2022 on ‘net zero’ and sector-level transition pathways. During 2023, we will be challenging businesses to present work programmes to develop Net Zero Transition Plans, based on: (1) a robust greenhouse gas baseline (2) science-based sector transition pathways to limit warming to 1.5C and achieve net zero by 2050; and (3) plans which follow best practice in terms of disclosures (such as the UK Transition Plan Taskforce guidance launched in November 2022).
Aside from climate, which other areas of sustainability will be prominent on your agenda and why?
There is no end of priorities and, in some cases, this can be detrimental to making sufficient progress in any one area. Taking greenhouse gas emissions and net zero as an example, private markets are still struggling to deliver information on current emissions and transition plans. So managers should exercise caution and restraint in leaping from one priority to another.
That said, there is a genuine urgency to integrate sustainability across businesses and financial markets, and clearly we need to make progress across a number of ESG topics, simultaneously.
Looking ahead, inflation, the ongoing ‘cost of living crisis’ and the array of impacts that will emerge from this are key to monitor in 2023.
How are more emerging topics like nature/biodiversity occupying your time and resources?
Nature and biodiversity are becoming topics increasingly raised by our investors and, indeed, are areas which we are looking at closely across our portfolio. Biodiversity intersects with multiple other facets of ‘ESG’, including climate, where companies are beginning to explore biodiversity projects as part of their net-zero approach (nature-based carbon sequestration). Healthy habitats also underpin ecosystem services, such as improved flood protection and air quality. Ecosystem services will be an important tool for businesses in improving the climate adaptation and resilience of assets.