At affiliate publication Infrastructure Investor’s Global Summit, sustainability is, unsurprisingly, all over the agenda. Whether it be in the dedicated ESG forum on day one, or the many other streams, the topic is pervasive. Here are some of the sustainability takeaways from the first two days of the world’s largest infrastructure investment event:
Green assets no easy ESG-win
Investors are taking a far more nuanced approach to ESG, and gone are the days when ‘green’ assets would automatically be considered an easy win.
According to Mercer Investment’s global head of infrastructure, Amarik Ubhi, investors increasingly understand that the physical characteristics of an asset don’t necessarily translate into good ESG integration. “You can have a renewable power asset or company that is actually very problematic from an ESG perspective,” Ubhi told attendees.
With investors understanding that there’s more to ESG than meets the eye, the nuanced approach is good news for assets not traditionally seen as ESG-friendly. As investors increasingly focus on how ESG is integrated into a particular asset and how it’s managed – rather than the physical characteristics of the asset itself – Ubhi pointed out this will help broaden the investment horizon.
“If you think of traditional utilities, they may not be seen as being climate-change friendly, but there are clear environmental aspects of their operations on a day-to-day basis,” he said. “Investors wouldn’t necessarily rule out mainstream infrastructure if good ESG integration can be demonstrated.”
Climate alignment in emerging markets
For Deniz Harut, executive director at climate change investment and advisory firm Pollination: “There’s a lot of money chasing climate-aligned opportunities, [and while] hurdles may be higher for investors flowing back to emerging markets, infrastructure is a good asset class for long-term investments, as long as they have net zero and nature positivity at heart.”
According to Harut, emerging markets need to create a 1.5C-aligned project pipeline. “Multilaterals can help with that, by creating some kind of labelling, for example. Investor demand is there, but they are confused over where to allocate capital,” she argued.
Developing economies also need to get on top of climate adaptation.
According to Leticia Ferreras, portfolio manager, development finance at Allianz Global Investors, blended finance can help with that: “Blended finance – vehicles that combine public and private capital – is very efficient for us to tackle challenging projects and jurisdictions; not just blending capital but also blending knowledge.”
PPF turns its back on laggard managers
The cultural differences in approaches to ESG between Europeans and their North American and Asian counterparts are well known. They were duly acknowledged by Claire Curtin, head of ESG at the UK’s Pension Protection Fund, who gave a warning to GPs across the board.
“We have had to increase the hurdle a bit more now and if we have an existing manager and they’re really lagging compared to where our other managers are moving to, we say, ‘We won’t be re-upping with you until you really improve practices a bit more,’” said Curtin.
She went further, though: “In RFP processes, people won’t even get through to the presentation round unless they already have general counsel saying they will commit to [the UN’s Principles for Responsible Investment]. We have had to walk away from situations where they haven’t got to the level they need to.”
So, that’s the PPF way of addressing laggard GPs. Will the laggard LPs follow suit?
The limits of control
“The time for [net zero] commitments has passed – it’s very much about getting on [with it] now,” Chris Leslie, Macquarie Asset Management’s global head of sustainability told Global Summit attendees.
Well said, too. But as Leslie knows – given Macquarie announced plans in late 2020 to manage its portfolio in line with net zero emissions by 2040, a full 10 years ahead of most net-zero targets – the “getting on” bit is no cakewalk.
“We committed to have business plans in place for our 160 portfolio companies [to achieve] net zero by the end of this year. When you peel back those 160 companies, there’s 150,000 individuals,” Leslie said. That means Macquarie has a lot of educating and convincing to do.
So, how’s it all going? It’s going to be tight, Leslie conceded.
“We’ve encountered pockets of resistance. It’s difficult to be authoritarian when you’re a GP and you don’t have full control [of some of these companies], so we’re wrestling with implementation,” he pointed out.
We’ll find out how well net-zero aligns with minority control, then.
Mind the tech gap
The road to net zero is not just about convincing people, though. It’s also about coming up with innovative private finance structures to accelerate the adoption of climate-friendly new technology, Kroll Bond Rating Agency’s director of project finance and infrastructure, Karim Nassif, told attendees.
Having to wait for government regulation, and then consumers, to determine the successful implementation of new technologies like battery storage and electric vehicles means the private sector can often find itself on the back foot when it comes to the energy transition.
So when new technologies do come around, Nassif suggested the private sector double down on helping stakeholders to best assess the risks involved with technologies that have more complex, uncertain dynamics.
That will be key to kicking the energy transition up a notch. “If we can get there from a financing perspective, there’s a lot that can be done,” he said.
Charge me up
Earlier this month, when Antin Infrastructure Partners sold UK-based Roadchef to Macquarie Asset Management, we noted the brave new world facing motorway service area (MSA) owners, as the EV charging infrastructure rollout takes place.
Speaking yesterday on a sustainable transport panel, Antin partner Mauricio Bolaña seemed rather content that the firm was exiting Roadchef at this moment in the energy transition. Why? Because the EV rollout means MSAs will need about 140 charging points, rather than the six to 10 points per station they have at the moment.
“[MSAs] are typically not near urban areas, and the cost to bring power in with sufficient capacity can cost a few hundred thousand – if you’re lucky – to several million. That makes [the rollout an] extremely difficult investment as a private party,” he said. What’s more, “the [EV-dedicated] funds being created by governments are absolutely critical but are too slow”, Bolaña added.
Sounds like Antin timed its exit well.