How to scrutinise sustainable infra funds

Behind 'thematic' and 'solutions' strategies, many GPs are hiding poor ESG performance. Double materiality will weed them out, says bfinance.

Fund managers deploying thematic infrastructure strategies have been getting a “free pass” from investors when it comes to their internal ESG capabilities, according to bfinance. The answer, says the investment consultant, is double materiality.

In a report seen by New Private Markets and due to be published later this week, bfinance argues that looking at managers through a double materiality lens can help investors expose GPs hiding ESG failings behind ‘solutions’ or ‘thematic’ investment strategies.

The report also examines the current state of investment in sustainable infrastructure, including the intersection of private equity and infrastructure.

Double materiality refers to a company’s sustainability performance from two viewpoints: one focuses on ESG risks that can affect a company’s financial value (an ‘outside-in’ perspective); the other considers the impact a company has on people and the planet (an ‘inside-out’ perspective).

The report states: “Our experience assessing fund managers indicates very large variability of approaches and differing degrees of commitment. Although data challenges do exist and imperfect data does not necessarily imply a lack of consideration, investors should still demand high standards from asset managers. Strong pre-investment due diligence and post-investment monitoring are key.”

The report lists nine indicators LPs may wish to consider when assessing sustainable infrastructure managers. These are:

  • biodiversity
  • climate risk
  • community engagement
  • cyber security
  • geographical challenges
  • carbon reporting
  • broader environmental and social impact reporting
  • stewardship/active ownership
  • supply chain risks

When it comes to impact funds, investors have been warned not to rely on regulatory classifications as a guarantee of a fund’s credentials. For example, only 70 percent of SFDR Article 9 strategies have a formal impact process, per the report. Instead, investors should scrutinise managers on intentionality, additionality and measurability.

The advice comes in the nick of time for UK LPs, many of which seem to be gearing up to invest in sustainable social infrastructure for the first time.

Update – Bfinance’s report has now been published. Access it here.