Proving the value of sustainable infrastructure

The global energy transition is gathering pace. Almost all major economies have set targets for achieving net-zero carbon emissions, and rapid progress is being made in rolling out renewable energy infrastructure. Awareness of other sustainability issues linked to infrastructure – ranging from impacts on biodiversity, to workforce health and safety – has also grown significantly in recent years.

So, it seems intuitive that being able to demonstrate solid sustainability credentials is a key value-add for infrastructure managers. Large institutional investors are themselves often bound by net zero and other sustainability commitments – and many are actively prioritising sustainability in their manager selection process.

“There is an increasing trend of institutional investors looking for infrastructure fund managers that have strong sustainability credentials,” says Eleanor Fraser-Smith, head of sustainability at energy transition-focused manager Victory Hill Capital Partners.

Lars Meisinger, head of international client advisory at Hamburg-based Aquila Capital, adds that a sustainability track record has “become a hygiene factor in the selection process”. The search for infrastructure managers that can demonstrate sustainability “is now the norm”, he says.

The backlash

For many, it is simply common sense for infrastructure managers to focus on sustainability, given the huge global demand for assets that reduce greenhouse gas emissions. Considering how ESG factors will affect the performance of an asset over the long-term likewise strikes most stakeholders as a matter of good corporate governance. But not everyone is convinced that sustainability should be on the agenda for infrastructure funds.

In the US, right-leaning politicians have increasingly adopted fire-and-brimstone rhetoric to attack ESG. Former US president Donald Trump hit out at funds that adopt an ESG mandate in February, claiming that “these poorly performing woke financial scams are radical left garbage”. He has also pledged to sign an executive order restricting the ability of certain institutional investors to consider ESG factors in investment decisions if elected again in 2024.

Many Republican-controlled states have already imposed restrictions on the ability of their pension funds to consider ESG investments. According to law firm Morgan Lewis, 20 states have implemented some form of anti-ESG rules as of July 2023. Some, including Texas, have even sought to penalise financial institutions that divest from fossil fuels.

“These poorly performing woke financial scams are radical left garbage”

Donald Trump

While it is not yet clear what practical effect these measures will have on infrastructure funds, there is no doubt that attitudes to sustainability are vastly different between red and blue states. Infrastructure managers in the US have to tread carefully when it comes to sustainability, although they can certainly emphasise the practical benefits of sustainable infrastructure.

Peter Raftery, global head of technical, commercial asset management and ESG for climate infrastructure at BlackRock, describes sustainability as “a key component in risk mitigation for infrastructure”. He adds that BlackRock’s investments in infrastructure “provide essential services to society”. 

Even in Texas, the heartland of the anti-ESG movement, wind and solar energy have become key to the power supply. When thermal power plants repeatedly went offline during a summer heatwave this year, wind and solar performed consistently well, generating 30-40 percent of the state’s power requirements.

Fighting greenwashing

While advocates of sustainable infrastructure are unlikely to ever concede that the anti-ESG movement has a point, there is consensus that ‘greenwashing’ – making false or exaggerated claims around sustainability – is a significant problem.

LPs are placing “growing importance” on disclosures and transparency, says Fraser-Smith. “Fund managers are being held to account for delivering ESG performance, particularly on climate risk and carbon reduction performance.” 

Meanwhile, regulators – especially in the EU – have laboriously built a vast architecture to govern the ability of financial institutions to make claims to investors around sustainability. The SFDR introduced a classification regime for investment products, while the EU has been followed by many other jurisdictions in creating a taxonomy for determining which investment activities can be defined as ‘sustainable’.

The SFDR has created a system in which funds can be classified according to their sustainability objectives. Article 9 – or ‘dark green’ – funds must have sustainability as a core objective and are required to meet the most stringent level of sustainability criteria. However, relatively few infrastructure managers have sought to designate their funds as Article 9. This reticence stems partly from onerous reporting requirements, compared with ‘light green’ Article 8 funds, which are only required to demonstrate that they “promote environmental or social characteristics”. 

The SFDR’s system for classifying investment products is “a helpful contribution towards establishing certain standards, but should not be the sole indication for credentials,” says Meisinger. He notes that this is far from the only framework that can help investors judge how managers are performing. “We find GRESB ratings to be a very useful and accepted tool for providing objectivity to clients,” he notes.

The value of sustainability

The argument that managers should indeed focus on sustainability boils down to the belief that sustainable infrastructure is simply more valuable. There is now greater understanding in the market “that you do not have to compromise financial returns” to achieve a positive social or environmental impact, says Fraser-Smith.

As she points out, the obvious example is supplied by energy transition infrastructure, which is in high demand throughout the world. In fact, a sense of urgency about the need to speed-up the rollout of green energy solutions is finally becoming apparent, with key legislation such as the US Inflation Reduction Act incentivising the delivery of renewables.

“The coming years present a crucial time to invest in sustainable infrastructure as the global community aims to mitigate the impacts of climate change,” says Jasmin Kotivuori, investor relations manager at Stockholm-headquartered Infranode.

“The demand for sustainable infrastructure, such as renewable energy systems, green facilities and decarbonisation solutions, is therefore rapidly growing,” she says. “We are seeing many interesting infrastructure investment opportunities that facilitate the transition to a net-zero economy, such as investments in flexible renewable energy systems, fossil-free transport, industry decarbonisation, energy efficiency and green facilities.”