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INFRASTRUCTURE

ESG is paramount for sustainable near- and long-term returns

Private infrastructure investing has reached a tipping point. The integration of environmental, social and governance (ESG) standards is now mainstream, a forward-looking matter of strategic positioning rather than the backward-looking compliance consideration of the past. We view ESG as the No. 1 trend—critical to effective due diligence, underwriting and ongoing asset management, and a fundamental influence on investment outcomes.

GOVERNANCE LAYS GROUNDWORK FOR SUSTAINABILITY

The first ESG component to be broadly adopted was governance, and it was the condition for the other two to take hold. Governance is threefold: majority control, which allows for implementing sustainable practices; an indepen­dent board of directors, which brings diversity of insight, relationships and experience; and business-wide policies—hiring, health and safety, and anticorruption, among others.

Next, environmental considerations, such as mitigating climate change risks and bolstering resilience, rose to the fore. Infrastructure investing has led other asset classes here, partly because meeting environmental regulations is a fundamental threshold for achieving expected returns. Examples from our portfolios include water companies meeting water conservation goals; renewable energy providers reporting on emissions avoided; and the adoption, testing and revision of disaster resilience plans.

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Examples of infrastructure assets (L to R): Ffynnon Oer Wind Farm, South Wales, Wales; Cairns Airport, Queensland, Australia; Noatum Marine Terminal Málaga, Málaga, Spain; a high-performance diesel locomotive.

THE COMPLEXITY AND IMPORTANCE OF SOCIAL STANDARDS

Third and most challenging are social factors—an asset’s impact on its community, customers, employees and other stakeholders. Social factors are complex and deeply influenced by local context, and many companies (especially monopolies) overlook them—even though a failure can cost a company its social license to operate.1 What is meeting social standards? Giving utility customers access to real-time usage data, improving passengers’ airport experience and communicating with those affected by weather-related events are examples. These take time and resources yet can both reduce risk and potentially be powerful catalysts for returns. Social factors we consider include positive reputation/customer satisfaction, community health and safety, local employment opportunities and employee voluntarism. And there can be a regulatory impact for infrastructure companies that fail to consider other social factors: community development; employee health and safety reviews; and reviews of customers, communities and supply chains.

In 2019, being proactive on ESG risks and opportunities will be paramount in the successful active management of private infrastructure assets.


1 When a project and its operating procedures (waste management, human resources, etc.) have ongoing approval or broad acceptance by the local community and other affected stakeholders, such as employees and the wider public.


OVERVIEWS AND OUTLOOKS BY ASSET CLASS

 

 
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Infrastructure