Institutional investors should look for robust reporting of environmental, social and governance performance when considering investing in infrastructure, according to a new discussion paper released by WSP | Parsons Brinckerhoff.
Integrated frameworks for infrastructure sustainability by Richard Palmer and Bronte Bishop analyses the risk factors attached to these investments, including climate change, social licence and governance.
The report intends to encourage investors and asset operators to understand why and how to use the Infrastructure Sustainability Council of Australia’s IS tools and the Global Real Estate Sustainability Benchmark Infrastructure Assessment to manage risk, efficiency and governance.
The authors state that because of the long economic lifespan of infrastructure assets compared to property, ESG factors become more crucial in determining the investment approach.
There is also a need to consider the whole asset lifecycle and how sustainability is or is not embedded in design, delivery and operational phases.
There are big stakes at play and they each deserve attention
“The large immediate impacts of infrastructure project construction on ecosystems and communities, the long-term economic planning that is underpinned by infrastructure projects and the risks posed by climate change over the same timeframes bring the stakes at play into stark relief,” the authors say.
A comparison was carried out between ISCA’s IS Operations rating tool and the GRESB Infrastructure reporting framework to see which can deliver the most robust data.
The two systems were also compared to the United Nation’s Principles for Responsible Investment, to assess whether the frameworks address the PRI requirements.
The difference between ISCA and GRESB
The ISCA tool is structured to benchmark and assure ESG performance at the asset or project level, across planning, design, construction and operations. The GRESB Infrastructure Assessment assesses ESG performance across assets and funds to provide institutional investors with an ESG metric for assessing infrastructure funds.
The mapping exercise carried out for the paper showed that the ISCA Operations rating is more comprehensive than GRESB, covering 90 per cent of GRESB’s benchmarks and 77 per cent of the PRI reporting requirements.
The GRESB Infrastructure assessment satisfies 45 per cent of the PRI indicators.
However, 23 per cent of PRI indicators are not satisfied by either assessment, and 10 per cent of GRESB Infrastructure Assessment Indicators were not satisfied by ISCA Operations Ratings.
For this reason, the authors suggest leveraging the substantial overlap between the scope covered by the different frameworks to avoid duplication in data handling for effective reporting across multiple channels and over the lifecycle of projects.
By using the tools that best apply to each level of engagement in the asset lifecycle, performance data can be aggregated at the asset scale, then further at fund scale and also at the institutional investment level.
The report says the complex financing and ownership structures of modern infrastructure assets – often spanning national jurisdictions, the public-private divide and shared ownership – presented a risk, as responsibility for ESG performance was often not shared, and knowledge of ESG performance might not be effectively communicated across the development phases and investment vehicles.
“This risk can be mitigated with comprehensive reporting that enables carriage of responsibility for ESG measures to be maintained from planning through to operations and between physical entities that are co-owned.”
The ISCA tool applies to the design, delivery and operations of the asset. Investors should be looking to projects that are committed to using the tool in particular for its risk mitigation benefits.
These include reducing the risks associated with the social licence to operate through to embedding approaches to ESG that engage communities.
This is becoming more of an acute risk due to urbanisation, with more major projects now being undertaken within established communities.
“Increasing land use pressures outside of cities also mean we’re often impacting remnant habitats that are valuable to communities,” the authors state.
“Social licence risk often manifests as political risk, and from an investment perspective, political uncertainty can severely impact investment decision-making.
“Embedding a comprehensive ESG framework into the delivery of projects is one mechanism for improving social licence and mitigating political risk for projects that directly impact communities.”
Reducing resource use, engaging with energy efficiency and looking for low-carbon design and construction solutions also have a risk mitigation benefit, the authors say.
They include future-proofing the asset in its operational phase from rising energy costs and potential imposts around carbon emissions.
Infrastructure lags property in sustainability
The authors point out that while sustainability and ESG considerations have taken hold in the property sector, infrastructure has lagged behind in terms of putting these factors at the centre of both project development and investment in the sector.
Financial markets are a barrier
A trend the paper identifies that is impacting on the sector is the nature of the global financial markets.
“The interconnectedness of financial markets provides a material barrier to integrated and consistent benchmarking reporting between assets, funds and institutional investors. It demands asset-level tools that can support verified ESG performance across the asset life-cycle and also to enable aggregation at the fund level.”
For investors and long-term asset owners to respond to this and the other major trends including urbanisation, climate change and biodiversity loss, there needs to be a pathway that is “globally applicable, benchmarked and independently assured, to shape decision-making for individual assets and with a view to enabling institutional investors to take ESG risk into account”.